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The Franchise Memorandum

Court In Texas Confirms That "Franchise Rule" Contains No Private Right of Action and Dismisses Franchisee's Claims

The U.S. District Court for the Northern District of Texas confirmed that the FTC's Franchise Disclosure Rules do not confer a private right of action. In Yumilicious Franchise, LLC v. Barrie, 2015 U.S. Dist. LEXIS 64407 (N.D. Tex. May 18, 2015), Yumilicious had filed breach of contract claims against a franchisee, Barrie, which had failed to make required payments and closed its franchised frozen yogurt store without consent. Barrie responded with counterclaims alleging violations of the Texas Deceptive Trade Practices Act ("DTPA"), the Franchise Rule, and the Texas and South Carolina Business Opportunities Acts. In an earlier decision, the court dismissed Barrie's DTPA counterclaim, finding that the alleged misconduct—Yumilicious' speculation that it "could go national," financial performance representations outside of the FDD, unanticipated start-up costs, and failure to provide an up-to-date FDD—were at most "technical violations" of disclosure rules. Absent evidence of a knowing omission or misrepresentation that caused detrimental reliance by the franchisee, the court found no DTPA violation. The court similarly held that the franchisee failed to establish damages required for a fraud or negligent misrepresentation claim. The court therefore granted Yumilicious' summary judgment motion and awarded damages.

Because Yumilicious neglected to move for summary judgment with respect to the Franchise Rule claim, the court raised the issue sua sponte. The court concluded that Barrie had no private right of action to raise a stand-alone claim. Although violations of the Franchise Rule that also contravene state law are actionable, the court had already dismissed Barrie's state law claims on other grounds. Thus, it dismissed the alleged Franchise Rule violation as well.

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