FRANCHISEE 101: Technical Disclosure Violations

by Lewitt Hackman
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Lewitt Hackman

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.

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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