Prior to signing a franchise agreement, many franchisors ask prospective franchisees to complete a disclosure questionnaire. The franchise disclosure questionnaire is designed to be an affirmation from the prospective franchisee that they received the franchise disclosure document 14 days and the agreements 7 days before signing, and that no unauthorized financial performance representations were made. The completed disclosure questionnaire is evidence that the franchisor complied with the federal FTC franchise disclosure laws.
But, what if the questionnaire does just the opposite? What? How? What if the prospective franchisee checks that he did not get the disclosure document 14 days before signing? Or, what if the prospective franchisee notes that financial performance representation was made, which was not included in the franchise disclosure document [FDD].
Would it not follow that the completed questionnaire would then be evidence that the franchisor violated the franchise disclosure law? The outcome may surprise you!
The case is Braatz, LLC v. Red Mango FC, LLC. The facts of the case go like this. Prospective franchisees, Mr. and Ms. Braatz sign a franchisee agreement and complete a ‘Franchise Compliance Questionnaire.’ As part of their completed questionnaire they mark ‘No’ to the following:
- It is true no employee or other person speaking on our [the Franchisor’] behalf made any statements or promise regarding the costs involved in the operating a RED MANGO Store franchise that is not contained in the Franchise Disclosure Document……….
- It is true no employee or other person speaking on our [Franchisor’] behalf made any statement or promise regarding the actual, average or projected profits or earnings………..
The Braatzes were given a business plan and financial projects from an existing RED MANGO by the Franchisor’s Regional Manager. That is part of the facts of the case. It is a fact they were given a business plan and financial projects; therefore Mr. and Ms. Braatz marked no on the questionnaire and signed the franchise agreement.
The franchisor gets the signed franchise agreement, completed questionnaire, and a check from the Braatzes. The franchisor deposits the check, signs the franchise agreement, but contacts the Braatzes and says they cannot open a RED MANGO until they correct their answers on the questionnaire. The franchisor does not give the Braatzes a copy of the franchise agreement signed by the franchisor, but instead gives them a second questionnaire to complete.
Now remember, the franchisor has signed the franchise agreement and cashed the check. The Braatzes complete a second questionnaire answering ‘Yes’ to the questions, return the second completed questionnaire to the Franchisor, form Braatz, LLC limited liability company, open the franchise, and several years latter file bankruptcy and want to rescind the franchise agreement.
No go. The Court dismisses their claim. Yes. The franchisor may have improperly given financial projects, information about cost, but the Court reasoned the Braatzes did not materially rely on the Regional Manager’s disclosures, because when they were asked to correct the questionnaire, the Braatzes corrected the form and formed their limited liability company and opened their franchise. The Regional Manager’s disclosure may have been contrary to the FTC disclosure law, but they were not material.
Unexpected outcome. Not one to rest your hat on. The franchisees’ compliant was dismissed, but the court left room for the franchisees to amend and refile their claim against the franchisor.
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