When you purchase a franchise as an individual, many jurisdictions consider the franchisee a consumer, which affords your franchise important legal protections under consumer protection law. With the passage of the Uniform Deceptive Trade Practices Act (UDTPA) in 1964, a cause of action was provided for those who have been harmed by a business or franchisor through fraudulent or negligent practices.
Since the passage of the UDTPA, each state has enacted modified variations of the statute. These state-by-state variations of the UDTPA are commonly known as each state’s “Little FTC Act”. If successful on a claim, Little FTC Acts are a powerful tool against a business or franchisor, as success often means a judgment for treble (or triple) damages so that the business/franchisor is heavily discouraged from committing the same unfair or deceptive actions again.
Now, consumers in all states have some level of protection against businesses with bad practices, and many jurisdictions afford these protections to franchisees. North Carolina law provides a cause of action for consumers as well as franchisees considered consumers within their franchisee-franchisor relationship. This cause of action is designed to protect you and your franchise against harm from a franchisor's fraudulent or negligent business practices.
Is your franchise going to be considered a consumer or a competitor?
The first question for an individual is: are you the type of person that your state’s Little FTC Act is meant to protect? Importantly, many states make distinctions between consumers and competitors and do not protect competitors with their Little FTC Act.
While some states consider a franchisee a competitor, many of them are willing to define a franchisee as a consumer in the context of their relationship with the franchisor because the franchisor typically has superior resources, experience, and bargaining power.
These superior resources can functionally render a franchisee a consumer, providing them shielding under consumer protection laws. While a franchisee is often considered a consumer, it is not always considered as such. If your franchise is considered a competitor in your jurisdiction and that jurisdiction does not provide a cause of action for competitors, your case may be dismissed for lack of standing as a non-consumer.
Is the practice that harmed your franchise considered a deceptive trade practice?
Intentional misrepresentation is a common root for success for a franchisee’s claim under Little FTC Acts. False statements made by the franchisor must be demonstrated to be false at the time they were made. Similarly, you cannot rely on mere projections or opinions from the franchisor that turn out to be false (unless the speaker had superior knowledge and knew they were speaking falsely) and expect to succeed under a Little FTC Act. Intentional misrepresentation by the franchisor must be done knowingly and with intent to deceive the potential franchisee. This can be difficult to prove. But if proven, intentional misrepresentation is almost universally considered a deceptive trade practice.
For example, a franchisee in Florida sued Qdoba for intentional misrepresentation when they relied on Qdoba’s website’s statements about offering an excellent sales-to-investment ratio and statements regarding profitability projections in certain areas by Qdoba’s real estate representative. However, the court rejected their claim, stating that these projections and opinions were not statements of fact, and could not be proven to be false at the time they were made. For the franchisee to have been successful, they would have had to prove that Qdoba made a specific misleading statement like “all of our locations bring in a minimum of $50,000 of revenue per year,” and then prove that Qdoba knew that statement was false at the time the statement was made.
Negligent misrepresentation is another common root for success for a claim under a state’s Little FTC Act. A plaintiff-franchisee may allege that negligent statements made by the defendant-franchisor induced them to enter into an agreement to purchase a franchise and subsequently incur damages. For negligent misrepresentation, a plaintiff-franchisee must prove that the defendant-franchisor’s statements are likely to mislead, and that the franchisor acted unethically.
For example, a plaintiff-franchisee in Florida sued Travelodge Hotels, Inc. for negligent misrepresentation regarding the requirements to bring a certain hotel building up to code. The franchisee relied on representations made by Travelodge about the needs of the hotel based upon a random sample of rooms, but discovered upon acquisition of the building that much more work would have to be done on the building than was originally projected. Again, the court ruled against the plaintiff-franchisee, stating that although there was more work to be done than the franchisee originally expected, the franchisee’s presumptions regarding the amount of work to be done were unreasonable because Travelodge told the franchisee to do their own research.
Critical omissions by a franchisor may give rise to a successful claim under a state’s Little FTC Act. An omission is when a franchisor fails to provide an essential piece of information in a prospective franchisor-franchisee deal. However, what may commonly be thought of as “essential information” does not necessarily create a cause of action if omitted by a franchisor.
For example, a plaintiff-franchisee in Illinois sued its franchisor, 7-Eleven, for omitting an earnings claim in a disclosure document. However, the court found that the defendant-franchisor had expressly stated that it would not provide such earning statements to the franchisee, and the franchisee entered into the agreement, nonetheless. Thus, the case was dismissed with summary judgment in favor of the defendant-franchisor. For the franchisee to have been successful, they would have had to prove that 7-Eleven agreed to provide such a document and then did not provide it.
Conclusion
Unfair and deceptive trade practices threaten consumers and franchisees alike, and that is why all states have enacted their own Little FTC Act to provide a cause of action against those committing deceptive trade practices. If you find yourself or your franchise damaged from deceptive trade practices, including but not limited to false statements, negligent statements, or omissions of critical information, you may have options for recovery under your state’s Little FTC Act. NCGS 75-1.1
Dye Culik PC is a law firm based in Charlotte, North Carolina. Our attorneys practice in the areas of business law and franchise law. If you are considering purchasing a franchise or are experiencing challenges with your existing franchise, we may be able to help you protect your investment. Connect with us and mention this article to set up your consultation.
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