A franchisor is allowed to make "financial performance representations" in its disclosure documents. These figures may project how much money a franchisee is likely to make and can play a critical part in the franchisor's sales process. But if the numbers are way off, what kind of legal recovery can the franchisee get?

In Legacy Academy, Inc. v. Doles-Smith Enterprises, Inc., a Legacy Academy ("Legacy") franchisee suffered losses during the first 3 years of operating its daycare franchise. The franchisee sued, claiming that Legacy had misrepresented the projected cash flow of its franchises in the Franchise Offering Circular they provided to the franchisee. At trial, the franchise owners showed that they paid $40,000 for the franchise and took out $200,000 in loans to cover start-up expenses before the daycare was operational. They also testified that they lost their life savings in order to keep the daycare operational while it lost money. The jury agreed and awarded the franchisee $390,000 in damages.

However, an appeals court found the franchise owners failed to present evidence of damages necessary to receive an award. The court explained that the owners certainly could not recover the difference between what their business made and what the Offering Circular projected because the figures given were only a projection - not a guarantee.

The owners may have been able to recover their costs to buy and start the business - the $40,000 franchise fee and $200,000 in loans - had they asked to "rescind" the franchise agreement: to be put back into the financial place they were before they signed the agreement. But instead, the owners asked for all of the damages they suffered as "consequences" that flowed as a result of the franchisor's misrepresentation. The court concluded that only the owners' ongoing losses due to operating the franchise qualified as such consequential damages. But testimony the franchise owners gave about those particular damages - the "loss of their life savings" - was so vague that a jury had to speculate what the fair recovery should be. Therefore, the appeals court reversed the jury verdict and found in favor of Legacy.

In light of these developments and other negative publicity that non-compete agreements for workers have received, franchisors that provide such agreements for their franchisees' use may want to consider whether or not they are enforceable, and whether such agreements constitute good business practice.