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ST. CHARLES, Missouri – A circuit court ruled last December that Francorp development firm did give Jitterswing, Inc. legal services and advice in preparing its franchise offering circular and franchise agreement, although it did not have a license to practice law in Missouri.
This “one-stop shop” issue has been a bone of contention in the franchise community for years concerning firms that offer clients their “packaging of legal and consulting” services in franchising their businesses. It has also been an issue with attorneys offering “business consulting services” along with its legal obligations.
In 2009, attorney Robert Einhorn of Zarco Einhorn Salkowski & Brito declared after his victory in a similar case against Francorp that the jury’s decision sends a clear message to Francorp and other franchise packaging houses. Even though that jury did not rule on the “unauthorized practice of law” issue, Einhorn said firms will be held accountable for false and misleading franchise documents for their clients. Francorp continues to pay off $400,000 judgment, in addition to numerous others totally well-over one million dollars.
Not only did Circuit Judge Rick Zerr state that Francorp did engage in the unauthorized practice of law in Missouri and certain provisions of Missouri law, he stated Francorp has previously been cited for similar breaches under Illinois law, citing Francorp, Inc. v Siebert.
After the Missouri Court of Appeals ruled that Missouri did have jurisdiction over the lawsuit Jitterswing Inc. and Francorp Inc., and not Illinois, the circuit judge said the owner of the company, Terry James, testified that Francorp created a franchise offering circular and marketing materials for. He said he had traveled to Illinois several times to meet with Don Boroian, owner of Francorp and to attend seminars on how to franchise your business. James said Boroian nor his staff came to Missouri where JitterSwing was located.
James testified at trial on October 8, 2013, that a certain percentage of Francorp’s fee was designated for “legal development.” He stated that at the time his company was established on March 29, 2008, he paid an amount of $13,867.54 to the development company. Francorp, did not cross-exam James, but said in its answer to the complaint that when it entered into a contract with the owner in December 2006, JitterSwing did not exist. And it asserted that James paid the initial required fee out of his own personal accounts.
The judge ruled that that did not matter. He said, “. . . the Court finds that these expenditures were for the benefit of the entity that would eventually become Jitterswing LLC. Clearly, at its inception, Jitterswing LLC has only the assets committed to it by the James.” Because the parties knew that Francorp’s services were for James’ company, yet to be formed, Judge Zerr ruled that Fracorp could not deny that Jitterswing LLC was the client.
The Missouri Court of Appeals ruled that Francorp’s violation of practicing law without a license occurred in Missouri where the franchisor is based, and not in Illinois where the development firm is headquartered. While legal services were provided to Jitterswing for the purpose of preparing its legal documents in Missouri and other states, and Francorp said representatives never traveled to Missouri to perform legal work, the circuit judge pointed to another case. He said, “The Defendant [Francorp] has previously been cited for similar breeches, under Illinois law, in Francorp, Inc. v. Siebert . . .”
The Circuit Court of St. Charles County, Missouri ruled that Jitterswing paid $5,952.00 to Francorp for law work and pursuant to Missouri law is the company is entitled to Judgment in “. . . treble the amount which shall have been paid . . .” Judgment was entered in favor of Jitterswing for $17,856.00, plus all taxable costs incurred.
ABA raises ethical issues surrounding role of consultant/lawyer
At the same time Jitterswing v Francorp case was being argued in court in 2007, the American Bar Association scrutinized Francorp’s “one-stop-shop” program. The Forum on Franchising seminar stated, “Perhaps the most significant case that faced the issue of the unauthorized practice of law by a franchise consultant is Francorp, Inc. v. Siebert."
When former Francorp president Mark Siebert started his own competing business, Francorp sued him. Siebert brought a counter-claim against Francorp, alleging Francorp's preparation of franchise documents constituted the unlawful practice of law, which constituted an unfair trade practice under the Illinois Uniform Deceptive Trade Practices Act.
The court determined, according to the Forum paper, that "one who reviews documents produced by a lawyer, critiques them, and advises another of their legal consequences is practicing law." The court continued, "[n]o matter how knowledgeable the lay person, or how inexperienced the lawyer, however, Illinois has rendered its judgment that certain tasks are to be performed only by licensed attorneys directly engaged by the client." The court made it clear that an in-house attorney can only perform legal services for their employer and not for his or her employer's clients.”
But based on the findings that drafting the legal disclosure documents and executing registration certificates constitute the practice of law, and that the evidence suggested that Francorp was doing significant legal work with outside attorneys only on the cursory review of documents, the court refused summary judgment. The Forum paper explains that it was so because the precise division of responsibilities between Francorp and the independent counsel was unclear and very much in dispute.
Although no reported decision followed, Forum materials state that the ruling indicates that a consultant who creates legal documents, even through a licensed in-house attorney, would be treading on thin ice. But it continues, "The case did not address whether legal advice generally provided by consultants, as part of their services, would constitute an unauthorized practice of law by the consultant."