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A Fraud or Misrepresentation Can Lead Franchisees to Receive Franchises Far Different From What Was Promised

When you put your hard-earned money, time, and effort into buying a franchise, the last thing you might expect is to be misled about what you’re buying. But sometimes, that can be the case. The franchise development or sales department for franchisors is tasked with growing the franchise system and hitting target growth numbers. Unfortunately, this can often result in salespersons and brokers making inaccurate statements to entice a prospective franchise owner. Franchisors also can misrepresent or omit material items in the franchise disclosure document provided to prospects.

Fraud and misrepresentations in the sale process can result in a franchisee being stuck with a franchise far different from what was promised. We know the franchise investment laws and the Federal Trade Commission’s Franchise Rule forwards and backward. We can quickly ascertain whether the franchisor or its salespersons or brokers violated the law in making representations to you. We know when the franchisor has omitted something in the franchise disclosure document that is required by the FTC’s Franchise Rule. In these circumstances, we often bring fraud and negligent misrepresentation claims.

Examples of franchise fraud can include misrepresenting:

  • Revenue or sales of franchisees in the system;
  • The experience of or composition of the executive team;
  • The affiliates and suppliers owned by the franchisor and its management;
  • The training or support provided by a franchisor;
  • The proprietary or unique elements of the franchise system;
  • Whether there are national accounts or “synergies” with other franchised brands under the same ownership;
  • Your territory protections or exclusivity;
  • Whether the franchisor’s model works or is viable in your territory or part of the country;
  • How the marketing fund is to be utilized;
  • The costs of ownership of the franchise; and
  • Whether there is a legal post-term non-compete provision.

State Unfair Business or Deceptive Trade Practices Statutes Can Also Provide Franchisees an Opportunity to Obtain Relief

State consumer protection statutes, also known as “little FTC Acts,” may provide claims against franchisors for misrepresentations or deceptive acts. These statutes often refer to these acts as unfair business practices, deceptive trade practices, or consumer sales practices depending on the state. What they have in common is that they can provide a franchisee the ability to go after a franchisor who has engaged in misconduct or utilized unfair, deceptive or unlawful practices.

These statutes are often broadly construed, meaning that they may allow for claims even where a fraud or misrepresentation claim is not viable. One of the key differences is that a franchise owner may not have to show that in some circumstances, but for the franchisor’s misstatement, they wouldn’t haven’t bought the franchise. Instead, the franchisee could demonstrate that the franchisor’s acts or statements were likely to deceive or merely played a role in influencing prospects’ decision to purchase the franchise.

Another key difference is that the franchisee may not need to show that the franchisor intended to deceive the franchisee, only that it did. These differences can expand the range of possible deceptive practices claims by focusing on the franchisor’s actions rather than how the franchisee responded to them. Without looking at each individual’s reaction and reliance, multiple franchisees can bring an action, possibly through an association or class action, to address the franchisor’s actions.

The FTC’s Franchise Rule doesn’t provide a private right for franchisees to bring a claim. But the consumer protection statutes can often fill in the gap by providing franchisees a right to bring claims for omissions or misstatements in the FDD’s required disclosure items. The statutes also can provide for claims where a franchisor was not properly registered to sell franchises under a state’s franchise investment law or otherwise violated a franchise investment law. Such state laws can also provide for attorneys’ fees and damages multipliers where a franchisor has willfully or knowingly engaged in unfair, deceptive, or unlawful practices.

A Franchisee Lawyer with Extensive Litigation Experience

Our founder, Doug Luther, began his career at Global 100 law firm Sheppard Mullin and then moved on to the well-known litigation firm Glaser Weil. He has represented Fortune 500 companies in complex, multi-million dollar cases. He has frequently litigated fraud claims as well as obtained punitive and enhanced damages. Whether you want to rescind (cancel) your franchise agreement or want to be compensated for your loss, we can help you. If you are considering either bringing a lawsuit based on a misrepresentation made by a franchisor or unfair trade practice, Mr. Luther brings the knowledge and depth of experience you need.

If You Want to Evaluate the Strength of a Potential Fraud or Unfair Business Practices Claim, Then It’s Time to Contact a Franchisee Attorney

When you’re ready to discuss your fraud or unfair business practices claim, we are ready to listen. We will walk through the representations made to you, identify your case’s strengths and weaknesses, and develop a strategy to accomplish your goals. Whether you are in Orange County, Southern California, or beyond, to discuss your case and how we can help, call or email us today to schedule a consultation.