Federal and state laws prohibit franchisors from making improper financial performance representations when selling franchises. State statutes and common laws prevent franchisors from making misrepresentations when selling franchises. What are improper financial performance representations? What constitutes a misrepresentation?

In a case out of Minnesota looking at Florida law (Hockey Enterprises, Inc. Plaintiff, v. Dean Talafous, and Brian McKinneya), a franchisee claims that a franchisor committed fraud in making the following statements:

• Revenue and Expense Projection template, listed annual revenue estimates of $437,000 and an annual profit estimate of $139,600, even though the template said in bold font: “Disclaimer. This is a projection template and does not guarantee the results projected on this worksheet…….” The franchisor’s representatives said the revenues and expenses listed on the template were accurate and easily achievable.

• The franchisor assured franchisee that he could operate a successful franchise, even though he had no experience in the industry, if the franchisee just partnered or hired someone with a strong industry background.

• The franchisor said that he would receive a profitable and proven business model and the Franchisor would provide him with the tools he needed to run a successful franchise.

• The franchisor told him that the Franchisor was expanding in North America and that the expansion would increase brand recognition.

• The franchise did not have to be near a certain location to be successful.

How often do franchisors, when selling a franchise, talk about their intention to expand nationally, give franchisee a template business plan, boost about their system, meet with prospects with no core industry experience, give feedback about the site for the franchise business? Is the franchisor committing a fraud when he does these things?

The court, in a summary judgment, said that the franchisor’s actions did not rise to the level of fraudulent misrepresentation, but franchisor’s actions could amount to negligent misrepresentation. Basically, the franchisor did not intentionally mean to misrepresent the franchise, but the franchisor could have unintentionally misrepresented the franchise. And, the franchisee would have to prove it in order to prevail in the case.

The court’s findings were in the face of the standard disclaimers in the franchise agreement, which said the franchisee did not rely on any information not contained in the FDD or franchise agreement. The court’s findings were in the face of a franchisee questionnaire in which the franchisee checked a box and attested that he did not rely on the comments of the franchisor sellers in purchasing the franchise.

LESSON FROM THE COURT: Even the most standard of practices, can be misrepresentations if they do not rise to the level of an improper financial performance representation or fraud.

Lesson From the Court: I did not do my diligence, but you negligently misrepresented the franchise!

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