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Entries in franchise disclosures (5)

Friday
Mar242017

Franchisor 101: Ostensible Agency Victory; and Technical Disclosure Violations

Franchise 101 News

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dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
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March 2017

 

Tal Grinblat Recognized

Once again, Tal Grinblat will be named a 2017 Legal Eagle in franchising, by Franchise Times Magazine. He has been designated as such by his professional peers and the editorial board of the publication each year since 2014. The magazine will publish the list in April.

 

FRANCHISOR 101:
Ostensible Agency Victory

 

Franchise Lawyers

A California federal judge dealt a major blow to employees of a Bay Area McDonald's in their effort to hold the franchisor responsible for its franchisee's alleged failure to pay wages and provide meal and rest breaks. The ruling shut the door on the plaintiffs' argument that franchisor McDonald's could be liable for its franchisees' labor code violations based on an "ostensible agency" relationship.

In Salazar v. McDonald's Corp., the court previously concluded the franchisor was not liable as a joint employer with the franchisee or as the franchisee's principal under an "actual agency" rationale, and that the crew workers' remaining theory that the fast-food giant "ostensibly" controlled their wages was not amenable to class treatment.

With the workers' remaining theory against McDonald's disposed, franchisors who do not directly hire, fire or pay franchisee workers, or control their hours or working conditions, can take a cue from McDonald's to defeat similar "ostensible agency" claims.

In "ostensible agency," the alleged agent "appears" to a reasonable observer to be acting on behalf of a principal. This appearance alone is enough to create liability for the principal party, assuming it bears some responsibility for allowing the appearance to exist. Previously, the crew workers declared that it appeared to them that they and the franchisee worked for McDonald's, with the franchisee acting as McDonald's agent to employ them.

Under California law, an "employer" is one who "directly or indirectly, or through an agent or any other person, employs or exercises control over the wages, hours, or working conditions of any person." The employees argued that the clause "through an agent" was sufficient to render even McDonald's, which only appeared to act as a principal through a franchisee agent, an "employer".

However, the court ruled that the phrase "employs or exercises control over" indicated that to be an employer under California law, there must be actual control, not just the appearance of it.

The crew workers also contended that California wage laws broadly favor workers and that it would advance these goals to adopt their ostensible agency interpretation. The court rejected this argument because it would amount to rewriting the law. Moreover, the argument presumed that McDonald's could remedy the alleged wage violations, a claim the court rejected.

A prudent franchisor facing claims that it shorted a franchisee's employees' pay, rest and meal breaks can look to McDonald's for guidance when the employee asserts a belief that he or she was working for the franchisor.

Read: Salazar v. McDonald's Corp.

FRANCHISEE 101:
Technical Disclosure Violations

The consequences to an unwitting franchisor can be severe when it fails to provide disclosure documents required by franchise law. Most franchise laws provide for rescission of the franchise agreement, allowing the franchisee to "unwind the deal" by enabling it to recover all monies it paid in connection with the franchise sale.

But what if the violation was merely a "technical" one because the franchisee did not suffer damages from non-disclosure?

The Sixth Circuit court confronted this question in Lofgren v. Airtrona Canada. After affirming that a sanitation services franchisor violated the Michigan Franchise Investment Law ("MFIL") when it failed to provide a franchisee with a disclosure statement, the court confirmed that rescission of the franchise agreement was the proper remedy under MFIL for this disclosure violation.

Plaintiff Brian Lofgren purchased equipment for a vehicle-deodorizing and sanitizing business. After Lofgren's business was struggling, he sued the franchisor Airtrona Canada and its sales representative, alleging that he was entitled to rescission and restitution because their failure to provide the disclosure statement violated the MFIL. Upon the Court's finding that Logfren's agreement did establish a franchise, the sales representative argued that rescission was a proper remedy for a violation of the MFIL only when the violation directly causes financial losses.

In rejecting this argument, the Sixth Circuit quoted directly from the MFIL, which states that "[a] person who offers or sells a franchise in violation of [the MFIL's disclosure requirements] is liable to the person purchasing the franchise for damages or rescission." The court noted that, although the absence of a disclosure statement did not directly cause the franchisee's financial struggles, there was no requirement under the MFIL to establish causation; it merely says that rescission is permitted if the franchisor fails to provide the disclosure statement.

The court observed that lower courts may choose not to permit rescission if considerations of fairness are in the franchisor's favor, such as where the franchisor inadvertently provided disclosure a few days late. In this case, however, the franchisee met his franchise requirements and took no improper actions. As a result, Lofgren had the right to rescission and restitution for even a "technical" disclosure violation, without needing proof that the failure to supply a disclosure statement actually caused his losses.

If you are a franchisee looking to "unwind" your Franchise Agreement, consider whether the franchisor dotted all 'i's and crossed all 't's when you started the relationship. If not, there may be a law out there that will grant your wish.

Read: Lofgren v. Airtrona Canada, et. al.

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2017. All Rights Reserved.

Thursday
May282015

Freshii Not Joint Employer; 7-Eleven to Disclose Metadata

Franchise 101 News

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
gwintner@lewitthackman.com
swolf@lewitthackman.com

May 2015

 

Franchise Lawyers*Certified Specialist in Franchise & Distribution Law, per the State Bar of California Board of Legal Specialization

David Gurnick Presents to ABA

David Gurnick, Certified Specialist in Franchise and Distribution Law, business litigation attorney and author, was invited by the American Bar Association to co-present a seminar for members attending the 38th Annual Forum on Franchising in New Orleans. The seminar topic is entitled Finders Keepers Losers Weepers: Opportunities, Risks and Considerations in Using Intellectual Property Created by Others. The event takes place in October.

Tal Grinblat published in Business Law News Annual Review

Tal Grinblat co-authored an article highlighting recent case law regarding franchising and legislation passed affecting both franchisors and franchisees in California. The article appeared in the State Bar of California's Business Law News, which publishes an update every spring. Click: Selected Developments in Franchise Law to read the article.

Are You Ready?

Upcoming state and federal laws go into effect soon. Click the links for more information:

 

FRANCHISOR 101: Freshii Not Joint Employer 


Joint Employer Liability

The National Labor Relations Board ("NLRB") recently published a memo finding that Canadian fast-casual restaurant franchisor Freshii is not a joint employer of its franchisee's employees. The ruling concerns unfair labor claims made by an employee against a Chicago franchisee.

The ruling is important in light of another initiative at the NLRB, claiming McDonald's Corporation is a joint employer of franchisees' employees at many McDonald's locations.

In the Freshii case, a franchise owner fired employees who tried to organize a union. A regional NLRB branch requested advice from NLRB's general counsel whether to treat the franchisor as a joint employer, rendering the franchisor potentially responsible with the franchisee if the firings were found unlawful.

Under Freshii's franchise agreement, system standards do not include personnel policies or procedures. Even if Freshii shared policies with franchisees, each franchisee decided if it wished to use the policies in its own restaurant. The franchisees were solely responsible for setting wages, raises and benefits for employees. Freshii provided its franchisees with a sample employee handbook, but did not require the franchisees to use it. Potential candidates could apply for jobs with franchisees through the franchisor's website, but Freshii did not screen resumes or do anything more than forward them to its franchisees. Franchisees made their own hiring decisions. Freshii only passively monitored sales and costs, and the franchisor and any software it provided were not involved in scheduling workers.

In a key finding, NLRB's General Counsel noted Freshii stayed silent after the franchisee sought advice on how to resolve the union issue. After the union started to organize at the franchisee's restaurant, the franchise owner informed Freshii's development agent, but neither the franchisor nor the development agent advised the franchisee on how to respond.

Under the NLRB's current standard, joint employer status over franchisees' employees may exist if a franchisor "meaningfully affects matters relating to the employment relationship such as hiring, firing, discipline, supervision and direction." Freshii was found not to have a meaningful impact over the franchisee's hiring, compensation, scheduling, discipline, or ongoing supervision.

A broader standard proposed in several cases against McDonald's indicates the NLRB may look at "totality of the circumstances," including how the separate entities structure their commercial relationship, to decide if a franchisor influences working conditions of a franchisee's employees to the extent that collective bargaining cannot occur without the franchisor's involvement.

This so-called "industrial realities" test does not distinguish between direct, indirect, or potential control over franchisees' working conditions. Its broader scope would make more companies joint employers. In the Freshii case, the NLRB Memo said that even under the broader standard, there was no "joint employer: "Freshii does not directly or indirectly control or otherwise restrict the employees' core terms and conditions of employment." Therefore "meaningful collective bargaining could occur in Freshii's absence."

The NLRB's Freshii memo is good news for franchisors and provides guidance on steps franchisors can take to reduce the risk of being deemed a "joint employer" whether for matters concerning labor practices, or other vicarious liability matters.

To read the entire NLRB memo, click: Advice Memorandum re Nutritionality, Inc. d/b/a Freshii.

 

FRANCHISEE 101: 7-Eleven Ordered to Disclose Metadata

 

Litigation and Metadata

A federal court has ordered 7-Eleven to disclose its metadata in three franchisees' claims that they were targeted for termination for financial, political and racially discriminatory reasons. Metadata is deep down "data about data" in computer files. It is created when documents are created, collected and processed to be produced in discovery.

The franchisees sought metadata of documents 7-Eleven filed in litigation, including dates of creation, authors, custodians, dates of each modification, author of each modification, and data showing who documents were electronically sent to. The Court found the franchisees showed that many paper documents exchanged in discovery were missing source, date, and other key background. The Court rejected 7-Eleven's claim of hardship or undue expense to produce the metadata.

Read the Opinion and Order: Younes v. 7-Eleven, Inc. (D.N.J. 2015) 2015 WL 1268313.

 

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2015. All Rights Reserved.

 

 

 

 

 

Tuesday
Dec162014

Mixed Results in Delivery Driver Cases

Franchise 101

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com
gwintner@lewitthackman.com
swolf@lewitthackman.com

December 2014

 

How to Steer Clear of Franchise Financial Disasters

David Gurnick was quoted by CNBC regarding the necessity of research before investing in a franchise. To read the article, click: How to Steer Clear of Franchise Financial Disasters.

Comparing Franchise Relationships and Beer Distribution Relationships

Barry Kurtz and Bryan H. Clements had an article published in Orange County Lawyer, regarding the similar laws governing beer distribution and franchising. Click: Comparing Franchise and Beer Distribution Relationships for more information.

CalCPA Presentation

Tal Grinblat and David Gurnick presented a franchise law seminar to accountants of the California Society of CPAs' Los Angeles chapter. The seminar focused on accountants' roles in helping clients launch or operate franchise systems or operate as franchisees.

We Are Growing

We are pleased to announce the addition of Samuel C. Wolf to our Franchise and Distribution Practice Group. Sam earned his juris doctor at Southwestern Law School, where he was also a Dean's Merit Scholar and the recipient of a CALI "Excellence for the Future" Award (Trial Advocacy).

Mixed Results in Delivery Driver Cases

Recent court decisions in two delivery driver cases yielded mixed results for the plaintiffs and defendants involved, but serve as helpful reminders to franchisors and franchisees of ways to protect themselves in their franchise relationships.


Franchise Employee Liability

FRANCHISOR 101:
Statutes of Limitation Message for Franchisors and Franchisees

 

Franchise 101 Attorneys*Certified Specialist in Franchise & Distribution Law, per the State Bar of California Board of Legal SpecializationIn Kroshnyi v. U.S. Pack Courier Services, Inc., a case pending for 13 years (and not over yet), numerous drivers claimed their package delivery franchisor violated New York's franchise law. From 1996 to 1998 the drivers entered into franchise agreements with U.S. Pack Services (USP), a New York franchisor. Drivers paid a $15,000 "subscription fee," training fees, beeper fees and other charges to receive delivery assignments from USP's central dispatch.

In 2001 the franchisees sued in federal court claiming violations of the New York Franchise Sales Act (NYFSA), for alleged misrepresentations in USP's Franchise Disclosure Document, and state labor laws. The court dismissed the labor claims. At trial a jury found the company liable to the drivers for franchise law violations.

However, an appeals court reversed the jury award. The NYFSA has a statute of limitations requiring any action to be brought "before the expiration of three years after the act or transaction constituting the violation."

The court agreed with the franchisor that the "act or transaction constituting the violation" occurred in 1998 and earlier when the franchises were sold. It ruled the claims were time barred because the lawsuit was not filed until 2001.

The franchisees argued that the statute of limitations started anew since they made payments to the franchisor over time and because their franchisor transferred the business to a new entity and provided them new "Rules and Regulations" that purported to be a new agreement. But the appellate court rejected their arguments that these acts created new franchise relationships.

The court opined that under New York law, "continuous violations do not toll the statute of limitations" and that the new Rules and Regulations expressly provided they did not alter the parties' original agreement. The court noted that the NYFSA requires disclosures and prohibits fraud in making an "offer" and "sale" of franchises, "but does not seek to regulate the ongoing operations of a franchise."

A few drivers bought their franchises after 1998. The appellate court ruled their claims were not barred. The company challenged the damages award to them, claiming the franchisees had profited so they could not have suffered damages. But the appellate court upheld money awards to the franchisees whose claims were timely, ruling that in view of the numerous expenses they incurred over the years, the jury could properly have found that they lost money.

The Appellate Court's decision underscores the importance to franchisees of bringing claims promptly, before statutes of limitations expire - and reminds franchisors of the benefit of these statutes in defending franchise law claims.

Click Kroshnyi v. U.S. Pack Courier Services, Inc. to read the Court's decision.

 

Franchsise Employer Liability

 

FRANCHISEE 101:
Independent Contractors or Employees?

 

In Ruiz v. Affinity Logistics Corporation, another recent delivery driver case that arose in California, Affinity Logistics' drivers claimed they were employees and had been misclassified as independent contractors. The trial court ruled that the drivers were independent contractors since each had its own business name, business license, commercial checking account, federal employer identification number, and could hire its own employees, if it wished.

But the Ninth Circuit Court of Appeals reversed, finding the drivers were all employees. The appellate court emphasized that Affinity Logistics had the right to control the details of the drivers' work.

Affinity Logistics controlled their rates, schedules and routes; provided the trucks the drivers drove; controlled the mobile phones they used; specified the uniforms the drivers had to wear; and closely monitored the drivers through morning meetings, setting start times, inspecting their appearance and loading of trucks, conducting follow-alongs and customer interviews and requiring drivers to call a company supervisor after every two or three stops.

The appellate court rejected the drivers' indicia of being independent (business names, tax ID numbers, etc.) as determinate factors because Affinity Logistics required the drivers to take these steps. For these reasons, the appellate court ruled the drivers were employees, not independent contractors.

Parties to franchise agreements should be mindful of the level of control the franchisor exercises over its franchisees to avoid jeopardizing the independent contractor relationships.

Click Ruiz v. Affinity Logistics Corporation to read the 9th Circuit Court decision.

 

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2014. All Rights Reserved.

 

Thursday
May222014

When is Unreasonable, Reasonable?

Franchise 101

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com

May 2014

 

47th Annual International Franchise Association Legal Symposium

David Gurnick, along with representatives from Brinker International (known for the Chili's and Macaroni Grill brands) and Restaurant Services Inc. (national cooperative of Burger King franchisees) were invited to speak at the IFA's Annual Legal Symposium in Chicago, discussing aspects of the cooperative business model. Barry Kurtz and Tal Grinblat also attended. Tal served as roundtable facilitator on manufacturing issues facing franchise companies.

 

Franchise Distribution Lawyers*Certified Specialist, Franchise & Distribution Law - State Bar of California Board of Legal Specialization

Barry Kurtz & Bryan H. Clements in Fresno County Bar Association's Bar Bulletin

"Many unsuspecting businesses that have licensed their trade marks and marketing plans to others without providing the required disclosures or registering as a franchise have been found to be in violation of federal and state law." Click Is Franchising the Right Model for Your Client's Business? for further information.

 

Tal Grinblat & David Gurnick in American Bar Association's  Franchise Law Journal

"Implicit in the franchise relationship is that the franchisor owns intellectual property, which others cannot use without the franchisor's permission. But this fundamental premise is not entirely correct." Continue reading: OPIP: When Is It Lawful to Use Other People's Intellectual Property in Franchising?

 

FRANCHISOR 101:
When is Unreasonable, Reasonable?

Crown Imports, LLC (Crown) imports Corona beer from Mexico. In 2008, two of Crown's Southern California distributors, Classic and HBC, agreed that Classic would buy HBC's Crown distributorship. Crown denied approval of the transfer citing Classic's poor performance.

In 2008 and 2009, Classic won top-distributorship awards, and in 2010, Classic again sought Crown's approval to buy HBC's distributorship. But Crown again refused consent, and HBC sold its distributorship to Anheuser-Busch.

Classic sued Crown for interference, claiming that Crown had a secret plan to prevent Classic from acquiring HBC's distributorship. On appeal, the California Court of Appeal disagreed with Classic and with a lower court, and held that no genuine issues of fact existed as to whether Crown unlawfully withheld consent to the Classic/HBC transfer.

A plaintiff claiming interference must prove, among other things, that the defendant intentionally or negligently committed an independently wrongful act to disrupt an existing business relationship, which did disrupt the relationship.

Beer LawClassic argued Crown unreasonably withheld consent to its purchase of HBC's distribution rights in violation of California Business and Professions Code Section 25000.9, which, Classic claimed, amounted to an independently wrongful act. Section 25000.9 says that "Any beer manufacturer who unreasonably withholds consent [to a distributor transfer] shall be liable to the [distributor]."

In rejecting Classic's arguments, the court held that since Section 25000.9 provides a remedy for disappointed sellers, not buyers, Crown's denial, even if it was unreasonable and violated Section 25000.9, was not an independently wrongful act. Moreover, the court opined, Section 25000.9 can be read to "permit a beer manufacturer to unreasonably deny approval [of] a transfer."

It ruled that "as long as a seller receives adequate compensation either from a successor purchaser or the manufacturer itself, there is no violation of the statute." The court further ruled that good policy reasons exist to let beer manufacturers unreasonably deny consent to transfers, provided they make the disappointed distributors whole.

Under California law, beer distributors may not sell beer without first entering into written distribution agreements with manufacturers and filing the agreements with state. So, the court explained, if a manufacturer could not withhold consent, it would be forced to enter a new contract with the transferee distributor, even if it did not wish to do business with the new distributor.

Notwithstanding the court's reasoning and outcome in this case, California brewers should still keep in mind the risk that unreasonably denying consent to a distributor transfer may violate California law. Discretion remains a better part of valor.

Read the appellate court opinion: Crown Imports, LLC v. Superior Court and Classic Distributing & Beverage Group. 

 

FRANCHISEE 101:
Item 19 Misdirection Ultimately Discovered by Franchisee

Franchisors that make Item 19 financial performance representations (FPRs) must disclose all material facts and not knowingly conceal any facts necessary to make their disclosures true under the circumstances in which they are presented. Abbo v. Wireless Toyz L.L.C. provides hope for franchisees whose franchisors do not disclose all relevant facts in their FPRs.

Franchise LitigationIn August 2004, Wireless Phones, L.L.C. (WP) entered into a franchise agreement with Michigan franchisor Wireless Toyz Franchise, L.L.C. (Toyz) for a Wireless Toyz franchise to be located in Colorado. Wireless Toyz franchisees earn commissions by selling cellular equipment and 3rd party cellular contracts to customers. The commissions are reduced by Hits (customer discounts offered by cellular providers) and Charge Backs (recoupments due to early termination of customer contracts).

Before buying the franchise, WP was given Toyz's disclosure document, which contained an FPR that made no mention of Hits and only cautioned that commissions could be subject to Charge Backs, but included no data to indicate the financial impact Charge Backs would have on a franchisee profits. WP apparently recognized the discrepancies, raised the issue and received verbal assurances from Toyz's owner that the average Hit would not exceed $50 and Charge Backs would average 5% to 7% percent of annual commissions.

After WP's store failed in 2009, WP brought suit, asserting, among other claims, that Toyz violated Michigan's Franchise Investment Law (MFIL) and committed the tort of fraudulent concealment by knowingly concealing facts regarding Hits and Chargebacks.

A claim for fraudulent concealment arises from suppression of the truth with intent to defraud. The trial judge ruled that the evidence did not support a claim of fraudulent concealment, and WP appealed.

The appellate court overturned the trial court and ruled Toyz was liable for fraudulent concealment. The court held that the MFIL required Toyz to refrain from making material misrepresentations or omitting pertinent information from any disclosures relating to the sale of the franchise. The court found Toyz's FPR "omitted [material] information concerning average Hits and Chargebacks" that was necessary to make the FPRs not misleading and Toyz suppressed the truth by falsely giving WP verbal assurances that the impact of Hits and Chargebacks would be minimal.

Potential franchisees should carefully review their franchisor's FPRs to ensure that all pertinent financial information is fully presented and make further inquiry when they believe that is not the case.

Read the court opinion re: Abbo v.Wireless Toyz Franchise.

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2014. All Rights Reserved.

 

Tuesday
Apr222014

False Financial Representation Slams Franchisor

Franchise 101

bkurtz@lewitthackman.com
dgurnick@lewitthackman.com
tgrinblat@lewitthackman.com

April 2014

 

Craft Brewers Conference 2014

 

Barry Kurtz and Bryan H. Clements were invited to speak at the annual Craft Brewers Conference and BrewExpo America, the largest brewer's trade show in the country. The three day event was held in Denver. Lewitt Hackman represents craft brewers in distribution and related transactions. Barry and Bryan's presentation focused on the federal three-tier system of beer distribution law, and its similarities and contrasts with franchise and distribution law.

 

*Certified Specialist in Franchise & Distribution Law as designated by the State Bar of California Board of Legal Specialization

David Gurnick in Valley Lawyer Re Non-Compete Clauses

 

Generally, California Courts will not enforce a restrictive covenant. But there are several circumstances in which such covenants can be enforced. Read, Enforcement of Non-Compete Clauses in California by David Gurnick for details.

 

FRANCHISOR 101:
False Financial Representation Slams Franchisor

 

In Rogers Hospitality, LLC v. Choice Hotels International, Inc., a panel of arbitrators found that the franchisor of Choice Hotels violated Minnesota franchise laws by making false financial performance representations to its franchisee.

Hotel FranchiseThe franchisee proved that in a 2008 investor conference, the franchisor's Director endorsed financial projections for a potential Sleep-Inn and Suites Hotel in Minnesota. The projections were adopted into a pro-forma that identified average daily rates the hotel could expect.

At the conference, Choice Hotels' Director claimed the pro forma numbers were "attainable, conservative, and/or spot-on." The statements were made outside Item 19 of the Franchise Disclosure Document. Therefore they were unlawful.

The arbitration panel also found the information was false because only 2.3% of Choice's Sleep-Inn and Suite hotels achieved such performance, and Choice's Director failed to disclose this low percentage. The arbitrators concluded that some of the franchisee's representatives at the conference relied on the statements in electing to purchase the franchise. Accordingly, the panel ruled against Choice Hotels and in favor of the franchisee.

For franchisors, the Choice Hotels case is a reminder of the importance not to give financial performance information to franchisees or endorse pro formas prepared by franchisees, if not included in the Franchise Disclosure Document, Item 19.

This case should also remind franchisees to tread carefully when given earnings information outside Item 19. The information may be inaccurate, false or misleading.

 

FRANCHISEE 101:
Terminated Franchisee Can Pursue Fraudulent Disclosure Claims

 

In Solanki v. 7-Eleven, Inc., a U. S. District Court in New York ruled that a terminated 7-Eleven franchisee who decided to purchase a third location before receiving the Franchise Disclosure Document (FDD) could proceed with claims that 7-Eleven made false presale revenue and earnings claims in violation of the New York Franchise Sales Act.

The franchisee owned two 7-Elevens and contacted the franchisor to buy a third. At that time, he received the New York version of the 7-Eleven FDD, which contained unaudited financial statements showing averages of actual sales, earnings, and other financial performance of franchised 7-Eleven stores.

7-11 Franchise LitigationIn a deposition, the franchisee testified he decided to buy the third store before receiving the FDD. Later, he explained that he committed to the purchase only after seeing the FDD.

Prior to signing the franchise agreement, he provided a business plan to 7-Eleven for approval. When he was approved, he was told the projections in his business plan were consistent and in line with 7-Eleven's estimates.

However, 7-Eleven never provided its revenue projections for the store he purchased. In the first year of operation, the store never achieved the sales projected in the business plan. Later he was unable to make payroll. At the franchisee's request, 7-Eleven terminated the Agreement.

The franchisee brought an action claiming 7-Eleven's representation that the revenue projections in his business plan "were consistent with and in line with 7-Eleven's estimates" violated New York's Franchise Sales Act because:

 

  • 7-Eleven's revenue estimates and their basis were not in the FDD, as required by the Franchise Sales Act, and

  • 7-Eleven's earnings estimates were false, misleading and lacked any reasonable basis.

 

Though the franchisee testified he decided to purchase a third franchise before receiving the FDD, the court rejected 7-Eleven's defense. The court explained that making up one's mind to buy a particular store and committing to go through with the purchase based on information received from 7-Eleven were two different actions. The court also held that any disclaimers reviewed, acknowledged, or agreed to by the franchisee in the franchise agreement could not bar his claims.

For franchisees the 7-Eleven case shows that claims for damages and fraud against franchisors can be won, even though it is not clear how much a franchisee relied on an FDD when deciding to purchase the franchise and even though a franchise agreement contains customary disclaimers.

For more information regarding this case, click Jimmy Solanki v. 7-Eleven, Inc.

This communication published by Lewitt Hackman is intended as general information and may not be relied upon as legal advice, which can only be given by a lawyer based upon all the relevant facts and circumstances of a particular situation. Copyright Lewitt Hackman 2014. All Rights Reserved.
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