The Franchise Memorandum

In Allan Rand and Iron Horse Venture Group, Inc. v. CM Franchise Sys., Inc., 2009 WL 667227 (Wash. Ct. App. Mar. 16, 2009), a Washington appellate court affirmed a decision that Rand’s fraud claims were barred by the statute of limitations. In June 2003, Rand and CM Franchise Systems, Inc. entered into a subfranchise agreement for certain territories in Washington and Oregon. CM was not registered in Washington when the agreement was executed. Rand’s business subsequently failed and, in March 2007, he sued CM seeking rescission of the agreement and damages. In particular, Rand alleged that CM fraudulently misrepresented the earnings data for the franchised stores during the sale process and that CM sold an unregistered franchise.

Under the applicable statute of limitations, Rand was obligated to bring his fraud claims within three years after he discovered, or using due diligence should have discovered, the basis for the fraud. When he signed the subfranchise agreement, Rand knew that the financial information CM provided for two stores included CM’s highest performing store and that CM was not registered in Washington. CM also gave Rand contact information for CM’s franchisees and, in the subfranchise agreement that Rand drafted, Rand acknowledged conducting an independent investigation of the business. Based on these facts, the court determined that Rand, through due diligence, could have discovered the earnings disparity between CM’s highest performing store and the other franchised store in 2003. As a result, the appellate court affirmed, finding that the statute of limitations barred the plaintiffs’ claim.