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.

Franchisor’s Presale Representations Did Not Violate Florida Franchise Act

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide, and John W. Arden.

An ice cream shop franchisor’s alleged misrepresentations about a prospective franchisee’s chances for success did not violate the Florida Franchise Act, absent evidence that the franchisee relied on a misrepresentation in making its decision to purchase the franchise, the U.S. Court of Appeals in Atlanta has decided.

Reliance

Although the franchisee argued that it did not need to show reliance, that argument was contrary to Florida law. The parties' franchise agreement included a detailed disclaimer and explanation regarding the risks of owning and operating a franchise and encouraged franchisees to conduct an independent investigation of their chances for success.

The agreement did not promise that the purchaser would profit, the court observed. Evidence demonstrated that the purchaser understood the agreement and conducted an independent investigation of its prospect for success.

"Little FTC Act"

The franchisor also did not violate the Florida "little FTC Act" by allegedly causing two of its franchisees, acting as its agents, to make misrepresentations to the complaining franchisee about the franchise's prospects or chances for success, the court ruled.

The franchise agreement clearly stated that other franchisees did not have the authority to make representations on the franchisor's behalf about profit margins, the court noted.

It also included a detailed discussion of financial information, including the average gross revenues from the franchisor's franchises, but added that "[a]ctual results vary from unit to unit, and we cannot estimate the results of any particular Franchise."

Further, the agreement encouraged prospective franchisees to conduct an independent investigation of the cost and expenses it would incur, which the prospective purchaser did conduct. Under these circumstances, it was not likely that a consumer acting reasonably would have been deceived by the alleged statements made by the two existing franchisees, the court held.

The June 3 not-for-publication decision is Cold Stone Creamery, Inc. v. Lenora Foods I, LLC, CCH Business Franchise Guide ¶14,144.