The Franchise Memorandum

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, which induced them to purchase a franchise. Their franchise was unsuccessful, and the Hetricks eventually lost their investment. Ideal Image argued that the franchisees had no evidence that their loss was caused by the representative’s statements, so a claim under the Act, which requires a deceptive act or unfair practice, causation, and actual damage, could not stand.

The court decided to allow the franchisees to continue pursing their claim despite Ideal Image’s evidence that the Hetricks received a UFOC which warned that the listed initial investment was an estimate and a business advisor should be consulted. Ideal Image also presented evidence that the Hetricks signed a franchise agreement which acknowledged that the franchisees had not “received or relied upon any warranty or guarantee, express or implied, as to the potential volume, profits, or success of the business venture…” In denying the summary judgment motion, the court noted the statements made in affidavits by the Hetricks that they would not have invested in the franchise but for the statements made by Ideal Image’s representative, and decided that a jury should determine whether the Hetricks suffered injury as a result of the statements.

The court, however, also denied the Hetricks’ motion for summary judgment as to the element of the Act that requires a deceptive act or unfair practice. The Hetricks argued that the Act, which incorporates the Federal Trade Commission Rule, makes it an unfair or deceptive trade practice to disseminate any financial performance representations. Since they had established that Ideal Image made representations, they asked the court to find they had satisfied this element. But the court decided that a mere technical violation would not suffice to show liability; rather, the Hetricks would also have to prove the representation was likely to deceive a consumer in similar circumstances.