The Franchise Memorandum

A federal court in Florida partially granted, and partially denied, a motion to dismiss filed by franchisor Le Macaron Development LLC regarding claims brought by a franchisee for fraud, misrepresentation, and breach of contract. Le Macaron, LLC v. Le Macaron Development LLC, 2016 WL 6211718 (M.D. Fla. Oct. 24, 2016). The franchisee claimed that it based its decision to purchase a Le Macaron pastry franchise on several misrepresentations by Le Macaron, including oral representations regarding, among other things, the franchisee’s “huge profit potential,” and false statements regarding the background of the franchise system’s pastry chef, who allegedly had no prior professional pastry experience. The franchisee also pointed to deficiencies in Le Macaron’s Franchise Disclosure Document, such as an alleged significant understatement of the franchisee’s estimated initial expenses and the absence of required disclosures regarding Le Macaron’s owner’s involvement in a number of bankrupted businesses. Moreover, the franchisee alleged that Le Macaron referred it to a specific franchisee for business insights without
disclosing that Le Macaron had paid the franchisee $5,000 to exaggerate its earnings, and that Le Macaron approved a lease that would have made it “impossible” for the franchisee to turn a profit. The franchisee further claimed that, after the parties entered into the franchise agreement, Le Macaron failed to provide required training and assistance, and failed to include the franchisee’s stores on the company’s website. Finally, the franchisee alleged that Le Macaron’s affiliate supplied the franchisee with more than 51,000 defective macarons that it could not sell.

Based on these facts, the franchisee lodged claims against Le Macaron for fraudulent inducement, a violation of Florida’s Deceptive and Unfair Trade Practices Act (“FDUTPA”) based on a violation of the FTC’s franchise rule, and breach of contract. Regarding the fraud claim, Le Macaron argued that the nonreliance and merger clauses in the franchise agreement (which provided that the franchisee could not rely upon prior statements or representations) negated the franchisee’s claims. The court noted, however, that the nonreliance provision expressly excluded statements in the FDD. Further, the court observed that the nonreliance clause stated that the franchisee had not relied on any claims relating to “Gross Sales, expenses, or profit,” and therefore did not reach, for instance, the franchisor’s exaggerations regarding the pastry chef’s level
of experience. Turning to the FDUTPA violation, Le Macaron argued that the franchisee could not have relied on the allegedly defective FDD because the franchisee purchased an additional franchised business after receiving a corrected FDD. Rejecting this claim, the court held that such a conclusion required inferences that were inappropriate at the motion to dismiss stage. The court further held that Le Macaron’s failure to provide grand opening assistance and to include the store on its website appeared to be breaches of the franchise agreement, and declined to dismiss that claim. Due to the franchisee’s imprecise pleadings concerning several of its other allegations, the court partially granted Le Macaron’s motion, but invited the franchisee to amend its complaint and resubmit the remaining claims.