Franchisee 101: They Were Just Kidding

Lewitt HackmanA federal district court in Baltimore granted summary judgment against a former franchisee who claimed negligent misrepresentation against the franchisor and its officers. The court found there was no genuine issue of material fact whether the franchisee reasonably relied on the officers’ statements in the construction, marketing, and operation of franchisee’s childcare facility.

The franchisor of Kiddie Academy Educational Child Care (“Kiddie Academy”) centers sued a former Texas franchisee, alleging the franchisee defaulted on their financial obligations and refused to return proprietary materials. In a counterclaim, the franchisee alleged Kiddie Academy induced them to enter into a franchise, misrepresented that the curriculum was superior to competitors, that Kiddie Academy would guide the franchisee through construction, provided inaccurate site analysis that led the franchisee to select a poor location, provided false pro formas, and failed to disclose licensing requirements. One by one, the trial court found the franchisee did not rely on any alleged statement.

Kiddie Academy made promotional representations that franchise owner-operators did not need training or experience because “all training” was provided; that its curriculum “was as good or better than its best competitor;” and that Kiddie Academy had a platform that would guide franchisees to success. These statements were mere puffery according to the court because they did not convey concrete verifiable facts. The court found the franchisee was not justified in claiming to have relied on them.

The franchisee’s reliance on other statements was also unjustified. The franchisee was involved in generating draft pro formas and placed blind faith in them, but should have been on notice that projections based on frequent changes in first year student enrollments were optimistic, not conservative. Accusations that Kiddie Academy underestimated investment cost and did not disclose licensing requirements, did not support the element that the defendant state a partial truth that triggered justifiable reliance. There was no evidence of incomplete information or that the franchisor prohibited the franchisee from understanding the full cost of construction.

When a franchise venture goes bad, lawsuits on the basis of “sales talk” can be challenging to sustain. Proving reliance is fact-intensive. It requires specific inquiry into the education and background of the franchisee and circumstances of the interaction for any warning signs of deception. In this case, the franchisee made statements in affidavits that were contradicted by other evidence. Franchise counsel can be a franchisee’s best resource when a business turns south as a direct result of untrue statements or material omissions in the sales process.

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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