The Victory of Common Sense: Why Randall v. Lady of America Matters
Editor's introduction: Michael Garner is an attorney with Dady & Garner, P.A., representing franchisees, dealers and distributors in their disputes with suppliers and franchisors. He recently represented franchisee Randall and others. He won in what Blue MauMau ranks as the #1 most significant case impacting franchisees in 2007. Our online franchisee community welcomes Mr. Garner's legal insights and his new blog.
Randall v. Lady of America, 2007's most important franchise case, is a victory not so much for franchisees as it is for common sense.
Let's say you want to buy a franchise. You find something you're interested in and you're at the franchisor's on discovery day. After a good, long visit, you're very interested and feel you've built up some rapport with the director of sales. So over a coffee break in the late afternoon, you ask how much you can expect to make. The director of sales says, "Well, we can't really show you numbers, but I'll give you an idea." He then pulls out some spreadsheets that show the financial statements of company-owned stores. They're terrific, and you're enthused. "Now, you understand, we're not supposed to show these to you, so you can't expect to get the same results, but this will give you an idea." You agree.
You decide to buy -- in large measure because of the figures you saw. You understand that you're not going to replicate the same results exactly, but you've got a really good feeling, based on those financials. When it comes time to sign up, the franchisor gives you a questionnaire and tells you it's required by "the lawyers." You glance it over and sign.
A year passes, and you've opened. Your business is a disaster. It's nowhere near the performance levels you were shown. You find out that in fact, the company results that you were shown were wrong. Someone had cooked the books. You bring suit.
The franchisor takes out that questionnaire you signed and says you're out of court: in the questionnaire, you acknowledged that no one had shown you figures, and that you hadn't relied on any.
Should you be thrown out of court? Of course not. Not to protect the franchisor from its own fraud. This is, in essence what the Randall court said: a franchisor can't protect itself from its own fraud simply by making you sign a paper to that effect. It's simple. It's straightforward. It cuts through a lot of legal mumbo jumbo.
Within the last month, a New York appellate court made the same holding -- when a franchisor induces a franchisee to sign up on the basis of fraudulent statements, it can't escape simply by having the franchisee sign a paper.
Let's hear it for common sense!
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Related story:
Correct Use of Questionnaires and Franchisee Due Diligence
The question of illegal or misleading earnings claims has come up before, when we discussing the TES case by Mario Herman - which I hope to have an article on shortly.
But let me adopt a franchisor's position here. Franchisees ought to, but usually don't, perform the proper amount of due diligence prior to purchasing a franchise.
Franchisors naturally don't want to be surprised later on with claims about misrepresentations, especially when those misrepresentations could have be caught early in the purchasing process.
So, a franchisor developers a checklist or defence making sure that the prospective franchisee has not heard, relied upon, or otherwise made a reasonable decision about the franchise purchase based on information that is not consistent with the information in the UFOC of franchise agreement.
But, the franchisee quickly signs the questionnaire, but is in error. He or she signs off on a mistake- perhaps not induced by the franchisor.
The New York Appellant Court decided that in such a case: a) the common law claim of misrepresentation could not be sustained in view of the wavier of reliance, but b) the NY Franchise Act would not allow the franchisor to effectively obtain a waiver of the protection offered by the Act.
This is all very well: but, what should the reasonable franchisor do who wishes to have evidence prior to the transaction closing that the franchisee is not relying on information -from whatever source- that is inconsistent with the UFOC and Franchise Agreement?
I have my own ideas: but, I wonder what others think.
Michael Webster PhD LLB
Franchise News
The franchisor could...
abstain from making representations that he has to ask people to acknowledge that he did not make. It's a matter of franchisor quality control of the sales process. What we now have is simply a charade. The so called "honest" franchisor who wants to protect himself from mistakes that he did NOT make simply doesn't exist - certainly not amongst the newer franchisees.
If there were such an imaginary well intentioned franchisor, he could simply follow the suggestions in the article linked below.
--http://www.franchiseremedies.com/litigation_proof.htm
Richard Solomon, FranchiseRemedies.com, has 44 years experience with franchise litigation and crisis management. He is a graduate of The Citadel and The University of Michigan Law School
That's what happened to me when I dealt with Quiznos
This scenario is too eerily familiar to me. We had the exact situation occur. Verbally communicated to us were earnings expectations, what we could expect our sales volume to average down to after grand opening campaign, salary expectations and cost structure quotes (from build-out construction, average utility bills totalled together etc). Then, once you hand over those first checks, sign the dotted line of the FA, then that last document was presented.....the 'ol "You sign here acknowledging that nothing was communicated to you either verbally, written etc as far as expected earnings etc".
Interesting
123 fit has a disk that discloses what we would make. It was nothing but crap. From the build out to everything that was disclosed it didn't pan out. I'm glad there was justice in this case. The more people speak out about being taken I believe there will be justice.