Misleading, Fraudulent or Incomplete Franchisor’s Disclosure Document

Under the business law statutes of the Federal Trade Commission (FTC), the owner of a franchise business is required to disclose certain information to a potential franchise buyer in the Franchise Disclosure Document (FDD). A Franchise Disclosure Document must be given by a corporation to a prospective franchisee at least 14 days before any deals are made.

Within a typical Franchise Disclosure Document, there are 23 items that must be provided to the prospective franchisee. Item 19, the “earnings claim,” is optional, but a franchisor is prohibited by law from making any earnings representations outside of the document. The franchisor is not required to have the Franchise Disclosure Document legally reviewed before it is provided to a buyer, so if you intend to buy a franchise, it is important to review the document yourself before you sign an agreement with a business organization.

If after you purchase a franchise you find that the required information provided in the Franchise Disclosure Document is false, misleading, or incomplete, you may have a cause of action against the owner of the franchise. You should immediately contact an experienced franchise attorney to determine if the false, misleading, or incomplete information provided in the Franchise Disclosure Document is material, and therefore provides a potential basis for a lawsuit. Generally a material fact is one that a reeasonable person would believe to be important in making a decision on whether to buy a franchise or not.

If you have not yet bought a franchise, but are in the process of reviewing an FDD, you should also strongly consider having a franchise attorney review the disclosure agreement. A franchise attorney will be able to point out any information that is incomplete in the document and will recognize any information that may be misleading. The franchisee should be aware that while the FTC does require the owner of a franchise to provide certain information in the Franchise Disclosure Document, it does not require the franchise owner to list any of the material risks of buying the franchise. This information will likely always be missing from the disclosure document, and it will be up to you and your attorney to research the potential risks of any franchise investment.

Case Studies: Franchise Disclosure Document Issues

Case Study 1: Misleading Earnings Claims

John, a prospective franchise buyer, relied on the earnings claims stated in the Franchise Disclosure Document (FDD) to make an informed decision. However, after purchasing the franchise, he discovered that the actual earnings were significantly lower than what was disclosed in the FDD. Seeking legal recourse, John consulted a franchise attorney to explore potential actions against the franchisor.

Case Study 2: Incomplete Disclosure Document

Sarah, in the process of reviewing an FDD, realized that essential information about the franchise, including material risks, was missing. To ensure a comprehensive understanding, Sarah engaged a franchise attorney, Mark, who identified incomplete and misleading details in the document. Mark’s expertise helped Sarah evaluate the potential risks associated with the franchise investment.

Case Study 3: False Representations

In this case, Mark, a franchise buyer, discovered that the Franchise Disclosure Document contained false representations about the franchise’s financial health and profitability. Relying on this misleading information, Mark made the decision to invest in the franchise. After experiencing significant financial losses, Mark sought the advice of a franchise attorney to assess the viability of a lawsuit against the franchisor.