| Licensing, Technology Transfers, |
One of the major, and I mean major, problems faced by people thinking about buying a franchise is that they think any lawyer, especially if s/he says he is a 'business' lawyer, can competently advise them about the wisdom or advisability of buying a franchise. Nothing could be farther from fact/reality. First of all, knowledge of business law may enable someone to 'read' a contract competently, but that isn't really the due diligence on the transaction itself. Anyone who can read ought to be able to figure out that every franchise contract provides that franchisees must do as they are told and that any failure to do as they are told may result in loss of the entire business investment. [See also 'Franchise Compliance -- What does It Mean?' elsewhere in this Specialized Tutorial section] Secondly, a business lawyer who is not up to date on what is happening in the franchise industry most probably will not 'spot' many of the contract language traps.
The franchise industry -- at least the newer franchisor segment of the franchise industry, and also many of the older franchises that are 'over the hill' -- uses that lack of available expertise to enable rampant misrepresentation. Here is how that works.
When you are thinking about investing in a franchise, you receive sales and marketing brochures that tout expertise that you supposedly cannot get elsewhere, and that promise economies/savings that you supposedly cannot accomplish elsewhere or, for that matter, on your own even if you knew where to look.
If you look at all the franchise adverts for franchise opportunities in any business category, they all say the same thing -- we know how to do it -- we can show you how to do it -- you save a lot of money and reduce risk of failure if you do it with us -- we have the 'secret' to success -- we will support you to achieve success -- we have the proven system -- we have the name recognition -- we get you up and running quickly. In actual fact, most of this is not even remotely true. How can you tell what is true and what is not true? One way is to know the difference between fantasy and reality because of experience in dealing with the franchise industry. In addition to that, if what is said in the sales and marketing brochures and what is said to you orally on discovery day is not also specifically stated to be an obligation of the franchisor in the franchise agreement itself, then the franchisor isn't promising any of the things that they said they would provide when they made these statements.
The mistake that franchise purchasers and their lawyers make is that they assume that if the things said to them turn out not to have been true, they can sue for fraud and get all their money back and their damages to boot, as well as their attorney fees. That may not be a reliable assumption. It may not be reliable in terms of the applicable law, and even if it is, it may not be reliable in terms of the franchisee having sufficient resources to pay for the litigation required to get effective relief from a court or from arbitration.
How can this statement be true? Do franchisors have a license to lie, cheat and steal? Would any court ever rule that a crooked franchisor can get away with such conduct? Don't franchise regulations forbid such conduct? The answer to all these questions is that franchisors think they can get away with it; that regulators rarely/almost never do anything to protect the victims because of lack of enforcement resources; and that lawyers fail to recognize the intended impact of certain clauses in every franchise agreement. Part of the problem is that in some courts, the application of integration and acknowledgement clauses really acts as a license to steal, leaving the victimized franchisee to seek relief in courts of appeal -- adding enormous additional expense to the process of seeking redress of grievances. And if there is an arbitration clause in the franchise contract, the franchisee may not even have a right to appeal an adverse ruling. There are cases under the Federal Arbitration Act that say that arbitrators are not required to follow the law -- and this is ruling case law.
Does your lawyer know about all of this? Probably not! Why am I telling you this? I am telling you this so that you can bring this to your lawyer's attention and maybe, if your lawyer has read this, you can get higher quality advice. I am not giving you legal advice, and this article does not make me your lawyer. But if you call this article to your lawyer's attention, it will probably help to bring the advice up several levels of quality. This article only deals with the effect of integration and acknowledgement clauses in franchise agreements. It does not deal with any of the other problems presented in franchise agreements, and it does not deal with the issues of what level of due diligence is appropriate on the transaction itself -- which are necessary in addition to analysis of the franchise contract language.
Lay people have no idea at all what I am talking about, so here's the explanation. In contract disputes there is always the question of whether what the customer/franchisee says was promised is really promised in the contract. What if it was promised orally or in a brochure that the franchisee relied on in making the decision to buy the franchise? Every franchise agreement has two provisions that are calculated to let the franchisor off the hook for anything that isn't specifically promised in the written franchise agreement. Every franchise agreement has two provisions that say what the franchisor will do. They are, first, the clause that says that the franchisor grants to the franchisee the right to be a franchisee for a specific term of years, so long as the franchisee is not in breach of the agreement. The second is a serious of provisions under the title 'Obligations Of The Franchisor'. Anything that is not specifically provided for is not required of the franchisor, according to normal rules of contract construction. There is an Integration/Entireties clause that says that this written agreement contains all the obligations of the parties and fully accounts for everything that the parties agreed to. That means that if something isn't specifically provided for in that document, you don't get it! You want an example? If you were promised world class support to help make your store the best operation in the business, but the contract says the you will get 'such support as the franchisor may from time to time provide to its franchisees' (or any words roughly to that effect), you get whatever they feel like providing whenever they may feel like it, with no requirement of quality, competence or effectiveness.
To drive the nails more deeply, there is another clause called 'Acknowledgement'. In this provision it says that you, the franchisee, agree that nobody acting for the franchisor ever told you anything that is not in the franchise agreement and in the UFOC disclosure document package that had to be provided for you before you made the decision to buy the franchise. If you sign the contract acknowledging that no one made any promises or representations to you that are not stated in those two documents, the franchisor's intent is that you cannot later say that other promises or representations were in fact made. Actually, in cross examination of you as the witness, it will probably be suggested that, in the light of the fact that you now claim other promises and representations were made to you, it is you who defrauded the franchisor when you signed the contract saying that that was not so.
It is the stupid franchisee defense. If people told you things and you sign an agreement saying that they did not tell you those things, who is the liar? How bloody stupid can you be?
Most lawyers think of the integration/entireties clause and the acknowledgement clause as something called 'boilerplate'. Boilerplate is language that is in every contract and so taken for granted that lawyers rarely think anymore about what impact is intended, or what questions to ask the client in order to figure out whether and to what extent something very wrong is about to happen
Now that you know this and are consciously aware of it, you are probably asking yourself whether the world has gone nuts. If the law really works this way, isn't that giving franchisors a license to lie, cheat and steal? The answer is sometimes yes and sometimes no. It depends. The best defense is to account for everything you think you were promised and then see if every one of those things is stated in the contract. Do you believe people told you that you would make a profit? Where is that stated? If you look at Item 19 of the disclosure document package (The UFOC) you will see that the franchisor claims you were never told you would make a profit and that whether you do or not is your problem/risk, and that no one is authorized to make any earnings claim statement to you except what is said to you in writing in that Item 19. If you prepared a business plan that shows you will become profitable and the franchisor's sales person tells you that you did it right and that your projections are reasonable, did they tell you something that the UFOC says they didn't tell you and that the contract does not promise? If the numbers in your business plan came from the franchisor, and the UFOC says they don't give you such information, and you sign the contract, are you being cheated or are you simply stupid, or both? Is it lawful to cheat the stupid? Who will protect the franchisee who reads things but doesn't understand what they say? Most lawyers who advise about franchise contracts aren't any more astute than the ignorant franchisee. It is being hammered home more and more often in court opinions that stupidity can make you fair game for any crooked franchisor. If you sign documents that say things you know are not so, you may be as much at fault for your troubles as the crook you claim defrauded you.
When the contract is 'integrated' -- says everything that was actually agreed to -- courts are reluctant to allow you to testify that there were other promises. That's called the 'Parole Evidence Rule' -- if an agreement is an integration/entireties, oral or other evidence that is at variance with its express written terms will not even be allowed into evidence.
Fraud is an exception to the rule unless something has changed dramatically while I slept last night. Fraud is something you still cannot contract draft your way out of. Any conclusion that fraud is OK if you write the contract carefully enough flies in the face of the ages old belief and doctrine that inducing any agreement through the artifice of fraud is grounds for vitiating the agreement and seeking redress for other consequential damages incurred due to having entered into it in the first instance.
In a court where the judge has the sensitivity to recognize that acknowledgements can be the devil's own work in the hands of a devil, acknowledgement clauses will be given the same short shrift as integration clauses where fraud is alleged and can be proven. Acknowledgement clauses should instantly be rejected where the false statements were not obvious at the time of contract execution, but were discoverable only after the fact. To rule otherwise is simply to bestow a license to lie. And once that 'defense of integrity' dynamic is in play the operation of long respected legal principles opens the evidentiary door to permit exposure of the entire panoply of devious statements that would be proper to consider under the standard specifically stated in every franchise investment statute in the USA, as well as under the FTC Franchise Rule -- that it is unlawful to sell franchises by making false and misleading statements and by omitting to state that which is necessary to make what is said not misleading in light of the statements made.
Franchisors who lie know that fraud is an exception to the rule, so they use the Acknowledgement clause in addition to the integration/entireties clause. Franchisors who don't lie also use the same clauses. You have to have the expertise to differentiate between the two -- who is who here? In the Acknowledgement clause you actually agree that no one said anything to you that is not contained in the contract and in writing in the UFOC. If you don't know enough to stop and recognize that other things were promised/represented to you that are important considerations, if such is in fact the case, and you go on and sign the contract anyway, more and more courts are less willing to listen, even where the fraud is intentional and very significant. And even where a judge is not willing to allow apparently obvious and intentional fraud to be excused by cute draftsmanship, will you even have enough money to pay for the trial of the case. Do you understand what it costs to have lawyers working for a year or more on your case -- lawyers who have tried such cases before and who know how to do it? Even if you have a legal remedy, if you don't have the money to pay for the help you need to get the remedy, the result is the same as if the remedy wasn't there in the first place. That is why it is so critically important that your due diligence on buying a franchise include much more than simply 'reading the contract'.
In some situations, it may not be possible to tell at the time when the contract is signed that things stated in the sales brochure and in the UFOC were false -- you only learn that later. If your were told that there were savings available to you only because you are the franchisee of this franchisor rather than being an independent, and the savings are not there, and the franchisor knew the savings weren't there or had no idea whether they were or they weren't when the statement was made to you, that could still be a fraud case you could get to a jury. If the franchisor said in the written sales brochure that what you bought from the franchisor was resold to you at the franchisor's cost -- dollar for dollar -- and that is later seen to have been untrue, you can still get to the jury, if you can afford the lawyers. If financial information is provided to you -- including earnings claims in Item 19 of the UFOC -- that were based upon unreliable/false numbers, or characterized in a manner that causes them to be otherwise misrepresented, that too is admissible and should not be foreclosed by any Intergration or Acknowledgement clause in the franchise contract. Those are some examples of fraud issues that can survive the integration/entireties clause and the Acknowledgement clause. There are others, but the point is that these are things that you couldn't have known about when you signed the contract. What those other things are and whether they provide help to your fraud claims depends on your individual situation and circumstances. [See also in this Specialized Tutorials series 'Franchise Enterprise Insights -- Myths and Realities']
The point is that you have to be alert and not sign contracts that you don't know how to evaluate or that your lawyer may not know how to evaluate because of inexperience in the franchise industry.
You will never suffer because you decided, even at the last minute, not to buy a franchise. You can suffer irreparably if you sign something that has not been competently expertised.
The most obvious and most frequently misrepresented inducements to buy a franchise are dealt with in the article cited to you at the end of the paragraph just before the bold print. Read it! Doubt everything that is said to you. Insist that everything you think was promised or represented to you be in the contract itself. If they won't put it in the contract, it isn't there in the deal and you don't get it when you become a franchisee. Don't invest your money with people who you ought to be able to see are lying to you and being 'tricky'. Being smart before you buy and sign contracts is the only sure and certain defense to investment fraud. All after the fact remedies, even if they are available to you, are of less value. It's your money and your life that are at risk. You don't want to lose everything you own and have saved and can borrow and have to go bankrupt because some slick sales people outsmarted you.
Copyright 1997 - 2010 || Richard A. Solomon
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