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Log In / Register | Feb 9, 2012

Gathering Storm: Franchisees Sue Lawyers

Posted Tue, 2009/10/20 - 21:14 by Don Sniegowski

"There is an insidious trend developing in the franchise sales arena: Lawyers are being sued," observes Rupert Barkoff. The franchise attorney then goes on to highlight a news piece that reporter Janet Sparks wrote three months ago in the August edition of Franchise Times, where lawyers were being held accountable for defects and misdeeds in the sales materials they help prepare.

…lawyers, in addition to acting incompetently as lawyers, have crossed the line and have become actively engaged in the franchise sales process in business roles—that is, promoting franchise sales and otherwise acting more like a franchise sales person than a legal adviser. - New York Law Journal (pdf)

In January of this year, Blue MauMau first reported on a Dream Dinners lawsuit, where the franchisor’s attorney became actively engaged in selling franchises by showing earnings statements that were required to be supported in the franchise disclosure document, but weren’t.  In his September article, Barkoff goes on to discuss obligations to the franchisor and what activities look like they cross over into sales, exposing the attorney to lawsuits. He writes:

Much of franchise law is based upon securities law, and in the context of securities law, especially violations of the Securities Act of 1933, it is clear that a lawyer has a duty to perform due diligence, and if he does not, there may be liability to the purchasers of the securities being floated. In contrast, the history of the lawyer's responsibilities in franchise sales regulation and the lawyer's responsibilities are not as well defined, either by law or in practice. Unlike the situation in securities laws, many believe that the standards which franchise lawyers must follow are not as stringent as those imposed on their securities laws counterparts. Few will doubt that there is a duty of competence owed to the franchise lawyer's client, but does this duty extend to prospective franchisees?1 And, at the same time, we must ask what does competence entail?

He does not believe that attorneys should be given immunity.

Barkoff speculates to the New York Law Journal's legal readership that these lawsuits against attorneys will result in higher malpractice insurance costs, higher billing rates from franchisor attorneys, and an increase of innocent lawyers settling these lawsuits out of court to avoid the time and effort needed to defend against them.

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