Texas Deceptive Trade Practices Act: A Powerful Tool for Franchisees

Have you invested your hard-earned money in a franchise only to discover the business doesn’t match what was promised?  You’re not alone.  At Luther Lanard, we have seen countless franchisees who were sold a dream that quickly turned into a nightmare.  Fortunately, Texas franchisees have a powerful ally: the Texas Deceptive Trade Practices Act (DTPA).

How the DTPA Can Protect Your Franchise Investment

The decision to purchase a franchise represents a significant investment of time and money.  Unfortunately, some franchisors employ misleading practices to secure franchise sales, leaving franchisees with businesses that fail to meet the promised expectations.  At Luther Lanard, we have successfully represented numerous franchisees whose investments were jeopardized by deceptive practices.  One powerful legal tool available to franchisees in Texas is the Texas Deceptive Trade Practices Act (DTPA).

What Is the Texas Deceptive Trade Practices Act?

The Texas Deceptive Trade Practices Act (DTPA) is Texas’s consumer protection shield, designed to protect individuals and businesses from false, misleading, or deceptive statements in the course of business.

The key provisions of the DTPA include:

1. Definition of a consumer: A “consumer” is defined as any individual, partnership, corporation, or governmental entity that seeks to acquire, by purchase or lease, any goods or services.
2. Prohibited practices: The Texas Business and Commerce Code Section 17.46 has a laundry list of 25 prohibited acts that are considered false, misleading, or deceptive acts or practices.  These include misrepresenting goods or services, failing to disclose information concerning goods or services which was known at the time of the transaction, and false claims about warranties.
3. Non-disclosure violations: It is a violation of the DTPA to not disclose known defects if the reason for failing to disclose was to lure the consumer into the transaction. In this situation, silence can result in a violation of the DTPA.
4. Protection against unconscionable actions: The DTPA also protects against any act that would be considered unconscionable. It is defined as an act or practice that, to a consumer’s detriment, takes advantage of a person’s lack of knowledge, ability, experience, or capacity to a grossly unfair degree.
5. Procedure for filing a claim: When you are ready to file a DTPA lawsuit, you cannot go straight to court and file your claim. The DTPA requires that you give written notice of your problem to the merchant or seller at least 60 days before you can file a lawsuit.
6. Available remedies: When you fall victim to illegal practices covered by the DTPA, you may have the right to sue for damages under the act. If you win your suit and prove that the defendant knowingly deceived you, you may be eligible to recover up to three times your damages.

The DTPA is an important legal protection for consumers against deceptive business practices, allowing for compensation when businesses engage in misleading or fraudulent behavior.

Importantly for franchisees, courts have consistently recognized that franchisees qualify as “consumers” under the DTPA and can bring claims against franchisors. Several court cases, including Texas Cookie Co. v. Hendricks & Peralta, Inc., 747 S.W.2d 873, 879 (Tex. App. 1988) and Century 21 Real Estate Corp. v. Hometown Real Estate Co., 890 S.W.2d 118, 125 (Tex. App. 1994), have confirmed this right. 

Common DTPA Violations in Franchising

Based on our experience representing franchisees, several common violations of the DTPA occur in the franchising context:

1. Financial Misrepresentations

A significant provision of the DTPA for franchising would be Section 17.46(b)(5), which addresses misrepresentations about affiliations, sponsorships, approval, or connections. In the franchising context, this would cover situations where a franchisor misrepresents the nature of the franchise relationship, the potential earnings, the level of support provided, or other material aspects of the franchise opportunity.

One of the most damaging deceptive practices involves providing prospective franchisees with misleading financial projections. The Federal Trade Commission’s Franchise Rule permits franchisors to provide information about potential financial performance only if “there is a reasonable basis for the information, and if the information is included in the disclosure document” (16 C.F.R. § 436.5(s)(1)).

In our recent cases, we’ve seen franchisors providing pro forma financial statements with vastly inflated revenue projections—sometimes as much as twice the actual median revenue of existing franchisees. These inflated figures not only induce franchisees to purchase franchises they otherwise would not but also help them qualify for loans they might not otherwise obtain.

2. Material Omissions

The DTPA specifically prohibits “failing to disclose information concerning goods or services which was known at the time of the transaction if such failure to disclose such information was intended to induce the consumer into a transaction into which the consumer would not have entered had the information been disclosed” (Texas Business and Commerce Code § 17.46(b)(24)).

In the franchising context, this often involves franchisors concealing the poor performance or closure of similar franchises in particular markets. When franchisors hide the fact that prior franchisees in a specific region have failed, they deprive new prospective franchisees of critical information that would likely influence their decision to invest.  The franchisor had not only hidden this critical information but also provided grossly inflated financial projections to help franchisees qualify for loans.

3. False Representations About Business Models

Some franchisors falsely represent that their business model will work in all markets, when in fact they know that certain geographic regions or economic environments pose particular challenges. Under the DTPA, representing that “goods or services have benefits which they do not have” constitutes a deceptive trade practice (Texas Business and Commerce Code § 17.46(b)(5)).

4. Waivers of DTPA

We have seen some franchisors attempt to include DTPA waivers in their franchise agreements, but these waivers are generally unenforceable. As stated in the DTPA itself, “any waiver by a consumer of the provisions of the DTPA is contrary to public policy and is unenforceable and void” (Texas Business and Commerce Code § 17.42).

Powerful Remedies Available Under the DTPA

The DTPA offers franchisees significant remedies when they’ve been victims of deceptive practices:

1. Get Your Money Back: Franchisees can recover the full amount invested in the franchise, including franchise fees, startup costs, and operating expenses.
2. Treble Damages: In cases where violations were committed knowingly, franchisees may be awarded up to three times the amount of economic damages.
3. Attorneys’ Fees Covered: A successful plaintiff under the DTPA is entitled to recover reasonable and necessary attorneys’ fees.

Protect Your Franchise Investment with Luther Lanard

If a franchisor has misled you with false promises or hidden crucial information, don’t wait until your business collapses. At Luther Lanard, our experienced attorneys have successfully recovered millions for franchisees who were victims of deceptive practices.

Contact us today for a confidential consultation. We’ll analyze the representations made to you, identify your case’s strengths, and develop a strategy to protect your investment and secure the compensation you deserve.

Note: This blog article is intended for informational purposes only and does not constitute legal advice. Each case is unique, and results will vary based on the specific facts and circumstances.