Franchise-Related Ppt
Transcript of Franchise-Related Ppt
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Comparison of the Trilogy: Common Law Fraud, Franchise Investment Laws, and
Little FTC Laws Remedies for Misrepresentations and Omissions in the
Offer and Sale of Franchises
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Lord of the Rings
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Fellowship of the Ring
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The Trilogy
• Common Law Fraud
• Franchise Disclosure Laws
• Little FTC Acts
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Gandalf and the Federal Trade Commission Act
Section 5 of the FTC Act prohibits “unfair
and deceptive acts or practices” and “unfair
methods of competition.”
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The Breadth of the FTC Act and Purpose of the
FTC Franchise Disclosure Rule • Showing of capacity to deceive
sufficient. No showing of actual deception required.
• The FTC Franchise Disclosure Rule’s Statement of Basis and Purpose found the following landscape at original enactment:– rampant misrepresentations– false earnings claims by
franchisors– “informational disparity” – “economic disparity” between
franchisors and franchisees.
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State Franchise Disclosure Laws
• California Franchise Investment Law addresses “numerous problems from an investment and business point of view …”
• In enacting the New York Franchise Sales Act, the New York Legislature found “franchise sales fraud was endemic … [S]ince 1972 alone, an estimated 14,000 New Yorkers had been victimized by fly-by-night and unethical franchisors …”
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State Little FTC Acts
• “With the enactment of the Tennessee Consumer Protection Act (“TCPA”) in 1977, Tennessee joined the growing number of states that had passed so called ‘little FTC Acts.”
• Consumers or businesses covered?• Goods or services limitations?• State geographic limitations?
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Actionable Misrepresentations
Misrepresentations of Fact
• Intentional
• False statement about a past or present material fact
• Knowledge of falsity or recklessly made
• Defendant intended that plaintiff would rely
• Plaintiff did rely to his or her detriment
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Actionable Misrepresentations
Misrepresentations of Fact
• Negligent
• Defendant supplied false information
• Plaintiff was justified in relying
• Defendant did not exercise reasonable care
• Special relationship?
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Actionable Misrepresentations
Half-Truths
“To tell half a truth only is to conceal the other half.”
Rochester Methodist Hospital v. Travelers Ins. Co., 728 F.2d 1006, 1017-1018 (8th Cir. 1984).
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Actionable Misrepresentations
Material Omissions
• Concealment of a fact material to a transaction
• Duty to disclose?
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Actionable Misrepresentations
Earnings Claims and Projections
• Representations pertaining to past or present facts?
or
• Predictions or opinions as to possible future events?
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Actionable Misrepresentations
False Opinions
• “Actual language used and the context in which the comment is made”
Cal. Bagel Co., LLC v. Am. Bagel Co., No. 97-8863, 2000 U.S. Dist. LEXIS 22898, *28 (C.D. Cal. June 9, 2000).
• Superior knowledge?
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Actionable Misrepresentations
False Promises• Positive intent not to perform
• Promise made without present intent to perform
• Past or present material fact
• Superior knowledge?
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Proving Fraud Against Lord Sauron: Scienter and Intent to Deceive
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Reliance
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Causation / Reliance
• Some state franchise disclosure laws use the word reliance in remedy provisions.
• Some state franchise disclosure laws use causation or a derivative in remedy provisions.
• Some Little FTC Acts do not require proof of reliance, others do.
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Justified Reliance
• A number of judicial decisions have added a justified reliance requirement under several state franchise disclosure statutes though those statutes do not use the words justified or reasonable in their remedy provisions.
• Justified reliance is likely not required under the Minnesota Franchise Act. Randall v. Lady of America Franchise Corp.
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Remedies • Actual Damages• Statutory Damages• Non-Economic Damages• Punitive and Exemplary
Damages• Rescission• Injunctive Relief• Declaratory Relief• Attorney’s Fees
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Sauron’s Forces Attack With Integration, No
Representation, and No Reliance Clauses • Important to distinguish
integration, no representation and no reliance clause.
• Fraud vitiates all versus enforcement of contract terms at common law
• Anti-waiver provisions of statutes
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Choice of Law and Venue Clauses
• Enforceability:– At common law– Under state
disclosure laws– Under Little FTC
Acts
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Select Defenses • Statutes of
Limitations• Waivers and
Releases• Could Not Have
Known Defense• Claim Sounds In
Contract Rather Than Tort
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PERSONAL LIABILITY OF OFFICERS,
DIRECTORS AND SALESPERSONS
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Personal Liability of Officers, Directors and Salespersons
•Common Law
•Direct Liability
•Piercing the Corporate
Veil
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Personal Liability of Officers, Directors and Salespersons
• Common Law
•Direct Liability
•Direct personal involvement•Establish each element of common law fraud claim
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Personal Liability of Officers, Directors and Salespersons
• Common Law
•Piercing the Corporate Veil
•Individual exercised significant
control
•Use of control for improper purpose
•Fact-specific inquiry
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Personal Liability, Officers of Directors and Salespersons
• State Franchise Statutes
•14 states expressly
extend liability
•Typically directors, officers,
& employees
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Personal Liability of Officers, Directors and Salespersons
• State Franchise Statutes
•“Materially aid”
•Defense: did not know or could
not have reasonably known of
the wrongful conduct
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Personal Liability of Officers, Directors and Salespersons
• Little FTC Acts
•Individual’s direct, active
participation in the
wrongful conduct of the
corporate entity
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Personal Liability of Officers, Directors and Salespersons
• Little FTC Acts
•Broad definition of
“person”
•“Knowing acquiescence”
may be enough
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DRAFTING AND PLANNING CONSIDERATIONS
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Drafting and Planning Considerations
• Elements of Claims• Common Law• State Franchise Investment Law• Little FTC Act
• Reliance• Scienter• Remedies• Choice of Law/Venue• Waiver/Release• Integration, No Reliance, and No
Representation