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Hypothetical

Our corporation obtained a franchise and, in doing so, relied on a sales forecast provided by the franchisor. Specifically, the affluent sole shareholder (also president) of the franchisor emailed it to us together with the Franchise Disclosure Document, which did not itself contain any forecast representations. In the email, the president mentioned the forecast was based on “franchisee income statements and market data,” with no further detail, but he mentioned that “support” was available on request. Before our purchase, we requested written substantiation for the forecasted sales. In response, the president sent us a “supporting” spreadsheet, which included tables supposedly summarizing “regional franchisee sales” and embedding links to other documentation. We were unable to retrieve the linked documents, but we felt assured by the spreadsheet's organization and subtotals. Shortly upon opening our franchised outlet, in Naples, Florida, we discovered the forecast lacked any credible basis, and it relied on unfounded assumptions. Our losses have been substantial. Can we sue the president?

You may find relief through a number of statutory or common law actions, depending on additional facts. Pulling from the Florida Statutes, I'll briefly address a prime candidate: § 817.416 (the “Florida Franchise Act” or “FFA”). Our limited focus will be on joining the president as a defendant in an FFA action and holding him personally liable.⁽¹⁾

Florida Franchise Act

First, is there a viable cause of action under the FFA?

Assumptions

Let's assume there are no issues of jurisdiction, choice of law, standing, or other threshold matters that would frustrate initiation of an action.⁽²⁾ Also, the facts don't raise significant issues regarding the “franchise or distributorship” definition, under § 817.416(1)(b), Fla. Stat. We'll assume such definition is met.⁽³⁾

Unlawful act under § 817.416(2)(a), Fla. Stat.

The FFA renders it “unlawful, when selling or establishing a franchise or distributorship, for any person” to “[i]ntentionally . . . misrepresent the prospects or chances for success of a proposed or existing franchise or distributorship,” among other acts. § 817.416(2)(a), Fla. Stat. (boldface added).

Misrepresentation

Under the FFA, a misrepresentation generally consists of “[a]ny manifestation by words or other conduct by one person to another that, under the circumstances, amounts to an assertion not in accordance with the facts.” Travelodge Intern., Inc. v. E. Inns, Inc., 382 So. 2d 789, 790–91 (Fla. 1st DCA 1980) (quoting Restatement of Contracts § 470(1)). However, the above-noted act calls for a special form of misrepresentation:

The statute . . . by focusing upon misrepresentations as to the “prospects or chances for success”, concerns itself with what is said today about what probably or most likely will happen tomorrow. If the total effect of [a party's] conduct was to intentionally misrepresent what would be the probable or most likely prospects for success of the [business] enterprise, based upon the facts and circumstances which were known by [such party], it may be liable for damages under this statute. We hold that recovery under the statute may be had upon proof of intentional words or conduct by the franchisor, concerning the prospects or chances of success of the enterprise, which were relied upon by the franchisee to his detriment, and which are not in accordance with the facts.

Id. at 791 (emphasis added).

Whatever your source, you suggest the sales forecast was based on assumptions that were unreasonable when made. Maybe you've come across information calling the forecast into question. Before filing a complaint, we'd review this further, performing limited investigatory and analytical procedures. (Obviously, the bulk of fact-gathering would occur during discovery, down the road.)

Intention

Inevitably, though, a more complex FFA task would be establishing the misrepresentation was “intentional.” And yes, this would be required even for the acts appearing to separately violate the FTC's Franchise Rule, under 16 C.F.R. §§ 436.1 - 436.11, and the FTC Act, under 15 U.S.C. § 45. Also, to hold the shareholder-president liable, we'd need to show he “personally participated” in the intentional misrepresentation. See Checkers Drive-In Restaurants, Inc. v. Tampa Checkmate Food Services, Inc., 805 So. 2d 941, 944 (Fla. 2d DCA 2001).

In this regard, Florida's Fifth DCA has held that a complaint alleging the following participation, among other facts, sufficiently stated a cause of action under the FFA for which an officer-shareholder could be held personally liable:

• The officer and other defendants, “while acting in their capacities as corporate officers, directors and shareholders of [franchisor],” conferred regarding “the disclosure requirements applicable to the sale of franchises to prospective purchasers.”

• The officer “advised the other defendants in this [regard]” and informed them about “the liabilities and penalties that might result from a failure to comply with the requirements.”

• The officer and other defendants, though, “decided not to provide any of the disclosures mandated by state and federal authorities, despite knowing that the disclosures were required by law.”

• The officer and other defendants also “devised a scheme to provide [franchisee] with a ‘license agreement,' rather than a franchise agreement, so that they could obtain a . . . franchise fee from [franchisee] before [making required disclosures] and [providing the] franchise agreement.”

• The officer “participated in the development of pro forma spreadsheets regarding [franchisor] specifically to provide to [franchisee] and had actual knowledge of [their] contents and omissions.”

• The spreadsheets “purported to show the anticipated costs and revenues in the startup and operation of the franchise being sold to [franchisee].”

• However, the “spreadsheets were based on ‘conjecture and speculation' without any substantive research, which resulted in the document containing ‘unsubstantiated and misleading' representations.”

• The officer and other defendants “authorized the delivery of the misleading document to [franchisee].”

KC Leisure, Inc. v. Haber, 972 So. 2d 1069, 1071-75 (Fla. 5th DCA 2008).⁽⁴⁾ 

Similarly, on your facts, the president acted in his corporate-franchisor capacity with respect to the forecast. He expressly and/or implicitly authorized the delivery of the forecast and the “supporting” spreadsheet. Also, as we've tentatively concluded, the forecast contained one or more misrepresentations, which the facts suggest were material.

However, prior to filing a complaint, we'd want to develop the facts and adopt a case theme. At this stage, we wouldn't need proof of the relevant actions, but we'd need to construct a set of (working) ultimate facts, even if based on logical inferences. The rest can be filled in during discovery.⁽⁵⁾ A limited pre-suit investigation would be helpful to learn more about (i) the nature and extent of the president's participation in creating and/or editing the forecast; and (ii) his intentions regarding the sales representations. The firm's review of the FDD, communications between you and franchisor agents, the franchise agreement, franchisor advertising, and public records, among other items, may be sufficient for this purpose.⁽⁶⁾    

Reliance

Another significant issue, among others, would be establishing your justified reliance on the sales assertions.

If you bring an FFA action, the defendants will probably challenge your reliance and justification for any such reliance. This is particularly so if the post-forecast franchise agreement included a disclaimer or integration clause. See, e.g., Hotels of Key Largo, Inc. v. RHI Hotels, Inc., 694 So. 2d 74, 76 (Fla. 3d DCA 1997).⁽⁷⁾ Similar to the “intention” inquiry, this area would likely be fact (and discovery) intensive. We would need to methodically present legal and/or factual arguments supporting your reliance.

Conclusion

In your circumstance, you should consult an attorney who handles these matters ASAP and help provide such counsel with a comprehensive set of working facts. Although these facts are skeletal and require development, you're reasonable in exploring relief options, including, among other theories, recovery under the Florida Franchise Act.

(1) For the sake of brevity, we'll pass on various issues affecting the operation of the FFA and the scope of damages and attorney's fees that are recoverable. Regarding the latter, see, e.g., § 817.416(3), Fla. Stat.

(2)  Of note, the hypothetical casually uses the first-person plural. Even so, we'll assume that the corporation is the prospective plaintiff for the action. See, e.g., Checkers Drive-In Restaurants, Inc. v. Tampa Checkmate Food Services, Inc., 805 So. 2d 941, 944 (Fla. 2d DCA 2001) (sole shareholder of franchisee corporation lacked standing and was not person who invested in franchise under FFA). We'll assume each party is a “person” under the FFA.

(3) Under the statute, a “franchise or distributorship” is “a contract or agreement, either expressed or implied, whether oral or written, between two or more persons” in which four criteria are met:

• [A] commercial relationship of definite duration or continuing indefinite duration is involved;

• [O]ne party, hereinafter called the “franchisee,” is granted the right to offer, sell, and distribute goods or services manufactured, processed, distributed or, in the case of services, organized and directed by another party;

• [T]he franchisee as an independent business constitutes a component of franchisor's distribution system; and

• [T]he operation of the franchisee's business franchise is substantially reliant on franchisors for the basic supply of goods.

817.416(1)(b), Fla. Stat.

(4) These “bullet-point” allegations are based on the court's opinion, which includes a summary of the allegations, and are not necessarily quoted directly from the filed complaint.

(5) Among other requirements, the firm's counsel would need to ensure that “to the best of [his] knowledge, information, and belief there is good ground to support” such complaint. See Fla. R. Gen. Prac. & Jud. Admin. Rule 2.515(a)(2). This threshold is not exceedingly high, but it must be taken seriously. (Note: the FFA does not entail a special verified-pleading requirement.)

(6) If the president-shareholder didn't “sanitize” the forecast and spreadsheet, the information extractable from these items alone, including any embedded comments, hidden information and metadata, formula-view contents, altered formulas, “plugged” amounts, isolated hard-keyed values, etc., may collectively allow for certain inferences.

(7) To be sure, this seems inconsistent with the spirit of 16 C.F.R. § 436.9(h), which, in the context of the Franchise Disclosure Document, generally prohibits a franchisor from “[d]isclaim[ing] or requir[ing] a prospective franchisee to waive reliance on any representation made in the [FDD] or in its exhibits or amendments.” However, the disclosure document is not directly at issue here. In any event, the FFA was not intended to evolve in parity with the Federal Trade Commission's rules, unlike the Florida Deceptive and Unfair Trade Practices Act (§§ 501.201-501.213, Fla. Stat.). Regardless, I would seek to aggressively distinguish the written forecast, along with the franchisor's related conduct, from the facts leading to decisions in which franchisors avoided liability (often relating to oral representations) based on disclaimer or integration clauses.

Content posted August 18, 2023.