Franchisee as commonly asked to sign a general release of claims when entering to a franchise agreement when to transfer a franchise, when renewing a franchise, and when entering to a settlement agreement. Under a general release of claims, franchisees give up their right to sue the franchisor.
However, not always does the release of claims effective
operate to release or prevent claims against a franchisor. Hence the case involving Charlie Grainger hot
dog franchises.[i] It this case a class of franchisees and area
representative sued the franchisor making claims of (1) rescission; (2) fraud, intentional
misrepresentation, and concealment; (3) negligent misrepresentation; (4) breach
good faith and fair dealing; (5) breach of fiduciary duty; (6) violation of
North Carolina’s Unfair and Deceptive Trade Practices Act; (7) racketeering
activity, in violation of 11 U.S.C. §1962(b); (8) a pattern of racketeering activity, in
violation of 11 U.S.C. §1962(c); (9) conspiring to violate the RICO Act; and
(10) breach of contract.
The franchisor sought dismissal of the claims based on release claims signed by each of franchisees and area representatives incident to the signing of their franchise agreements. Under the release of the claims, franchisees and area representative waived their right to sue the franchisor.
Plaintiffs [Franchisees] argue that the General Release is void because it violates federal law. In particular, they argue that the release violates the Federal Trade Commission’s Franchise Rule, which provides in pertinent part that it is “an unfair or deceptive act or practice” to “[d]isclaim or requires a prospective franchisee to waive reliance on any representation made in the disclosure document or in its exhibits or amendments.” 16 C.F.R. 436.9(h).Id.
Not so fast, the court rejected the release of claims. In agreement with the franchisees and area representatives, the court held that the release of claims was in violation of the federal law; more particularly the FTC Franchise Disclosure Rule. The FTC Franchise Disclosure Rule prohibits disclaiming or waiver of any disclosures made in the franchise disclosure documents.
For other reasons the court dismissed RICO and Racketeering, but allow claims of (2) fraud, intentional misrepresentation, and concealment; (3) negligent misrepresentation; 5) breach of fiduciary duty; and (6) violation of North Carolina’s Unfair and Deceptive Trade Practices Act to proceed.
[i] Trident Atlanta, LLC, Dual Energy, LLC, Cynergetic AR, LLC, Ms. Marcie Bindes d/b/a KS Enterprises, LLC, Mr. Dale Atkinson & Mrs. Rose Atkinson d/b/a Rosedale Three, LLC, and Mr. Trent Moore d/b/a LindsTan, Inc., Plaintiffs v. Charlie Graingers Franchising, LLC, Charlie Graingers Franchising, Inc., Louis Craig North, Gregory Bruce George, and Jason Matthew Nista, Defendants. No. 7:18-CV-10-BO Business Franchise Guide – Explanations, Laws, cases, rulings, new developments ¶16,354