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A recent decision by the United States District Court for the Northern District of Georgia confirms that alleged misrepresentations contained in a Uniform Franchise Offering Circular (UFOC) or allegedly made during the franchise sales process are not actionable unless they are false, could have been reasonably relied upon and were the proximate cause of demonstrated damages.

In an oral ruling pursuant to Federal Rule of Civil Procedure 52(c) on February 26, 2009, confirmed in a subsequent written order dated March 10, 2009, Judge Richard Story granted judgment on partial findings to the defendants on all claims at the close of plaintiffs' case. The decision is Peterson, et al. v. Sprock, et al., Case No. 1:06-cv-3087 (RWS) (N.D. Ga. Mar. 10, 2009). DLA Piper represented the franchisor in the case.

Plaintiffs Pursued Numerous Claims against Their Franchisor

At the time of trial, 10 plaintiff franchisee groups, corresponding to more than 20 entities and individuals, were pursuing claims for breach of contract, fraudulent inducement, Georgia RICO and negligent misrepresentation against their franchisor, Mama Fu's Noodle House, Inc., as well as several of its affiliates and shareholders. Two of the plaintiff groups were also pursuing claims under the Florida Franchise Act (FFA) and the Florida Deceptive and Unfair Trade Practices Act (FDUTPA).

Alleged Misrepresentations Did Not Support Actionable Claims

With respect to the fraudulent inducement, Georgia RICO, negligent misrepresentation, FFA and FDUTPA claims, the court found that the alleged misrepresentations did not support actionable claims. In evaluating the various misrepresentations alleged by the plaintiffs, the court found that they "were either not false, lacked justifiable reliance, or did not result in any demonstrated damage to Plaintiffs."

The court first noted that the initial investment projections cited in Item 7 of the UFOC and alleged to be inaccurate, and the statement that Mr. Sprock, the company's founder and chairman, was involved in the day-to-day operations of Mama Fu's, cited in Item 2, were not inaccurate.

The plaintiffs had also alleged failure to disclose rebates from purchases by franchisees through a distributor which was partially owned by Mama Fu's majority shareholder. The court found no evidence that this had caused the plaintiffs any damage.

Next, the court noted that when the plaintiffs acquired their franchises, Mama Fu’s was still in the preliminary stage of development. At the time the 2003 UFOCs were prepared, no more than one Mama Fu's restaurant was open and operating; when the plaintiff franchisees signed their franchise agreements, no more than one or two Mama Fu's franchises had opened for business. Accordingly, the court found that the remaining alleged misrepresentations could not have been justifiably relied upon, either because they were mere puffery or because reliance would not have been reasonable in light of the plaintiffs' knowledge regarding the company's stage of development.

As to the plaintiffs' breach of contract claim, the only breach asserted was that they did not receive a franchise "system" because the system was not fully developed at the time the UFOC was prepared. The plaintiffs contended that they believed they were buying a system that would work, provided they followed it. However, the court found that the recitals in the franchise agreements "are not guarantees of success or profitability, but rather good faith expectations that the franchise will operate." Further finding that the plaintiffs were provided a fully functional operating system prior to the opening of their restaurants, the court held that there was no breach of the franchise agreements.

If you have any questions about the decision, please contact us.