Fraud & Misrepresentation
When a franchisor makes false or misleading promises to convince you to invest, you have legal rights. Our firm helps franchisees who were induced into agreements through misrepresentation — such as overstated profits, hidden fees, or false financial performance claims. We review your documentation, assess whether the franchisor’s statements violated disclosure laws, and pursue remedies for fraud in the inducement or negligent misrepresentation.
Fraud & Misrepresentation Take Many Forms
If your franchisor or its salesperson lied to you about something during the sales process, you may have been defrauded. If they made a false statement in the Franchise Disclosure Document (FDD) or otherwise, you may have been defrauded. However, equally importantly, if the franchisor or its salesperson failed to tell you something the law required them to tell you, you may have been defrauded. Finally, if they failed to tell you the whole truth about some fact they told you about, you may have been defrauded. If you have even a feeling that any of these things occurred, you should consult an experienced franchisee attorney right away.
Common Law Or Statutory Fraud.
The common law is law that has developed through history in the form of court decisions. Any lawyer will tell you that common law fraud or misrepresentation is very difficult to prove because you have to prove the franchisor knew the statement was false and that they intended that you rely on it. You have to prove their state of mind.
By contrast, statutory franchise fraud, as adopted in at least twenty-one states, does not require proof of the franchisor’s state of mind. You still have to prove: (1) a misrepresentation of an existing fact; (2) that the statement would have affected your decision whether to invest (that it was “material”); (3) that the statement was false; (4) your ignorance of its falsity; (5) your reliance on the truth of the representation; (6) your right to rely on it; and (7) the damages you sustained.
Another category of fraud or misrepresentation that most commonly arises under the state franchise statutes is fraud by omission. Under the state laws, it is a violation “ to sell or offer to sell by means of any written or oral communication which … omits to state a material fact necessary in order to make the statements made in light of the circumstances under which they were made not misleading.” Simplified, that means it is a violation of the antifraud law to fail to tell the whole truth about something you were required to disclose or that you voluntarily talked about. The Washington Supreme Court has interpreted the material omission provision, concluding that it gives a franchisee a rebuttable presumption of reasonable reliance on the omitted fact, effectively reducing the franchisee’s burden of proof to five elements. The franchisor has the right to rebut that presumption by proving that, had the franchisee been told the omitted facts, they still would have invested in the franchise. The Supreme Court acknowledged that the burden it placed on the franchisor was likely impossible to meet, but that it was good policy and consistent with the statute.
Keep in mind that the laws of your state will likely govern. It may or may not be the same as or even similar to Washington law, which we describe. If you think you might possibly have a claim, you should consult with an experienced franchisee attorney who is familiar with the franchise laws of your state.
Statutes of Limitations.
Often, a franchisee’s biggest obstacle to pursuing a claim for fraud or misrepresentation is the statute of limitations. The statute of limitations is different in many states. In Washington, your claims are barred if you do not file a lawsuit or start an arbitration proceeding, as applicable, within three years after you either knew or reasonably should have known the facts that give rise to your claim. Courts and arbitrators tend to look for any hint that you thought something was wrong to start the statute running. Even a common breach of contract by the franchisor can, in some cases, cause a judge or arbitrator to decide that should have put you on notice to consult an attorney about a potential fraud case. In some cases, if you did consult an attorney before you invested, even if the fraud was not an issue or apparent at that time, the judge or arbitrator could decide you should have known then.
Our point is that your fraud or misrepresentation claims could be cut off by a statute of limitations if you delay beyond the basic statute of limitations period in taking some action. In the business context, two or three years is an extremely short time, and it may be difficult to realize that you were deceived that quickly. However, because of how judges and arbitrators deal with such issues, we suggest that every franchisee obtain a legal consultation regarding potential fraud and misrepresentation before the base statute of limitations expires. In Washington, that is three years. In some states, it is two years or less. Review the facts of your investment and operations with an experienced franchise lawyer. They may be able to help you understand and discover how what happened three years earlier was really fraud or misrepresentation.
Having that information does not necessarily mean you will want to act on it. However, if your business continues to struggle or has never achieved profitability, understanding the legal implications of what happened around the time you invested and knowing your legal rights may provide a means of exiting the franchise and recovering some of your losses. The lawyers at Bundy & Fichter have experience in conducting such reviews. Please call us or contact us through this website. We are available to help.