The Franchise Memorandum

In Emfore Corp. v. Blimpie Associates, Ltd., 2008 WL 1946657 (N.Y.A.D. 1 Dep. May. 6, 2008), the court recalled and vacated its December 20, 2007, order in which it had held that disclaimers in questionnaires do not bar franchisee claims for fraud under the New York Franchise Act. The court, however, did not change the holding of its original order. Under New York’s Franchise Act, it is unlawful for a franchisor to require a franchisee to waive any duty or liability imposed on the franchisor by the Act. The questionnaire at issue asked the franchisee, among other things, to affirm that the franchisor had made no representations about actual or projected profits, sales, or expenses. It its original opinion, the court had reversed the trial court's holding that the disclaimers in the questionnaire were beyond the scope of the anti-waiver sections of the Franchise Act because they were not simply inserted as boilerplate in the parties’ franchise agreement. The court held that the franchisee’s statutory fraud claim remained viable, and that the disclaimers only created an issue of fact as to the extent and reasonableness of the franchisee’s reliance on the alleged earnings claims.

In its opinion recalling and vacating the December 2007 order, the court reached the same result, but went into greater detail regarding the validity and usefulness of questionnaires and held that the questionnaire provided to the franchisee did not violate the Franchise Act on its face. The court found that by requesting franchisees to disclose whether a franchisor’s representatives made statements concerning the financial prospects for the franchise during the sales process, franchisors can effectively root out dishonest sales personnel and avoid sales secured by fraud. However, the court rejected the franchisor’s argument that the franchisee’s statement in the questionnaire that no financial representations had been made constituted a waiver of the statutory fraud claims. The court held that such waivers are barred by the Franchise Act, and reiterated that the questionnaire created an issue of fact as to the reasonableness of the franchisee’s reliance.

The court did hold that the franchisee’s common-law fraud claims were properly dismissed because the disclaimers in the questionnaire were not merely boilerplate exclusions but were contained in a separate rider, read and signed by the franchisee, specifically stating that the franchisee was not relying on any representations by the franchisor. It is hard to reconcile the court’s rulings on the statutory and common law fraud claims, since both require a showing of reasonable reliance by the franchisee. The court gave no explanation for distinguishing between the two. Finally, the court held that the franchisee’s breach of contract claims were properly dismissed, as it was uncontroverted that the franchisee failed to provide written notice of any breach as required by the franchise agreement.