FTC Settlement Puts New Focus on Franchise Disclosure Standards

Craig R. Tractenberg recently wrote in an article for The Legal Intelligencer that the Federal Trade Commission secured a $17 million settlement against Xponential Fitness over alleged franchise disclosure violations, a case that could send a clear message across the franchise industry about the cost of incomplete or misleading pre-sale information.

The FTC’s complaint took aim at multiple aspects of Xponential’s franchise sales process, including how the company framed the path to opening. Franchisees were led to expect they could get a studio up and running within six months. In reality, many spent more than a year trying to open, and some never got there. That delay left some franchisees carrying unexpected costs such as rent and interest payments before they could generate revenue.

Federal regulators also alleged that Xponential failed to disclose material background information about key executives, including prior fraud lawsuits tied to a former CEO and a bankruptcy history involving a former president of franchise development. The complaint also alleged that Xponential did not fully identify former franchisees who had left the system. In some cases, the contact information it provided was outdated, limiting what prospective buyers could learn during due diligence. Regulators also said the company failed to provide franchise disclosure documents within the required 14-day review window before collecting money or signing binding agreements.

Under the proposed consent order, which remains subject to finalization by the U.S. District Court for the Central District of California, Xponential would pay $17 million to provide relief to affected franchisees. The order would also bar the company from making similar misrepresentations and require full compliance with the FTC Franchise Rule going forward.

For the broader franchising industry, the case could have a lasting effect even if Xponential proves to be an outlier. It reinforces that franchise growth cannot come at the expense of clear, timely and accurate disclosures. It may also encourage franchisors to take a harder look at their FDD practices, executive disclosures and sales language before regulators do it for them. For franchisees, it is a reminder that legal review matters, but it also shows how vulnerable buyers can be when critical information is never disclosed in the first place.

Read the original article here.

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