As some of you know, I am making an argument that some franchisors, if not a very high percentage of them, are guilty of white collar racketeering. I believe that civil RICO statues apply well to franchise fraud and that there is a place for civil RICO attorneys to help provide some accountability in franchising.
External private accountability is necessary in franchising because the Federal Trade Commission has breached its duty to franchisees and the economy by allowing the agency to be influenced by franchisors and franchisors’ attorneys.
The FTC has created a system that allows the expansion of franchising far beyond what the market legitimately supports. The FTC’s duty is to protect a fair market, not to protect franchisors and expand franchising beyond its actual market support. Franchisors should be making their money off of the sale of goods and services to the public, not franchise fees, litigation, threats of litigation, and SBA loan fraud.
I also believe there is a place for criminal RICO prosecutions, but that is for the government to decide. The government’s actions have clearly demonstrated that there is a large contingent of people in government who are currently on the side of racketeers. Not all of them are, of course. There are many good government employees who want to do what’s right and who are against organized crime.
I believe the following twelve points, together, open up franchising to racketeering charges. There is certainly more to the problem than this, but these twelve points, alone, IMO, demonstrate racketeering. And good arguments could certainly be made for SBA franchise loan fraud to be loan racketeering without the rest of this.
Please contact me on LinkedIn with feedback or suggested edits. I plan to continue to improve these points and my RICO argument over time.
Twelve points that I believe open franchising to racketeering charges:
- Fraud occurs when franchisors make misrepresentations in the FDDs they give franchisees before franchisees sign franchise agreements. Fraud occurs when franchisors make other misrepresentations to franchisees prior to franchisees signing franchise agreements. False franchisee satisfaction awards and false verbal promises are two examples of other fraudulent misrepresentations.
- The FTC has not put a system into place to ensure franchisors do not make misrepresentations in their FDDs. Franchisees sign ALL CAPS provisions in franchise agreements making it impossible for them to claim in court that misrepresentations made outside the FDD were fraudulent, even if, in reality, they were.
- Franchisors are incentivized to make FDD misrepresentations and other misrepresentations in order to get franchisees to sign franchise agreements.
- Upon the signing of franchise agreements, franchisees gave franchisors large franchise fees generally ranging from around $25,000 to hundreds of thousands of dollars.
- Franchisees sign personal guarantees in their franchise agreements, giving franchisors access to franchisees’ personal assets should franchisees default on their franchise agreements.
- Many franchise agreements have provisions that require franchisees to pay future royalties when franchisees defaulted on their franchise agreements. Franchisors can use litigation to access franchisees’ personal assets in order to pay these future royalties.
- Franchisors have a known advantage in litigation due to the unjust nature of franchise agreements and their greater wealth and access to legal support relative to franchisees. Franchisors are more prepared for litigation, even to the extent of having intentionally written franchise agreements to allow for specific legal strategies. From the onset, franchisors’ attorneys are prepared to litigate in accordance with the strategies franchisors have intentionally written into franchise agreements. Franchisees, on the other hand, have purchased the franchise to receive support, not litigate, and are therefore completely unprepared for litigation.
- Some franchisors use their known advantage in litigation to intimidate franchisees into silence, compliance, and even to garner support and obsequiousness from franchisees willing to be loyal to a powerful and dangerous franchisor in exchange for safety from litigation and the likely loss of personal assets.
- Sometimes franchisors litigate against a particular franchisees in order to set an example of what they might do to other franchisees should those franchisees choose to break their silence or try to default on their contracts. Franchisee bankruptcy is often the result.
- Some percentage of franchisors use franchise fees and their access to franchisees’ personal assets to illegitimately expand their businesses against market demands.
- Some percentage of franchisees stay in franchise agreements because they can not safely escape them without losing their personal assets rather than because their franchise locations are actually making a profit in the real market. Some are, no doubt, even running their businesses at a loss in order to avoid litigation and the loss of personal assets.
- In some cases, franchisors also use systematic loan fraud to collect franchise fees and get an influx of money from the SBA into their franchise system.
If you can explain why these facts, together, preclude franchising from being subject to civil RICO charges, please message me on Linked In and share your argument. I’d love to hear why you think this doesn’t add up to white collar racketeering?