Thursday, September 22, 2011

Franchisor Did Not Commit Fraud, Violate Minnesota Franchise Act in Franchise Sale

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

A janitorial business franchisor did not commit common law fraud or violate the anti-fraud provisions of the Minnesota Franchise Act (MFA) in connection with the sale of a franchise to three franchisees because the franchisor made no untrue statements of material fact or misrepresentations, a federal district court in Minneapolis has decided.

The claims were initially brought as part of a putative class action against the franchisor, but the motion for class certification was denied in an earlier ruling (CCH Business Franchise Guide ¶14,335). After proceeding jointly through discovery, the parties agreed that the franchisor would move for summary judgment on the claims of three representative plaintiffs.

As to the first of the three plaintiffs, the franchisor’s alleged statement to that "[i]f you buy more, you’ll get more" was not untrue, the court held. The franchisor structured its franchising business to correlate the amount of business it promised to offer a franchisee with the amount of initial investment made by the franchisee. In that sense, it was true that the more a franchisee bought (or the larger his initial investment), the more he would receive in gross billings of offered accounts, the court determined.


The statement that owning one of the franchises was a "good business" and that the business could continue for "a long time" were puffery, the court ruled. In general, puffery includes statements of exaggerated boasting or vague, subjective claims of superiority. The franchisee’s counsel contended that the franchisor’s puffery should be evaluated in the context of the lack of sophistication of the franchisee—an immigrant with limited English ability and business acumen. However, immigrants were not a group so gullible that they could not recognize obvious puffery, the court reasoned.

The first plaintiff also asserted that the franchisor falsely represented a guarantee of $1,000 per month in account billings, but the franchisee admitted in his deposition that he was not promised any level of profits or income. Even if such a representation was made by the franchisor, any reliance on representations regarding profitability was unreasonable as a matter of law because it was directly contradicted by the franchise agreement, the court held.

The fraud claimed by the second of the three plaintiffs hinged on the franchisor’s alleged representations that he could earn as much money as a medical doctor or Ph.D., and its failure to inform him that declined accounts would be counted against the amount of business the franchisor was obligated to provide.

Reliance of Statement

The franchisee could not have reasonably relied on the alleged statement because it was made after he signed the franchise agreement, the court held. Further, the statement directly contradicted the franchisor’s Uniform Franchise Offering Circular (UFOC), which disclaimed any representations as to profitability or income level and was incorporated into the franchise agreement. The franchisee could not impose liability under a common law or MFA-based fraud claim merely because he chose not to read the UFOC, according to the court.

The franchisor could not have defrauded the third plaintiff by allegedly failing to disclose that any offers of accounts that the franchisee declined would count against the total amount of accounts that the franchisor was obligated to offer the franchisee, the court ruled. A reasonable jury would find that the franchisee received a version of the franchisor’s UFOC that unambiguously made such a disclosure, the court decided.

Evidence showed that: (1) the franchisee admitted, while a prospective franchisee, to receiving a "black book" from the franchisor; (2) the franchisor’s May 28, 2002 UFOC was bound as a black book; (3) the franchisee signed a written acknowledgment of having received the May 28, 2002, UFOC; and (4) most importantly, the franchisee produced the first two pages of the May 28, 2002 UFOC in the course of the litigation.

Statute of Limitations

The third franchisee’s claim that the franchisor violated the MFA by making misrepresentations regarding profitability, the availability of evening accounts, and the ability to hire employees was time-barred by the Act’s three-year statute of limitations.

Had the franchisor made the alleged statements, and if they were false, the franchisee would have been aware of the facts constituting the claim within months of purchasing his franchise, the court decided. Thus, even if the discovery rule applied to the MFA to toll the statute of limitations, the claim was barred. The franchisee knew all of the facts constituting the claim in early 2003 but did not file the claim until approximately five years later.

The decisions in Moua v. Jani-King of Minnesota, Inc., will appear at CCH Business Franchise Guide ¶14,665 and ¶14,681.

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