Franchise laws require that franchisors provide all prospective franchisees with a disclosure document or FDD. But, do prospective franchisees really read the FDD? Well, we know at least one case were the franchisee did not read the disclosure document before buying.
So what? The franchisee is charged with notice of everything that is contained in the disclosure document; even if the franchisee did not read it! A reasonably prudent person would read the franchise disclosure document before buying a franchise. There is no duty for the franchisee to read the disclosure document. But, since a reasonable person would read it, the franchisee is given notice of everything that is contained in the franchise disclosure document. They cannot come back later and say, “I didn’t know.” And if there is an inconsistency or omission in the disclose document, the franchisee should have inquired. Not just read the disclosure document, but inquired! Again, the franchisee cannot lean back and say: “Well, you made a mistake; you left something out.”
That was the finding of the court in a recent case. The case is Massey, Inc. (Massey) v. Moe’s Southwest Grill, LLC. The plaintiff and franchisee openly and readily admitted that he did not read the FDD before buying his Moe’s Southwest Grill franchise. And that, in part, became the base to his claim. Massey said: “Look, I did not read the disclosure document before buying my franchise. I did not know that the franchisor executives are making a profit on the products that I buy for from my suppliers.” Item 8 of the Moe’s Southwest Grill read:
8. RESTRICTIONS ON SOURCES OF PRODUCTS AND SERVICES …
One of our approved suppliers, Systems Opportunities Savings (“SOS”) provides food brokerage services to MOE’S franchisees. SOS is indirectly related to us through Martin Sprock, our Chief Executive Officer and President, who is a 50% equity holder in SOS. Individually, Mr. Sprock also holds a small minority interest in two other suppliers in our system: Atlanta Lighting and Kudzu International. We do not derive revenue, directly or indirectly, from any of these suppliers in connection with the services or products they provide to our franchisees.
The fact was Martin Sprock, Chief Executive Officer and President of Moe’s Southwest Grill, did derive a profit from Systems Opportunities Savings, Atlanta Lighting and Kudzu International. The court said that Massey should have asked. The disclosure document said that Mr. Sprock had an interest in the suppliers. A reasonable person would have asked. It seems unlikely Mr. Sprock did not derive a profit from the suppliers that he had an interest. Massey, you did not read it. You should have and you should have asked!
Lesson from the Court: Read, know and understand first. Don’t figure out later what you actually signed!