When a franchise relationship goes awry, franchisees may look to claims against the franchisor. We have talked about some of those claims here in this blawg. Franchisees may claim fraud. The franchisor misled me into buying the franchise. Breach of the good faith and fair dealing, the franchisor is not acting fairly.
But what about claiming that the franchise is racket? In the case of the WWW, LLC et al. v. Coffee Beanery, Ltd., et al., the franchisee, WWW, LLC, claimed among other things that Coffee Beanery and its officers (yes, the franchisee sued 7 of the franchisor’s officer personally) were guilty of Racketeering. The Racketeer Influenced and Corrupt Organizations Act (RICO) is commonly associated with money laundering, embezzlement, and drug trafficking.
How did RICO get in the world of franchising? Well, let’s take look. A RICO violation involves (1) the commission of two or more acts (2) constituting a "pattern" (3) of "racketeering activity" through which (4) the culpable person (5) invests in, controls, or participates in (6) an "enterprise" (7) the activities of which affect interstate or foreign commerce. A private plaintiff must claim injury to business or property caused by the violation
The franchisee in the Coffee Beanery case claimed that the disclosure document given to prospective Coffee Beanery franchisees contained misrepresentations. Specifically Plaintiffs contend that the Coffee Beanery “café concept” was promoted to franchisees as a proven and money-making concept, when in fact Defendants (Franchisor, Coffee Beanery) knew that only one café store, which was uniquely situated, had ever been successful. Franchisees relied on this information, paid the franchise fee and invested in Coffee Beanery café franchises, only to lose a significant amount of money when the stores failed.
So does this translate to mean that if a franchisor claims that their franchise model is a ‘proven-money making concept’ they can be accused of a violation of RICO, when the franchisee’s business fails? RICO claims are scary. Not just because of the connotations, but also because of the damages that can be awarded if a RICO claim is proven. RICO calls for treble damages and reimbursement of attorney fees. In the Coffee Beanery case, the franchisees claimed operating losses of $325,000. If the franchisee wins, they could be awarded 3 X their operating lost and any other losses ($325,000 X 3 = $975,000), plus their attorney fees paid!
Lesson from the Court: What is thought to be mere puffery can be trebly damaging!