The Franchise Memorandum

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 rescission and damages based on the franchisor’s failure to timely provide it with complete and accurate disclosure documents and the franchisor’s unsubstantiated earnings claims. The franchisee alleged that the individual defendants consciously and intentionally elected to ignore the disclosure requirements in order to obtain a $50,000 franchise fee before creating and providing a Uniform Franchise Offering Circular and franchise agreement some eleven months later. The franchisee, upon receipt of the documents, determined that the representations contained within them were unsubstantiated, incomplete, and misleading and included pro forma spreadsheets with earnings claims that were created by the franchisor’s employees without any substantive research. 

Relying on a case decided under Florida’s Sale of Business Opportunities Act (“FSBOA”), the trial court had held that FDUTPA only imposes corporate liability on the seller of a franchise and, therefore, the franchisee could not maintain its cause of action against the franchisor’s officers in their individual capacities. The trial court further held that the franchisee had not satisfied its burden of demonstrating that the franchisor’s employees intentionally misrepresented the prospects of success of the franchise.

The appellate court found the trial court’s reliance on a case interpreting the FSBOA to be misplaced.  In reversing the dismissals, the appellate court held that case law permits individual liability for violations of the statute in the event that corporate liability is found. To prove individual liability, it must be shown that the individual defendant actively participated in or had some control over the deceptive practices. For monetary restitution, the plaintiff must establish that the individual defendant knew or should have known about the misrepresentations. Here, the face of the franchisee’s complaint met that burden. Because the complaint alleged that the individual defendants had actual knowledge of the violations of the Franchise Rule, including the failure to disclose, and that the defendants intentionally assisted in the preparation of inaccurate spreadsheets, the FDUPTA and Florida Franchise Act claims were sufficient to state a cause of action and survive a motion to dismiss.