Franchise Officer’s Presale Financial Claims Could Violate Florida Franchise Law

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

An officer and part-owner of a hockey training business franchisor could have violated the Florida Franchise Act’s prohibition on intentionally misrepresenting the prospects or chances for success of a proposed franchise by allegedly misrepresenting the financial condition of the franchisor to a prospective franchisee, a federal district court in St. Paul, Minnesota has ruled. However, the franchisee failed to adequately allege that the officer committed common law fraud.

Florida Franchise Act

The owner argued that the Florida Franchise Act did not apply to him because he was not a party to the franchise agreement and was not personally selling a franchise to the franchisee. However, the Act defined a "person" as "an individual, partnership, corporation, association, or other entity doing business in Florida," the court noted.

The owner was doing business in Florida because he personally travelled to Florida to assist with the establishment of the franchisee’s franchise, and he received money for doing so. As such, the owner was a "person" under the Act.

The showing required to recover damages for a defendant’s intentional misrepresentation of the prospects or chances of success of a proposed franchise was not the same under the Florida Franchise Act as required for an action for common law fraud, according to the court.

The statute did not require proof of a deliberate and intentional false statement of material existing fact. Rather, recovery under the franchise statute required only proof of intentional words or conduct by the franchisor, concerning the prospects or chances of success of the enterprise, which were relied upon by the franchisee to his detriment and which were not in accord with the facts.

The owner argued that he had little to no knowledge of the financial circumstances of the franchisor’s existing facilities. However, a reasonable jury could find that, to a prospective franchisee, the owner, an engineer who worked with the franchisor’s facilities and as part-owner of the franchisor, was in a position to represent the financial conditions of the franchisor, the court held.

Common Law Fraud

The franchisee failed to present sufficient evidence that the officer knew that his representations were false or that he intended his representations to induce the franchisee’s reliance to support a common law fraud claim, the court determined. Thus, the owner was entitled to summary judgment on that claim.

The franchisee’s allegation that the officer made false statements concerning the financial success of its existing facilities, if true, would qualify as false statements regarding a material fact. The franchisee submitted evidence that the financial success of existing facilities, a financial projection worksheet, and the statements the officer made to the principal of the franchisee were pivotal factors in the principal’s decision to open a franchise.

However, the franchisee introduced no evidence beyond a bare assumption showing that the franchisor was in financial trouble when the negotiations leading up to the purchase of a franchise took place, or that the officer knew of this financial trouble, the court decided.

The decision is Hockey Enterprises, Inc. v. Talafous, CCH Business Franchise Guide ¶14,773.