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.
In 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:
(1) 7-Eleven's revenue estimates and their basis were not in the FDD, as required by the Franchise Sales Act, and
(2) 7-Eleven's earnings estimates were false, misleading and lacked any reasonable basis.
7-Eleven argued the franchisee decided to buy the franchise independent of any information 7-Eleven provided.
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.