The Franchise Memorandum

A federal court in Illinois declined to dismiss franchisor 360 Painting’s claims against franchisee R. Sterling Enterprises for underreporting of gross sales but dismissed its claims for fraudulent misrepresentation. 360 Painting, LLC v. R Sterling Enters., Inc., 2021 WL 3603626 (N.D. Ill. Aug. 13, 2021). 360 terminated its franchise agreement with Sterling after an audit showed underreporting by the franchisee. 360 subsequently entered into a settlement with the Illinois Attorney General requiring it to offer rescission to franchisees who had not executed an Illinois-specific franchise agreement amendment. However, the settlement included specific language allowing 360 to hold Sterling accountable for its alleged misconduct. Sterling accepted 360’s offer of recission, and then 360 brought claims for breach of contract and fraudulent misrepresentation based on Sterling’s underreported gross sales.

Sterling moved to dismiss 360’s breach of contract claim, arguing that 360 could not recover for breach of a rescinded contract. The court disagreed, declining to resolve whether it was improper for 360 to offer to rescind a terminated agreement and whether the franchise agreement was executed in violation of the Illinois Franchise Disclosure Act, indicating determination of the obligations of the parties post-termination and determination of whether the franchise agreement was in fact void would require resolution of factual disputes “for another day.” Sterling also requested dismissal of 360’s claims for fraudulent misrepresentation arguing 360 failed to plead its claims with particularity. The court agreed, finding 360’s complaint contained no details about what documents were provided, when and by whom, the content of the documents, whether they all contained underreporting or only some, or how 360 determined that Sterling underreported gross sales by over $100,000. As such, though the court allowed 360 to proceed with its claim under the franchise agreement, its claims for fraudulent misrepresentation were dismissed.