“How much will I make?’ is one of the first questions asked by many, if not every, prospective franchisee. Under the FTC franchise disclosure laws, franchisors are not allowed to answer that question unless they include a Financial Performance Representation disclosure in item 19 of the franchise disclosure document [FDD].
The requirement to include a financial performance representation in item 19 is optional. However, if the franchisor chooses not to disclosure a financial performance representation, the franchisor is not permitted discuss earnings or profits of existing or future franchises. And, a pre-proscribed FTC disclaimer must expressly be stated in item 19 of the FDD.
If franchisor does not include a financial performance representation in the item 19 of the FDD, when the prospective franchisee asks, ‘How much will I make?’ the franchisor must say, ‘I cannot tell you or give you information about how much you will make as a franchisee.’
What if the franchisor does? What if the franchisor gives information about franchisee’s outlet performance, earning, profits without including a financial performance representation [previous called earning claims] in item 19 the FDD? That is exactly the facts in a case out of Georgia. The Supreme Court of Georgia said, ‘too bad for you, franchisee. The ill doing is on you, franchisee. You didn’t read the FDD or the franchise agreement. The FDD and franchise agreement said the franchisor made no financial performance representations.’
In the original discussion, the jury awarded the franchisee 750,000 dollars in compensatory damages, 375,000 dollars in RICO damages, and 30,000 dollars in cost of litigation. The Supreme Court reversed the verdict and remanded the case for a new trail. The Supreme Court of George held that the franchisee should have read the franchise disclosure document, which included the item 19 disclaimer about no financial performance representations. The franchisee should have read the franchise agreement where the franchisee acknowledged that the franchisor made no representations about earning capability, levels of potential sales, income or profit.
Franchisors don’t get too giddy. The Franchisee claims were based in fraud misrepresentation and RICO. The issue of the per se violation of the FTC disclosure rule was not raised. Probably because the franchise agreement was signed 14 years ago, 10 years after the franchisee was in business and the update FTC rule was not in effect. And, there were not state franchise disclosure laws discussed in the case.
And, did you see the jury verdict? If the Supreme Court had not reversed, the franchisor would have owed: 750,000 dollars in compensatory damages, 375,000 dollars in RICO damages, and 30,000 dollars in cost of litigation. Do want to risk that kind of money?
Franchisees heed the warning from the court. Read the franchise agreement and disclosure document. It is no excuse to say that the franchisor pressured me to sign the franchise agreement and I did not have time to read it.
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