Independent_Joe_20_Dunkin_Donuts_Lisa-Law-icon_fmtEditor’s Note: Last fall, the Coalition of Franchisee Associations, of which DDIFO is a founding member, requested its counsel, Dady & Gardner, P.A., prepare an amicus brief to support a franchise owner in his appeal of a lawsuit against his franchisor. The case, Avon Hardware Company v. Ace Hardware Corporation, questioned the validity of disclaimers franchisors routinely place in their Franchise Disclosure Documents. Even though the appeal was dismissed, the case brings to light an issue relevant to every franchisee.

We asked our friend John Holland, one of the partners of Dady & Gardner, to write a short summary of the case so Dunkin’ Donuts franchise owners could get a clearer sense of what is at stake when a prospective franchisee reviews franchisor disclaimers.

– Carl B. Lisa, Esq., Lisa & Sousa, Ltd. DDIFO General Counsel

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One of the ironies of franchising is that, while franchisors pitch their respective franchise concepts as successful blueprints for business operation, franchisor lawyers routinely pack franchise documentation with extensive disclaimer provisions identifying the myriad number of risks faced by any prospective franchisee that chooses to make a franchise purchase.

Franchisees that have substantively reviewed either pre-sale franchise disclosure documents or franchise agreements, are familiar with franchisors’ routine practice of including written provisions disclaiming that the franchisor’s sales team has said anything to a prospective franchisee that would give the prospective franchisee any reason for believing that the prospective franchisee, upon joining the franchise system, will have any meaningful expectation of financial success. Such disclaimer language, in many cases, is a complete fiction.

After all, while the franchisor’s legal team is crafting disclaimer language, (e.g., “We do not make any representations about a franchisee’s future financial performance or the past financial performance of company-owned or franchised outlets. We also do not authorize our employees or representatives to make any such representations either orally or in writing”), the franchisor’s sales team is, all too frequently, touting the bottom line profits to be enjoyed by those who purchase a franchise. Such financial claims by the franchisor sales team – formerly referred to as earnings claims – are, now, generally referred to as “financial performance representations” (“FPRs”).

In litigation, franchisor lawyers frequently rely on disclaimer provisions in an effort to defeat legal claims by a struggling franchisee who points out that the performance of his/her franchise is nowhere near as good as was predicted by the franchisor’s sales team.

Some franchisors have had success relying on disclaimers to defeat franchisee claims. For example, in Avon Hardware Company, et al., v. Ace Hardware Corporation, 2013 Ill. App. (1st) 130750 (October 28, 2013), the Illinois Court of Appeals rejected an appeal by franchisees based in Illinois and Indiana that the franchisor had presented them with financial pro formas that unlawfully overstated the franchisees’ likelihood of success. The Illinois Court concluded that the franchisees could not have relied, as a matter of law, on pro formas which had included disclaimer language stating that the pro formas were “merely estimates and should not be considered as the actual or potential sales, profits or earnings that will be realized by any specific store operator.” In so doing, the Illinois Court ignored the amicus brief presented by the Coalition of Franchisee Associations and the weight of recent franchise authority holding that franchisors cannot use disclaimers, as a matter of law, to defeat statutory franchise claims of franchisees that have, in fact, relied on the franchisor’s pre-sale financial performance representations in choosing to purchase a franchise.

The better result would have been for the Illinois Court to refuse to declare that the disclaimer made the franchisee’s reliance on the earnings claim unreasonable as a matter of law. The Illinois Court should have, instead, allowed for a factual examination as to whether the franchisee had, in fact, relied on the franchisor’s earnings claim.

As explored in two other court decisions involving recent franchise cases handled by our firm, courts should be reluctant to dismiss a franchisee’s statutory fraud claims based on the language of disclaimers alone. In Randall v. Lady of Am. Franchise Corp., a group of individual franchisees sued their franchisor and alleged that the franchisor had made earnings claims in violation of the Minnesota Franchise Act. The franchisor moved for summary judgment, arguing that the disclaimers in the franchise disclosure document and the franchise agreement precluded any conclusion that the franchisees had reasonably relied on the franchisor’s alleged misrepresentations. In denying the franchisor’s motion for summary judgment on such statutory claims, the Randall court illustrated why courts must be reluctant to allow franchisors to use disclaimers to defeat franchise fraud claims utilizing the following hypothetical:

Suppose, for example, that the dishonest franchisor included in the franchise agreement … the following: “I did not make any representations about the revenues of existing franchises. If you disagree, I hereby disclaim any representations that you believe I made. You cannot rely on them.”

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The disclaimer cannot change the historical facts; if the dishonest franchisor made misrepresentations, then he made misrepresentations, no matter what the franchise agreement says. 

For this reason, the Randall court refused to dismiss the claims of franchisees who alleged that they had relied on the franchisor’s earnings claims in electing to purchase a franchise. Other recent cases, including Long John Silver’s Inc. v. Nickleson, a civil case, have relied on the logic of Randall in refusing to use disclaimer language as a basis for dismissing franchise fraud claims.

That said, because some courts remain willing to rely on disclaimers to defeat franchisee claims, prospective franchisees should consult with a franchise attorney to evaluate the risk posed by disclaimer language which so frequently appears in boilerplate franchise documents.

By John D. Holland, Esq., Dady & Gardner, P.A.