The Franchise Memorandum

The Illinois Court of Appeals held that an arbitrator did not make a gross error of law in concluding that the exemption to the Illinois Franchise Disclosure Act's disclosure requirements did not apply where the franchisor and franchisee were controlled by the same individual and they entered into a franchise agreement when that individual was already in negotiations to sell the franchise to another party. McGill v. Wortham, 2015 III. App. Unpub. LEXIS 1052 (III. App. Ct. May 15, 2015). The arbitrator found that the franchisees, McGill, were entitled to rescission of the franchise agreement based on franchisor Wortham's failure to comply with the Franchise Disclosure Act's requirements. In reaching this decision, the arbitrator specifically rejected Wortham's argument that the sale fell within an exclusion applicable to transfers of existing franchises by franchisees if the sale "is not effected by or through the franchisor."

McGill purchased a pizza franchise from Wortham, who acted as both the franchisor and an existing franchisee of the location at issue. McGill's franchise went out of business after it discovered that Wortham had misrepresented sales and labor costs, and that some of the restaurant's equipment was not in working order. McGill commenced an arbitration action for fraudulent inducement and violations of the Illinois Franchise Disclosure Act. The arbitrator found that the Act's exclusion for sales not effected by the franchisor did not apply for two reasons. First, the exclusion was only meant to cover arms-length transactions between parties not affiliated with the franchisor, rather than transactions where an individual improperly uses multiple entities to act as both franchisor and franchisee. Second, the arbitrator noted that Wortham admitted in his testimony that there was no franchise agreement in effect when the sale to McGill took place. The trial court confirmed the award, and the appellate court affirmed, rejecting Wortham's arguments that a recent amendment to the Uniform Arbitration Act expands the scope of judicial review and that the arbitrator's conclusion was erroneous and unsupported by the evidence.