The Franchise Memorandum

In Ayu’s Global Tire, LLC v. Big O Tires, LLC, 2013 Cal. App. Unpub. LEXIS 3721 (Cal. Ct. App. May 24, 2013), the California Court of Appeals, applying Colorado law, found that clear and specific language in a Uniform Franchise Offering Circular and franchise agreement undermined a franchisee’s assertion that he reasonably relied on purported precontract misrepresentations and omissions by the franchisor. In this case, a tire store franchisee claimed that he was fraudulently induced to enter into a franchise agreement with Big O Tires. He alleged that he had been assured by Big O that it did not require prior experience in running a tire store in order to make the franchise a success because Big O would provide “many services and benefits” to support the franchisee. In addition, the franchisee alleged that Big O withheld from him the fact that many of its franchises had failed. The trial court granted Big O’s motion for summary judgment on the fraud in the inducement claim, holding that the franchisee had failed to show that it reasonably relied on Big O’s misrepresentations and omissions.

The appeals court affirmed. It noted that in order to succeed in a fraudulent inducement claim under Colorado law, a plaintiff must demonstrate that it reasonably relied on an alleged misrepresentation or material omission of fact. The franchisee failed to meet this standard because, among other things, both the UFOC and the franchise agreement contained disclaimers stating that the franchisee had not been promised anything prior to signing the contract and that Big O was not guaranteeing the success of the franchise. As for the fraudulent concealment claim, the court found that Big O had no duty to disclose any oral or written information regarding actual or potential earnings other than what specifically appeared in the UFOC.