Non-disparagement, non-disclosure and “goodwill” clauses do not prevent franchisees from speaking with regulators, according to a recent Federal Trade Commission policy statement

Often, franchisees are required to enter into agreements which prevent them from communicating with third parties like regulatory agencies about a wide variety of matters, including the franchisor’s compliance with applicable law and other rules.   

These provisions may take the form of:  

• non-disparagement clauses (“franchisee shall not disparage the brand in any way”);
• confidentiality or non-disclosure clauses (“franchisee is prohibited from sharing any information about the franchise or their experience”); and
• “goodwill” clauses (“franchisee shall not engage in any conduct that may tarnish the goodwill of the brand”).  

Such provisions may be included as part of a franchise agreement the franchisee is required to execute when acquiring the franchise or when a separation between the franchisor and franchisee occurs.  

In its July 12, 2024 Policy Statement (the “Policy Statement”), the U.S. Federal Trade Commission (the “FTC”) cast doubt on the enforceability of such agreements.  According to the FTC, 

[g]enerally, case law establishes that clauses that impair or prohibit free communication about potential law violations with an administrative agency acting within its statutory mandate are void and unenforceable. For example, courts have struck down contractual clauses that otherwise prevent a government agency from seeking and obtaining complete, candid information in furtherance of a statutory mandate.

The FTC itself “has challenged companies’ use of tactics, including non-disparagement clauses, that discourage purchasers from speaking or publishing truthful or non-defamatory negative comments or reviews as unfair practices under the [Federal Trade Commission] Act.”

According to the FTC, at least one court has endorsed the Policy Statement’s view: it found “on summary judgment that Defendants’ use of gag clauses to prohibit purchasers from speaking or publishing truthful or non-defamatory negative comments or reviews about the Defendants, their products, or their employees was an unfair practice in violation of Section 5 of the [Federal Trade Commission] Act.”  

The practice of gagging franchisees, the FTC contended, “is unfair if it causes or is likely to cause substantial consumer injury, which consumers cannot reasonably avoid, and which is not outweighed by benefits to consumers or competition.”

According to the FTC, 

[c]lauses that prohibit a franchisee from reporting potential law violations to the government are unfair. Similarly, implicit or explicit threats of retaliation, by legal action or otherwise, against a franchisee for reporting potential law violations to the government are unfair. By suppressing reports of potential legal violations by franchisors to the government, franchisors impede the flow of franchisee reports and voluntary interviews that are critical to government investigations.

If such information flows are restricted, legitimate governmental functions are impeded:  

[s]uppressing such information undermines the government’s ability to learn about practices that violate the Franchise Rule, the [Federal Trade Commission] Act, and other laws. It also impedes the ability of franchisees to demand lawful conduct from the franchisor by exposing such conduct to the government. These limitations undermine the government’s ability to police the marketplace and the ability of prospective and existing franchisees to protect themselves, and are thus likely to cause substantial harm. For example, prospective franchisees may not learn about deceptive practices before they invest. Such harm, resulting from the franchisor’s contract provisions or communications, is not reasonably avoidable. Most prospective and existing franchisees would need to seek legal counsel on such contractual terms to understand that they are illegal, thus effectively chilling truthful communication with government agencies.

No benefits flow from the suppression of truthful information to the government. Indeed, the competitive and consumer protection benefits that flow from the franchise business model are compromised.

Based on the Policy Statement, franchisees should not be deterred from communicating freely with regulatory agencies about matters under their supervision. Consequently, franchisors, to avoid adverse FTC scrutiny, may want to think twice about including non-disparagement, confidentiality and/or “goodwill” clauses in their franchise agreements as each may be viewed as amounting to an unfair business practice.  

Do your business contracts contain language that restricts the ability of a franchisee or other party to disclose information to a regulatory body? Can we help you better understand any other matter covered in the FTC’s Policy Statement. If so, please reach out to Castle Garden Law for an introductory conversation.