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The Franchise Memorandum

The Franchise Memorandum

Posts in Franchise Sales/Transactions.

Without previous notice that it was even under consideration, on December 6, 2021, the NASAA Franchise Project Group requested comments by January 5, 2022, on a comprehensive proposal to eliminate the use of the acknowledgments and questionnaires (“A&Qs”) franchisors usually incorporate into their franchise sales closing processes.

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A California appellate court affirmed a trial court’s ruling that a third party’s offer to purchase a franchise was not a valid, bona fide offer under the terms of a franchise agreement because the purchase price was contingent on the franchise’s future revenues.

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A Delaware federal court granted Huntington Learning Center’s motion to dismiss a lawsuit brought by a prospective franchisee. Dhade v. Huntington Learning Ctrs., Inc., 2019 WL 5067298 (D. Del. Oct. 9, 2019). Dhade applied to purchase two franchises from Huntington and, in the process of applying, requested information pertaining to financing options offered by Huntington. Huntington informed Dhade that its financing options required Dhade’s spouse to execute a personal guarantee of his obligations as a franchisee. Following a breakdown in negotiations, Dhade withdrew ...

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The United States Court of Appeals for the Fifth Circuit has affirmed a ruling dismissing a franchisee's counterclaims under the Texas Deceptive Trade Practices Act ("DTPA") and the Texas Business Opportunity Act ("BOA") stemming from the negotiation of the parties' franchise agreement. Yumilicious Franchise, LLC v. Barrie, 2016 WL 1375871 (N.D. Tex. Apr. 6, 2016). Yumilicious, a franchisor of frozen yogurt restaurants, brought suit against the franchisee, Why Not LLC, after Why Not allegedly failed to make royalty and product payments and closed a store without permission. In ...

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The Fifth Circuit also recently affirmed a district court's dismissal of a franchisee's complaint against another frozen yogurt franchisor for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6). Braatz, L.L.C. v. Red Mango FC, L.L.C., 2016 WL 1253679 (5th Cir. Mar. 30, 2016). After the Braatzes inquired about opening a Red Mango franchise in Wisconsin, a Red Mango representative sent them a business plan, financial projections for an established Red Mango franchise, and a copy of Red Mango's FDD. Over a month later, at the Braatzes' request, Red Mango sent them ...

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The United States District Court for the Southern District of New York has held that a provision in a franchise agreement disclaiming a franchisee's reliance on statements made outside of the franchise disclosure document was sufficient to defeat a claim for common law fraud. The court, however, also found the same disclaimer provision did not bar a cause of action for statutory fraud under the New York Franchise Sales Act ("NYFSA"). Coraud LLC v. Kidville Franchise Co., 2015 U.S. Dist. LEXIS 77028 (S.D.N.Y. June 12, 2015). Prior to the sale of the franchise, the franchisor, Kidville ...

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A federal court in the Southern District of New York recently granted in part and denied in part a franchisor's motion to dismiss claims brought by a franchisee related to financial performance representations (FPRs) allegedly made by the franchisor. Governara v. 7-Eleven, Inc., Bus. Franchise Guide (CCH) cli 15,368 (S.D.N.Y. Aug. 20, 2014). Governara asked the court to consider whether 7-Eleven's written and oral financial performance representations complied with the required FDD disclosures under Section 683 of the New York Franchise Act (NYFA), and whether its written ...

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In Jack in the Box, Inc. v. Mehta, 2014 U.S. Dist. Lexis 68519 (N.D. Cal. May 19, 2014), the court approved the request of Jack in the Box ("JIB") to modify an existing order authorizing JIB to operate restaurants owned by previously terminated franchisees, as the court approved a private foreclosure sale of the restaurant assets by GE Capital Bank ("GECB"), a secured creditor of the franchisees, to JIB. Mehta's franchise agreements and leases were terminated by JIB due to payment defaults. In a lawsuit, JIB obtained a "turnover order" allowing it to take over operation of Mehta's ...

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In responding to a motion to dismiss, the United States District Court for the Western District of Virginia recently permitted a “negligence per se” claim based on a franchisor’s FTC disclosure violation to proceed under Georgia law. Bans Pasta, LLC v. Mirko Franchising, LLC, 2014 U.S. Dist. LEXIS 19953 (W.D. Va. Feb. 12, 2014). Mirko, an Italian restaurant franchisee, alleged that the franchisor, Bans Pasta, violated the FTC Rule’s disclosure requirements by providing financial performance representations outside the context of Item 19 of the FDD. Bans Pasta filed a ...

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In Solanki v. 7-Eleven, Inc., 2014 U.S. Dist. LEXIS 11183 (S.D.N.Y. Jan. 29, 2014), a franchisee’s claims under the New York Franchise Sales Act have survived a franchisor’s motion for summary judgment. Solanski alleged that 7-Eleven’s presale revenue estimates should have been included in the FDD, and that its earnings estimates were false. At or shortly after the parties’ initial meeting to discuss the store, 7-Eleven provided Solanski with an FDD and a business plan outline to complete. At a subsequent meeting, Solanski presented his completed business plan, which was ...

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In Robinson v. Wingate Inns Int’l, Bus. Franchise Guide (CCH) ¶ 15,197 (D.N.J. Dec. 20, 2013), the court held that the owner of two hotel franchises failed to state actionable franchise sales fraud claims against franchisors Wingate and Wyndham. Robinson, the franchisee, entered into separate franchise agreements with each franchisor, and both businesses subsequently failed as a result of Robinson’s failure to obtain financing. When Robinson filed suit, the franchisors moved to dismiss his claims that they had violated the FTC Rule, committed fraud in the inducement, and ...

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In WW, LLC v. The Coffee Beanery, Ltd., 2013 U.S. Dist. LEXIS 100673 (D. Md. July 17, 2013), the United States District Court for the District of Maryland granted in part and denied in part Coffee Beanery’s motion for summary judgment relating to the franchisee’s claims alleged under the Maryland Franchise Act. WW alleged that Coffee Beanery violated Section 14-227 of the Act, which creates civil liability if the person who sells or grants a franchise makes an untrue statement or omission of a material fact to induce an unaware buyer to purchase a franchise. WW claimed that Coffee ...

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A federal district court in Maryland recently determined that a manufacturer did not timely exercise its right of first refusal to purchase a truck dealership from one of its dealers. Paccar Inc. d/b/a Peterbilt Motors Co. v. Elliot Wilson Capitol Trucks LLC, 2013 U.S. Dist. LEXIS 21004, (D. Md. Feb. 8, 2013). In granting the dealer’s cross motion for summary judgment, the court focused on the requirement that the dealer give notice in order to trigger the thirty-day option period set forth in the dealership agreement. Dealer Elliot Wilson claimed that the option had expired because ...

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Chicago Male Medical Clinic (CMMC) brought suit against Ultimate Management, Inc. (UMI), a company that licenses and oversees a national affiliation of medical clinics, alleging, among many counts, that UMI had fraudulently induced CMMC’s investment and had violated the Illinois Franchise Disclosure Act, the Illinois Consumer Fraud & Deceptive Business Practices Act, as well as common law fraud and breach of contract. In Chicago Male Medical Clinic, LLC v. Ultimate Management, Inc., 2012 U.S. Dist. LEXIS 183257 (N.D. Ill. Dec. 28, 2012), the court addressed several motions ...

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In Palermo Gelato, LLC v. Pino Gelato, Inc., 2013 U.S. Dist. LEXIS 9931 (W.D. Pa. Jan. 24, 2013), the United States District Court for the Western District of Pennsylvania dismissed a licensee’s action based on the FTC Rule for lack of subject matter jurisdiction. The parties had entered into a development and supply agreement that gave Palermo exclusive rights to sell Pino’s gelato product in certain designated counties. The dispute arose when Palermo allegedly discovered that Pino had misrepresented its manufacturing method. Palermo filed suit seeking a declaratory ...

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An arbitrator’s finding that a real estate brokerage franchisor violated the Connecticut Business Opportunity Investment Act has been upheld in GMAC Real Estate, LLC v. Fialkiewicz, 2012 U.S. App. LEXIS 26480 (2d Cir. Dec. 27, 2012). Franchisor GMAC Real Estate had sought to vacate the award in a Connecticut federal district court, which refused. The United States Court of Appeals for the Second Circuit affirmed late last month, finding that the arbitrator did not “manifestly disregard the law” in applying the state’s business opportunity statute.

The appeals court gave ...

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A federal court recently dismissed a franchisee’s antitrust claims but permitted its fraud claims to proceed. In Ohio Learning Ctrs., LLC v. Sylvan Learning, Inc., 2012 U.S. Dist. LEXIS 102784 (D. Md. July 24, 2012), a Maryland federal court considered claims for fraud and antitrust violations arising out of plaintiffs’ purchase of a Sylvan Learning Center franchise. The plaintiffs’ fraud claims alleged that, in connection with the sale of the center at issue, the defendants made numerous misrepresentations and material omissions as to the true financial condition of the ...

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In a recent decision, a federal district court in the Eastern District of Pennsylvania granted summary judgment to a franchisor on a terminated franchisee’s counterclaim. In Vino 100, LLC v. Smoke on the Water, LLC, 2012 U.S. Dist. LEXIS 46465 (E.D. Penn. Mar. 30, 2012), a wine/tobacco store franchisee had been terminated for failure to pay royalties and for breaching its lease agreement for the franchised business premises due to nonpayment. As a defense and counterclaim to the franchisor’s action for damages, the franchisee asserted that the franchisor had made an unlawful ...

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The Consumer Financial Protection Bureau (CFPB) has announced that it will assume certain enforcement responsibilities for the FTC’s Franchising Trade Regulation Rule. Details of how enforcement responsibilities will be shared with the FTC have been awaiting confirmation of a chair of the CFPB. Richard Cordray was named chair last week by President Obama.

Under Section 1063 (i) of the Dodd-Frank Wall Street Reform and Consumer Protection Act, the CFPB was required to publish in the Federal Register by July 21, 2011, a list of the rules and orders for which it would assume ...

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Franchisors who wish to exhibit at the June 2012 International Franchise Expo (IFE), being held for the first time this year in New York, may have the opportunity to do so without registering their franchises in the state. In October, the New York Office of the Attorney General published a unique franchise registration exemption under its “general” exemption powers pursuant to N.Y. Gen. Bus. L. § 684(1). Although the exemption will not allow franchisors to “sell” franchises or distribute Franchise Disclosure Documents, for $150 per day franchisors can attend the 3-day IFE ...

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A Minnesota federal court recently granted a franchisor’s motion for summary judgment on certain claims pertaining to the franchisor’s alleged violations of the Minnesota Franchise Act. In Ellering v. Sellstate Realty Sys. Network, Inc., 2011 U.S. Dist. LEXIS 75852 (D. Minn. July 13, 2011), the issue presented was whether the franchisor was registered to sell franchises in Minnesota and whether the franchisor had misrepresented the potential earnings of the area franchise agreement. The plaintiff-franchisees claimed that the franchisor was not registered when it sold ...

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In A Love of Food I, LLC v. Maoz Vegetarian USA, Inc., 2011 U.S. Dist. LEXIS 73539 (D. Md. July 7, 2011), the federal district court in Maryland this month declined to dismiss several claims brought by a Maryland-based franchisee under the New York Franchise Sales Act (NYFSA) and the Maryland Franchise Registration and Disclosure Law (MFDL). The franchisee alleged that Maoz, a New York-based franchisor of quick-service vegetarian restaurants, had made misrepresentations in its UFOC that induced the franchisee to enter into the franchise agreement. Specifically, the franchisee ...

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The federal district court for the Northern District of Illinois recently rejected a franchisee’s counterclaims, relating to the franchisor’s omission of same store sales information for the franchised unit purchased by the franchisee. In 7-Eleven, Inc. v. Spear, 2011 U.S. Dist. LEXIS 67415 (N.D. Ill. June 23, 2011), a convenience store franchisee was terminated for consistent failure to maintain a minimum net worth for the franchised store, as required by the franchise agreement. The franchisor obtained summary judgment on its action to enforce termination, leaving only ...

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In Vysovsky v. Glazman, 2011 U.S. Dist. LEXIS 51909 (S.D.N.Y. May 11, 2011), eight franchisees sued franchisor U.S. Pack Courier Services and various individuals for violations of the New York Franchise Act. The franchisees claimed that they paid franchise fees for unregistered franchises, a violation of the statute, and that they were entitled to damages, including the reimbursement of their franchise fees. After a jury found for the franchisees, the franchisor moved for judgment as a matter of law on the grounds that (among other things) the claims were barred by the three year ...

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The Illinois Franchise Disclosure Act (IFDA) imposes a one-year statute of limitations that begins to run when the franchisee becomes aware of facts or circumstances reasonably indicating a claim under the statute. In RWJ Mgmt. Co. v. BP Prods. N. Am., Inc., 2011 U.S. Dist. LEXIS 2928 (E.D. Ill. Jan. 12, 2011), franchisor BP filed a motion for summary judgment, asserting that the franchisees’ claims that BP had violated the IFDA registration requirements and committed fraud were barred because of the IFDA statute of limitations. BP argued that the limitations period began to run on ...

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In Hetrick v. Ideal Image Development Corp., 2010 U.S. Dist. LEXIS 135065 (M.D. Fla. Dec. 21, 2010), a Florida judge recently denied franchisor Ideal Image’s motion for summary judgment on the franchisee’s claim that certain representations made during the sale of the franchise violated the Florida Deceptive and Unfair Trade Practices Act. The Hetricks claimed that during meetings discussing their purchase of a franchise, an Ideal Image representative made representations (not included in Item 19 of its UFOC) regarding the profitability of certain existing franchises ...

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In JM Vidal Inc. v. Texdis USA, Inc., 2010 U.S. Dist. LEXIS 93564 (S.D.N.Y. Sept. 3, 2010), a franchisee sued under the Washington Franchise Investment Protection Act (WFIPA) after its “Mango” clothing store franchise did not meet performance expectations. It was undisputed that the franchisee had flown to Barcelona to meet with the franchisor regarding the possibility of purchasing a franchise before the franchisor had become registered in Washington or prepared an offering circular. In addition, the franchisee had prepared financial projections for the store, which it ...

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In an interesting decision in a case brought against a franchisor and its subfranchisor, the Washington Court of Appeals ruled last week that Washington’s franchise disclosure law does not require a subfranchisor to register its offering documents if the franchisor itself has already registered those same documents. Something Sweet, LLC v. Nick-N-Willy’s Franchise Co., 2010 Wash. App. LEXIS 1135 (Wash App. June 1, 2010). While the Washington Franchise Investment Protection Act does apply to disclosure documents registered by a subfranchisor, the court held that the ...

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In Brown v. Moe’s Southwest Grill, LLC, 2009 WL 5175280 (N.D. Ga. Dec. 21, 2009), a Georgia federal court declined to dismiss several claims brought by a group of franchisees alleging that franchisor Moe’s Southwest Grill had made misrepresentations when they received copies of the UFOC and entered into their franchise agreements.  In analyzing Moe’s motion to dismiss, the court evaluated the sufficiency of the franchisees’ amended complaint under the “plausibility” standard set forth in the recent Iqbal and Twombly U.S. Supreme Court opinions, which requires the ...

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In Cold Stone Creamery, Inc. v. Lenora Foods I, LLC, 2009 WL 1532736 (11th Cir. June 3, 2009), the Eleventh Circuit Court of Appeals affirmed a decision dismissing franchisee Lenora’s counterclaims against Cold Stone Creamery, Inc. under the Florida Franchise Act and the Florida Deceptive and Unfair Trade Practices Act. The court dismissed these claims due, in part, to specific statements in Cold Stone’s franchise documents encouraging franchisees to conduct independent investigations before purchasing a franchise and notifying franchisees of the risks in purchasing a ...

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After three years of difficult litigation across the country, a United States Magistrate Judge in Pennsylvania once again has dissected Quiznos’ ongoing franchise battle in Martrano v. Quiznos Franchise Co., 2009 WL 1704469 (W.D. Pa. June 15, 2009). In analyzing Quiznos’ motion to dismiss, the Pennsylvania court issued a decision with heavy citation to a Wisconsin court’s treatment of a similar Quiznos motion to dismiss in Westerfield v. Quizno’s Franchise Co., LLC (see Issue 101 of The GPMemorandum). The Pennsylvania court then dismissed only the franchisees’ ...

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It has now been well over a year since the Federal Trade Commission released its amended FTC Franchise Rule (“Amended Rule”) in January 2007. At this point, it is fair to assume that most franchisors have already converted their UFOCs to the new Franchise Disclosure Document format under the Amended Rule and have addressed, or are in the process of addressing, comments received from state franchise examiners. No doubt, however, there are other franchisors who are racing to meet the fast-approaching July 1 conversion deadline. After this deadline, franchisors may only use FDDs to ...

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In KC Leisure, Inc. v. Lawrence Haber, 2008 WL 195107 (Fla. App. 5 Dist. Jan. 25, 2008), a Florida appellate court reversed a trial court’s dismissal of a franchisee’s claims against a franchisor’s officers for violation of the Florida Deceptive and Unfair Trade Practices Act (“FDUTPA”) and for fraudulent inducement under the Florida Franchise Act. This case is significant because it holds that a franchisor’s employees can be found personally liable for their role in the franchisor failing to comply with disclosure laws.

In its complaint, the franchisee sought ...

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About this Publication

The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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