Focused on Franchise Law - July 2013

by Lewitt Hackman
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Kurtz Law Group photo
 

ARTICLE BY BARRY KURTZ AND BRYAN CLEMENTS FEATURED IN ORANGE COUNTY LAWYER

"The Accidental Franchisor--What Every Business Lawyer Should Know about Franchise Law" authored by Barry Kurtz and Bryan Clements was published in the July 2013 issue of the Orange County Lawyer, the monthly news magazine of the Orange County Bar Association [www.ocbar.org]. To see the article, click here.
 

BARRY KURTZ IN JUNE 2013 SOUTHWESTERN LAW SCHOOL ALUMNI PROFILE

 

Barry Kurtz was featured in an Alumni Profile on the Southwestern Law School Alumni Association website www.swlaw-alumni.com. To see the article, click here.

 

FRANCHISOR 101: PROVIDING FINANCIAL PERFORMANCE REPRESENTATIONS TO POTENTIAL FRANCHISEES 

 

Financial performance representations (FPRs) consist of historical earnings data presented by franchisors to potential franchisees to provide some indication of how a franchise might perform in the future. Federal and state franchise disclosure laws do not mandate that franchisors provide FPRs to potential franchisees. However, if a franchisor elects to provide an FPR, it must be disclosed in Item 19 of the franchisor's Franchise Disclosure Document (FDD), the FPR must have a reasonable basis and must not be false, misleading or omit information necessary to make it not misleading.

 

Hanley v. Doctors Exp. Franchising, LLC, provides an example of the risks franchisors face of providing FPRs that lack information necessary to make them not misleading. Doctors offers urgent care medical center franchises. Hanley received Doctors' FDD, purchased a Doctors franchise and opened the business in 2011. The Doctors FDD contained initial investment estimates and an Item 19 FPR containing cost and earnings information based on the operating results of an urgent care facility operated by one of Doctors' affiliates in Maryland. The earnings information indicated to Hanley that the franchise would have substantial revenues beginning the first month of operations. Unfortunately for Hanley, the business suffered revenue problems and failed within months.

 

Hanley sued, and presented evidence that Doctors knew when it signed Hanley's Franchise Agreement that the operations of its Maryland affiliate were materially different from those of its then-current franchisees. Hanley claimed that Doctors' failure to disclose the actual earnings of its other franchisees, which were far below the projections contained in Doctors' Item 19 FPR, constituted misrepresentation under the Maryland Franchise Registration and Disclosure Law. The court rejected Doctors' defense that its FPR consisted of mere estimates, rather than factual assertions, observing that Doctors was not required by law to provide an FPR, but since it had, it "was required to make it supportable based on what it knew at the time it made the representations." Additionally, the court rejected Doctors' claim that it was unreasonable for Hanley to rely on the FPR and that Doctors was shielded from liability because of multiple disclaimers Doctors provided in Item 19 and throughout its FDD. The court held that the disclaimers "...are legally inoperative to bar [Hanley's] Maryland Franchise Law claim, to the extent that they would operate as a release, waiver, or estoppel, as to [Hanley's] claims of misrepresentations or omissions."

 

Providing FPRs to potential franchisees is a risky, but worthwhile, endeavor. However, determining whether to include an FPR in one's FDD, and what data to include, can be daunting. A word to the wise: be certain that the information you include is complete, correct and current.  Click here to read the entire case.

 

 

FRANCHISEE 101: CALIFORNIA SAYS "NO", BUT OTHER JURISDICTIONS SAY "YES" 

Tainter purchased an auto painting and body repair franchise to be located in Palo Alto, California from Maaco Franchising, Inc. in 2004. The Franchise Agreement contained a "choice of law" provision and a "forum selection clause" that expressly provided, respectively, that Pennsylvania law would apply and that any action arising from a dispute under the Franchise Agreement would be litigated in Pennsylvania. In 2012, Maaco sued Tainter for unpaid royalty fees in federal district court in Pennsylvania. Tainter filed a motion to transfer the case to California claiming the forum selection clause was unenforceable because the Franchise Disclosure Document Tainter received before purchasing the franchise in 2004 stated that some provisions of the Franchise Agreement might be superseded by California law, and thus, the parties did not "reach a meeting of the minds" that any disputes would be litigated in Pennsylvania. As a result, Tainter argued, California law applied and the forum selection clause was unenforceable under California's Franchise Relations Act, which states: "A provision in a franchise agreement restricting venue to a forum outside [of California] is void with respect to any claim ... involving a franchise business operating within [California]." Tainter also cited case law arguing that the forum selection clause violated California's strong public policy against enforcing any out-of-state forum selection clause in a franchise agreement.

 

The district court sided with Maaco stating "the language of the Franchise Agreement was clear and unambiguous in stating Pennsylvania law would apply" and that any action would be brought in a state or federal district court in Pennsylvania. The court held that nothing in Pennsylvania law prohibited the enforcement of the forum selection clause and that the forum selection clause was valid under federal law, which provides that forum selection clauses are presumptively valid unless the objecting party can show enforcement is unreasonable under the circumstances. Finally, the court dismissed Tainter's public policy argument reminding Tainter that the issue is not whether enforcement of the forum selection clause would contravene any public policy, including California's, but rather, whether it "contravenes the public policy of the forum in which the suit is brought", which, in this case, was the federal district court in Pennsylvania.

 

The Maaco case serves as a good reminder to carefully consider the consequences of the "choice of law" and "forum selection clauses" in a franchise agreement before signing up.  Click here to read the entire case.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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