Wednesday, October 19, 2011

Projections of Store Openings Could Have Violated North Dakota Franchise Law

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

Pharmacy franchisor Medicine Shoppe International, Inc. could have breached the anti-fraud provisions of the North Dakota Franchise Investment Law (NDFIL) by allegedly making a material misstatement of fact in a Franchise Disclosure Document (FDD) filed by the franchisor with the North Dakota Securities Commissioner in 2009 when it projected the opening 0-1 stores in North Dakota, a federal district court in Fargo, North Dakota, has ruled.

In reality, the franchisor did not intend to offer any franchises in North Dakota of the type and trade name described in the FDD so as to avoid triggering the “most favored nations” clause in the franchise agreements of current franchisees, such as the two plaintiffs.

The plaintiff franchisees argued that they were induced to enter into renewal agreements with the franchisor specifically because they were assured that, by virtue of the “most favored nations” clauses in their renewal agreements, they were assured that if a better deal came along, they would be able to convert to it.

If a factfinder determined that the franchisor employed such a scheme as a way to defraud or commit deceit, it could also find a violation of the statute. Thus, genuine issues of fact existed with regard to whether the franchisor violated the NDFIL, the court held.

Private Right of Action

The franchisor’s contention that there was no private right of action under the NDFIL was rejected. The plain language of the statute stated that a franchisee or subfranchisor could bring an action against “any person who violates any provision of this chapter,” the court observed.

The decision is JMF, Inc. v. Medicine Shoppe Int’l, Inc., CCH Business Franchise Guide ¶14,692.

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