FTC notice of penalty franchiseThe Federal Trade Commission (“FTC”) has kept itself busy as of late, issuing a series of notices to over 1,000 businesses (many of them franchise companies) advising them that they could face civil penalties for conduct that the FTC has deemed unlawful. The Notice of Penalty Offenses Concerning Money-Making Opportunities is of particular importance to franchise companies. The first round of notices went out in late October. They advised businesses that if they deceive or mislead consumers about potential earnings or otherwise make false or misleading representations in connection with a money-making opportunity, they could be subject to large civil penalties (up to $43,792 per violation).

Once a business receives this letter, the business is officially on “notice” of certain practices that the FTC has found to be deceptive or unfair in previous administrative cases. If the FTC subsequently determines that one of these companies is engaging in conduct covered by the letter, it can then seek civil penalties against the company for knowingly engaging in conduct that the FTC has determined is unlawful.

The FTC is particularly focused on false, misleading, or deceptive conduct or representations regarding profitability, including:

  • phrasing that can be construed as a guarantee of success,
  • a promise of a return on investment,
  • an implication that the opportunity is risk-free or low-risk, or
  • statements that could mislead consumers into the belief that buying a franchise will earn them money.

Although the notice itself advises that receipt does not suggest that the company has engaged in a deceptive or unfair practice, companies receiving the notice should take it very seriously. Receipt of the notice signifies (i) that the company is on the FTC’s radar, and (ii) the FTC now has a clear pathway to issue penalties for “knowing” violations.

A business receiving one of these notices is advised to immediately review all advertising and marketing materials (including print, electronic, and web-based) to ensure that they do not violate any practices outlined in the notice. Additionally, review policies and procedures with any employees or brokers involved in the sales process to ensure nothing is being done that violates conduct outlined in the notice. It is also important to advise counsel that you have received the notice so appropriate steps can be determined.

A copy of the notice is available on the FTC’s website.