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.