Hot dog franchisor, Charlie Graingers, was unable to obtain dismissal of a federal lawsuit brought by franchisees alleging fraud, misrepresentation and breach of fiduciary duty.
The franchisor claimed that a general release signed by the franchisees released it from the claims. However, the court ruled that the franchisees presented sufficient facts to show they might have been defrauded into signing the release.
The franchisees received a Franchise Disclosure Document that said they would be provided various resources and operational support. The franchisees had written statements from the franchisor saying the franchise was a low-cost, low-overhead foolproof restaurant concept and was “guaranteed to be successful.” The franchisor made other claims in writing about its restaurant experience and franchise commitments.
The court found that the franchisees sufficiently alleged misrepresentations relating to the time, place and content of the claimed fraud. In addition, the franchisees plead sufficient facts to show that they reasonably relied on the franchisor’s claims since they had no other way to evaluate the prospective business. The court also found that the franchisees sufficiently plead that the franchisor had a fiduciary duty. This was based on the FTC’s Franchise Rule, which requires franchisors to make complete, truthful disclosures to franchisees due to the imbalance of power between the parties.
This case is a lesson to franchisors, and their sales teams, that a general release is not always protection, especially if a franchisor makes untrue claims in the FDD or outlandish representations outside the FDD, to induce a sale. Representations made in the FDD about services to prospective franchisees need to be based on reality. Franchisors and their sales teams should discuss best practices and compliant sales practices with counsel before selling franchises to avoid getting into situations like this one.
