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The Franchise Memorandum

Tennessee Federal Court Refuses to Dismiss Fraud Claims Based on Disclaimers

A federal court in Tennessee denied a motion to dismiss a franchisee’s allegations of fraud in Item 19 of an FDD. Sugarlips Bakery, LLC v. A&G Franchising, LLC, 2022 WL 210135 (M.D. Tenn. Jan. 24, 2022). Sugarlips Bakery and other franchisees of A&G Franchising’s “Gigi’s Cupcakes” concept alleged that A&G had engaged in fraud by providing them with a false and misleading financial performance representation in Item 19 of A&G’s FDD. They asserted, among other things, that the Item 19 understated labor costs, comingled company-owned stores with franchised stores, and did not take royalties and other franchise fees into account. In moving to dismiss these claims, A&G argued that the disclaimers in Item 19 of the FDD precluded the franchisees from having relied on the financial performance representation. The court suggested that while the Item 19 disclaimers might be sufficient to ultimately defeat a claim of reliance, the franchisees’ complaint was sufficiently pleaded to withstand a motion to dismiss. The court further declined to dismiss the fraud claims against A&G’s operators as individuals, because they personally authored and/or approved of the fraudulent statements. The court granted A&G’s motion to dismiss certain declaratory judgment claims as redundant, but permitted the fraud claims to proceed.

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