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.

Puffery

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.

Choice of Florida Law Barred Minnesota Franchise Act Claims

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

Minnesota Franchise Act claims asserted by a Florida franchisee of two hockey-training businesses and its principal against a Minnesota franchisor and several of its officers were barred by the valid and enforceable choice of Florida law provision in the parties’ agreements, the federal district court in St. Paul, Minnesota, has decided.

After hearing about the franchise opportunity, the corporate franchisee’s principal traveled to Minnesota and met with three officers of the franchisor there. Provided with a Uniform Franchise Offering Circular, the franchisee and principal entered into two franchises for territories in Florida. The franchisee opened only one of the franchises, closing it after one year due to financial losses.

The franchisee and principal filed suit, alleging that the franchisor violated the Minnesota Franchise Act by failing to register the franchise and making several false representations that induced them to purchase the franchises. As a result of these violations, the franchisee and principal lost more than $800,000.

Specifically, the plaintiffs alleged that, contrary to the franchisor’s representations:

(1) The franchises did not generate anywhere near the gross total sales that the franchisor claimed they could;

(2) It was imperative that a franchise be located in or near a hockey rink;

(3) It was highly unlikely that all of the hockey facilities of the franchisor were financially successful;

(4) The owner of the franchise needed to have significant hockey experience to operate profitably; and

(5) The franchisor did not experience the growth that had been represented or have an established business plan for running hockey facilities.

Waiver of Rights

The franchisee and principal argued that, despite the choice of law provision, the franchisor was liable for violations under the Minnesota Franchise Act (MFA) because Minnesota law did not permit the waiver of any rights secured by the Act.

However, the statute’s anti-waiver provision prohibited the waiver of rights secured by the MFA through a choice of law provisions only if the waiver purported to bind (1) a person who was a Minnesota resident (or Minnesota corporation) at the time the that person or organization acquired a franchise or (2) a person (regardless of residence) who was acquiring a franchise that would operate in Minnesota.

In this case, the principal was not a resident of Minnesota, the franchisee was not was not organized or incorporated in Minnesota, and the franchises at issue were to be operated in Florida, not Minnesota, the court found. Accordingly, the Minnesota Franchise Act’s anti-waiver provision did not void the parties’ choice of law provision.

Although the statutory anti-waiver provision was to be construed broadly, it was also to be construed in favor of protecting Minnesota franchisees, the court observed.

Fraud, negligent misrepresentation, and Florida Franchise Act claims brought by the franchisee and its principal withstood a motion for dismissal. The court held that the issues could not be decided at such an early stage of litigation.

The January 10 decision is Hockey Enterprises, Inc. v. Total Hockey Worldwide, LLC, CCH Business Franchise Guide ¶14,531.

“Technical” Violation of Minnesota Franchise Act Did Not Entitle Franchisee to Rescind Agreement

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

A cleaning business franchisor’s sale of a master franchise before its franchise registration was approved—but after its application for registration had been submitted—was a "technical" violation of the Minnesota Franchise Act that did not entitle the franchisee to rescind the franchise agreement in the absence of actual fraud, a federal district court in Minneapolis has decided.

Registration Violation

The franchisor submitted its franchise registration to the state on April 19, 2007, and the state approved the registration on July 26, 2007, the court noted. However, the franchisor entered into an "expedited" version of a master franchise with the franchisee on June 4, 2007, before its franchise registration was approved.

The franchisor argued that the franchisee was not entitled to rescind the parties’ agreements because on August 20, 2007, the parties entered into new franchise and master franchise agreements that explicitly superseded the earlier agreement and that the franchisee had ratified those agreements.

Equitable defenses were available in actions for rescission under the Minnesota Franchise Act, according to the court. To avoid unjust outcomes based on technical violations, absent actual fraud, franchisees did not have an absolute right to rescind a franchise that violated the Franchise Act, the Minnesota Supreme Court held in Clapp v. Peterson (Business Franchise Guide ¶7907).

The franchisor’s registration in the current dispute was just the type of "technical violation" that concerned the Clapp court. Thus, the franchisor’s equitable defenses were available and applicable, the court held.

Noncompete Covenant

Absent rescission of the franchise agreement, the franchisor could enforce the agreement’s noncompete covenant, which restrained the franchisee from unfairly competing against the franchisor for the duration of the agreement plus two years within a 50-mile radius of the franchise location or any other franchise. The covenant’s geographical and durational restrictions were reasonable and not greater than necessary to protect the interests of the franchisor, in the court's view.

Because the noncompete covenant was valid and the requisite elements of injunctive relief were satisfied, the court granted the franchisor’s request for a preliminary injunction prohibiting the franchisee from transferring or diverting customers to any competitor of the franchisor, using the franchisor’s trademarks in association with the competing business, and otherwise violating the terms of the noncompete provision.

The decision is Bonus of America, Inc. v. Angel Falls Services, LLC, CCH Business Franchise Guide ¶14,415.

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