User:DozenAttempts/Franchise fraud

Franchise Fraud
Franchise Fraud or Franchise Churning is defined by the United States Federal Bureau of Investigation as a Pyramid Scheme.

The FBI website states:


 * "pyramid schemes :—also referred to as franchise fraud or chain referral schemes—are marketing and investment frauds in which an individual is offered a distributorship or franchise to market a particular product. The real profit is earned, not by the sale of the product, but by the sale of new distributorships. Emphasis on selling franchises rather than the product eventually leads to a point where the supply of potential investors is exhausted and the pyramid collapses."

In the United States, franchising is regulated by a complex web consisting of the Federal Trade Commission Franchise Rule, state laws, and industry guidelines.

The most recent version of the FTC Franchise Rule was in 2007, is printed in the Federal Register / Vol. 72, No. 61 / Friday, March 30, 2007 / Rules and Regulations, pages 15544 to 15575. (page 1 to 133 of this cited pdf file)

The FTC franchise rule specifies what information a franchisor must disclose to a prospective franchise business as a franchise opportunity.

Franchise Fraud via the use of Gag Orders, Confidentiality Agreements, and Non-disclosure agreements in the Franchise Industry
Franchisors that practice franchise fraud will attempt to pressure a franchisee leaving the franchise system sign a non-disclosure agreement, confidentiality agreement, or a gag order. The gag order will help prevent prospective new franchisees learning important details about the churning franchise.


 * In the 2007 Franchise Rule, in the Federal Register from pages 15505 to 15506, comments from former franchisees were listed concerning confidentiality agreements:


 * "commenters complained that the use of confidentiality clauses is widespread,622 and several commenters urged the Commission to ban the use of confidentiality clauses as a deceptive or unfair trade practice. Other opponents of confidentiality clauses—including state regulators and some franchisors—asserted that such provisions inhibit prospective franchisees from learning the truth as they conduct their due diligence investigation of a franchise offer."


 * "one franchisee representative, contended that the harm flowing from confidentiality provisions goes beyond individual franchise sales, noting that such provisions intimidate franchisees into not testifying before legislative committees and public agencies, such as the Federal Trade Commission."


 * "[T]he gag order . . . prohibits me from being able to answer questions, you know, and give cautionary remarks to other people who might be considering the franchise that I was with."


 * "‘‘the use of gag orders is almost 100 percent in some franchise systems."


 * "Three franchisees— Raymond Buckley, Roger C. Haines, and David E. Myklebust—believed that they were kept in the dark about the failure of their franchisor’s system due to confidentiality clauses imposed on current and former franchisees."


 * "confidentiality clauses "typically release the franchisor from legal liability and bar the franchisee (under threat of legal action) from making any oral or written statements about the franchise system or their experience with the franchised business. The purpose of such clauses is to shut down any negative public comment about the franchise system."


 * "franchisee, related: "I had spoken to some of the franchisees that had left the system. I now feel certain that they painted a picture that was not close to being the truth based on the gag order that [the franchisor] imposed. Had I gotten the truth from these people, my decision certainly would have been different. Every franchisee leaving the system has had a gag order placed on them, making it impossible for current and future franchisees to get the facts."

By having former franchisees under a gag order, franchisors that practice business franchise fraud or franchise churning "inhibit prospective franchisees from learning the truth about the franchising opportunity as they conduct their due diligence investigation of a franchise offer." (page 15505 of the Federal Register Franchise Rule)

References