Franchisee 101: Expo is No Excuse

Lewitt HackmanA federal court in Missouri ruled that a franchisee’s fraud claim cannot be based on the franchisor’s prediction at a franchise expo of future success in the franchised business.

The franchise was for a virtual care platform, enabling hospitals, doctors and other practitioners to connect with other medical professionals and provide care to patients. The franchisee attended a franchise expo, a trade show where various franchisors can exhibit and present information about their programs.

At the expo, the franchisee met several franchisor representatives. The franchisee claimed the representatives misrepresented how much the franchisee would make in the first two years of operation.

Based on the alleged representations, the franchisee entered into the franchise agreement and began operations. The franchisee claimed the franchisor failed to support the franchisee, which forced the franchisee to stop operating, and that he was fraudulently induced to enter into the franchise agreement due to false, misleading and fraudulent representations, including unsupported statements about potential earning capacity.

Fraud requires proving misrepresentation of past or existing fact. Statements of opinion, expectation or predictions for the future are insufficient to recover for fraudulent misrepresentation. The court dismissed the fraud claims arising from the franchise expo statements, finding the statements, if made, were only puffery and were insufficient to win a claim of fraud. Since franchisor representatives made the profit representations without knowledge of the franchisee’s business plans, experience and expected level of investment, their representations did not rise to the level of fraud.

Fraud also requires proof of reasonable reliance on the misrepresentations. The court found no reasonable reliance due to the franchisee’s experience in the telehealth business, due diligence performed by the franchisee, and the franchisee’s participation in negotiating the franchise agreement. These negated reasonable reliance on anything the franchisee was told.

Some statements, opinions or predictions made by a franchisor outside the Franchise Disclosure Document, regarding future performance, may support a claim for relief. Success depends on a variety of factors, such as applicable state law, the franchisee’s background and whether the franchisee reasonably relied on the statements in entering into the franchise agreement.

Fabius v. Medinexo USA, LLC, No. 4:19CV2526 JCH (E.D. Mo. Apr. 3, 2020)

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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