Despite a district court's recent decision in Braatz, LLC v. Red Mango FC, LLC, franchisors are well advised to comply with applicable disclosure requirements to a "T" to ensure new franchisees will not have an ongoing right to rescind their franchise agreements.
Braatz was disclosed with Red Mango's franchise disclosure document (FDD) on November 4, 2011. On December 28, 2011, Braatz received an execution version of the franchise agreement and a franchise compliance questionnaire from Red Mango. On January 5, 2012, Braatz paid Red Mango an initial franchise fee and entered into a franchise agreement with Red Mango for a Red Mango yogurt store.
After cashing Braatz's check for the initial fee and countersigning the franchise agreement, Red Mango re-sent a blank closing questionnaire to Braatz asking Braatz to change two answers it had previously provided and resubmit the questionnaire. Braatz completed and signed the replacement questionnaire and returned it to Red Mango before January 16, 2012. Braatz closed the store on March 2, 2014, filed for bankruptcy soon thereafter, and filed a claim against Red Mango for violation of the Wisconsin Fair Dealership Law (WFDL) on December 23, 2014. Braatz sought to rescind the franchise agreement since Red Mango had not provided Braatz 14 days to review the replacement questionnaire before accepting Braatz's initial franchisee fee payment.
The WFDL provides "No franchise [...] may be sold in [Wisconsin] unless a copy of an offering circular is provided to the prospective franchisee at least 14 days prior to [its] execution of any binding franchise agreement or other agreement with the franchisor or at least 14 days prior to the payment of any consideration...." If the franchisor materially violates this provision, the franchisor shall be liable to the franchisee and the franchisee may bring an action for rescission.
The court ruled that even if Red Mango was required to provide Braatz an additional 14 days to review, complete and resubmit the questionnaire, the alleged violation was not material. Since Braatz promptly completed and resubmitted the questionnaire, the court opined, the violation did not affect Braatz's decision to enter the franchise. Also, the representations Red Mango had asked Braatz to change in the questionnaire conflicted with representations Braatz had made in the franchise agreement. In the court's opinion, asking Braatz to align its representations did not present any new requirements for franchise ownership, and thus, was not enough to amount to a material violation of the WFDL's disclosure requirements. Accordingly, the court granted Red Mango's motion to dismiss Braatz's claim.
Had this case been heard by a different court, or had the court been asked to apply the franchise disclosure laws of a different state, the result could have been different. So, keeping in mind that an ounce of prevention is worth a pound of cure, franchisors are best advised to provide franchisees no less than 14 full days to review all documents before accepting any signed documents or monies for a new franchise.
See: Braatz, LLC v. Red Mango FC, LLC.
