Thursday, June 17, 2010

Failure to Disclose Business Plans to Prospective Franchisee Did Not Violate Washington Law

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

A pizza restaurant franchisor did not violate the Washington Franchise Investment Protection Act (WFIPA) by failing to disclose to a prospective franchisee that the franchisor was planning to discontinue its outlet franchises at the time that the franchisee purchased its franchise, according to a Washington appellate court.

Thus, a Washington trial court’s dismissal of the franchisee’s claim that the franchisor’s silence as to its plans was a “material omission” under the WFIPA was affirmed.

The franchisor sold two different models of franchises: an outlet model that sold only “take-and-bake” pizzas and a restaurant model that sold both "take-and-bake" pizzas and “ready-to-eat” pizzas that could be consumed at the store.

The proposed franchise agreement between the parties did not require the franchisee to specify which model they would follow and provided that the franchisor could change store operating methods in the future.

Material Omission

Case law held that nondisclosure of a fact would qualify as a material omission under the WFIPA if a reasonable person would consider that fact important in determining what action to take with respect to the transaction in question, the appellate court observed.

The franchisor presented evidence demonstrating that it had not discontinued its outlet stores after the franchise purchase. In fact, it continued to support outlet store franchisees in several locations throughout the country.

In response, the franchisee pointed to evidence that approximately seven months after its franchise purchase, the franchisor announced a plan to require new franchises to offer some dining facilities. However, under this plan, existing outlet stores were not required to change their operations and they continued to receive support from the franchisor.

The franchisee failed to offer any evidence that this prospective policy affected existing outlet stores such as its franchise, the court determined. At most, it showed that the franchisor was considering a shift in its mix of stores going forward. Moreover, the franchisor disclosed in both its offering circular and the franchise agreement that such a shift could occur if the franchisor decided to change its store operating methods.


As to materiality, the franchisor’s mix of outlet and restaurant models was not a key feature of the franchise agreement, the court ruled. Indeed, the number of outlet versus restaurant stores was not mentioned in the franchise agreement. Further, the agreement did not require franchisees to specify which model they would follow or limit their ability to change methods. Thus, there was no reason to expect that the mixture of store models would remain static.

Even assuming that the franchisor was considering a change to the way new stores could operate in the future, the franchisee failed to show that disclosure of this fact would have been necessary to make the franchise offering not misleading, according to the court.

The June 1 unpublished decision is Something Sweet v. Nick-N-Willy’s Franchise Co. It will appear at CCH Business Franchise Guide ¶14,398.

No comments: