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The Franchise Memorandum

Kentucky Federal Court Allows Franchisee to Proceed With Claim That Financial Projections Violate Minnesota Act

In Long John Silver’s Inc. v. Nickleson, 2013 U.S. Dist. LEXIS 18391 (D. Ky. Feb. 12, 2013), a federal court in Kentucky granted in part and denied in part a franchisor’s motion for summary judgment on a former franchisee’s counterclaims. After Long John Silver’s initiated a lawsuit against Nickleson in connection with multiple failed franchises in Minnesota, Nickleson brought various counterclaims, alleging violations of the Minnesota Franchise Act (MFA) and common law fraud, among other claims. Nickleson’s counterclaims were based on Long John Silver’s allegedly false and misleading statements concerning future profitability and the past performance of other franchisees.

The court denied Long John Silver’s motion as to the violation of the MFA. It noted that, in order to succeed on this claim, Nickleson had to establish reasonable reliance on the statements. Long John Silver’s argued that any reliance on representations about profitability was unreasonable because of the multiple disclaimers about costs and projected revenue in the franchising documents. While the court acknowledged that those disclaimers were relevant to a determination of reasonable reliance, it also noted that conflicting Minnesota case law on the subject could have led the franchisee to reasonably believe that such disclaimers would not be upheld in court. Therefore, the court held that there was a genuine issue of material fact regarding whether the franchisee reasonably relied on the alleged misrepresentations, and it denied summary judgment. Nickleson’s claim of fraudulent misrepresentation survived summary judgment for the same reason. The court, however, did grant Long John Silver’s motion with regard to Nickleson’s claim of fraudulent non-disclosure. It held that a non-disclosure claim was only actionable when one party had a duty to disclose material facts, and the court found that the franchise agreement did not create any fiduciary relationship between the parties giving rise to such a duty.

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