Franchise 101: Farsighted Vision for System Changes; and Handle Profit Projections With Care

Franchisor 101: Mowing and Blowing Past Mediation

An Ohio federal court granted a franchisor’s motion to dismiss a putative class of franchisees alleging antitrust violations and related claims, including interference to deflate franchisees’ reimbursement rates. Other class claims, based on franchisor’s alleged increased restrictions and control over franchisee’s eyewear selections, and breach of contract and negligence due to the franchisor’s alleged failure to secure franchisees’ customer privacy data, were also dismissed.

In 2014, eyewear franchisor, Pearle Vision, changed its franchise agreement to introduce a new program to “automate the supply chain system.” Under the program, franchisees would receive supplies and frames that were most likely to sell based on the products the franchisees were selling. Franchisees argued this program reduced profit margins because it limited eyewear frames only to brands owned or licensed by the franchisor. The franchisees also argued the frames were not marketable or tailored to each franchisee’s purchase history. They contended that the franchisor’s increasing control extended to third party vendors when franchisor contracted with a vision care provider and agreed that the provider would pay franchisees at reimbursement rates lower than franchisees would have received in the open market.

The franchisor moved to dismiss on the basis that the antitrust and tort claims were time barred, and the breach of contract and privacy claims were unfounded and not supported by contract terms. The franchisees argued the claims were timely because each below market payment received was an independent wrongful act that restarted the statute of limitations period.

The federal court agreed with the franchisor that the antitrust claims were time barred, because the alleged violations occurred on or before 2014, far beyond the limitations period, and franchisees did not experience “continuous violations,” which would renew the statute of limitations period. If the violations occurred, the federal court concluded the violations began and ended when the new franchise agreement and related documents were executed. Any subsequent payments were mere manifestations of the previous agreement.

The court also dismissed the breach of contract claims because the franchisees failed to point contractual terms that prohibited the franchisor from controlling the relationship between franchisees and third-party vendors. First, the franchise agreement stated that no provision covered this issue. Second, the provisions franchisees specifically cited in the franchise agreement gave franchisor the power to exert such control over franchisees’ inventories. The court also dismissed misrepresentation claims as time barred, because the alleged misrepresentations were discovered no later than 2018, when franchisees formed an independent association over this very concern.

Franchisees in established franchise systems can be expected to resist and sometimes challenge new standards of operation. The perception that such changes benefit the franchisor to the detriment of its franchisees is sometimes the reality. As a result, franchisors planning to implement systemwide changes should consult their franchise counsel to anticipate potential franchisee challenges and analyze potential defenses to such claims as part of the effort to evolve the system.

Brave Optical, Inc. v. Luxottica of Am. Inc., 2025 WL 962827 (S.D. Ohio Mar. 31, 2025)

Franchisee 101: Handle Profit Projections With Care

A New York federal court denied a franchisor’s motion to dismiss a franchisee’s complaint for misrepresentations and improper financial performance representations which allegedly induced the franchisee to enter into multiple franchise agreements.

The plaintiff purchased seven franchise locations from another franchisee and entered into multiple franchise agreements with Interim Healthcare. Prior to the purchase, franchisee received an independent audit report, operations assessment, and financial statements. The franchisee alleged the franchise agreements were signed with an understanding that the franchisee would not be liable for the sellers’ debts and liabilities based on alleged statements by franchisor’s former COO and CEO that the franchisee could achieve profits of $3 million annually, as well as income statements and financial documents about the existing franchised business. Franchisee did not realize such profits.

The franchisee sued the franchisor for alleged false misrepresentations of financial performance representations that allegedly induced the franchisee to enter into the multiple franchise agreements. Based on the documents, the franchisee understood that once the third parties’ debts and liabilities were replaced, “a lot of expenses … would be eliminated based on [franchisee] acquiring the business.” Franchisee also argued that the royalty documents received were projections of earnings because “one could go back into the sales or earnings by using formulas franchisor provided on what the franchise fees would be.” Franchisee argued that they relied on franchisor’s representations that the franchise could be profitable in the future, and reasonable because there was insufficient time for due diligence.

Franchisor moved to dismiss the complaint, arguing in part, the franchisor’s financial documents and seller documents disclosed to franchisee, which included an audit, operations assessment, and financial statements disclosed the true state of the seller’s franchises, including all of sellers’ liabilities. Franchisor further argued that the royalty documents provided did not provide any representation of estimated earnings or revenue and were only provided as an example of how the royalty structure mechanically works using historical data from 2016.

The federal court denied franchisor’s motion, ruling that the documents and royalty models provided about future earning probability is a factual question that the jury must resolve. The court held a reasonable jury could find that the documents and spreadsheets were “projections of earnings” because they contained future looking dollar values and revenue could be inferred. In addition, the court found that the reasonableness to forego a full due diligence check was a material issue of disputed fact and a reasonable jury could conclude franchisee reasonably relied on franchisors representations.

Franchise counsel should be consulted when a franchisee is seeking franchisor’s approval of franchisee’s sale of franchise(s) when financial information is provided that is outside of the franchisor’s disclosures and/or the existing franchise seller’s books and records. Where, as here, a purchaser of an existing franchise relies on such financial information there could be factual questions over whether such financial information must be provided as part of the franchisor’s FDD and form a basis for claims of misrepresentation, noncompliance with the FTC’s Franchise Rule and various fraud theories.

(Cmty. Care Companions, Inc. v. Interim Healthcare, Inc. (E.D.N.Y. Mar. 27, 2025, No. 19-CV-4870 (PKC) (LGD)) 2025 U.S.Dist.LEXIS 57761.)