A New York federal court denied a franchisor’s motion to dismiss a franchisee’s complaint for misrepresentations and improper financial performance representations which allegedly induced the franchisee to enter into multiple franchise agreements.
The plaintiff purchased seven franchise locations from another franchisee and entered into multiple franchise agreements with Interim Healthcare. Prior to the purchase, franchisee received an independent audit report, operations assessment, and financial statements. The franchisee alleged the franchise agreements were signed with an understanding that the franchisee would not be liable for the sellers’ debts and liabilities based on alleged statements by franchisor’s former COO and CEO that the franchisee could achieve profits of $3 million annually, as well as income statements and financial documents about the existing franchised business. Franchisee did not realize such profits.
The franchisee sued the franchisor for alleged false misrepresentations of financial performance representations that allegedly induced the franchisee to enter into the multiple franchise agreements. Based on the documents, the franchisee understood that once the third parties’ debts and liabilities were replaced, “a lot of expenses … would be eliminated based on [franchisee] acquiring the business.” Franchisee also argued that the royalty documents received were projections of earnings because “one could go back into the sales or earnings by using formulas franchisor provided on what the franchise fees would be.” Franchisee argued that they relied on franchisor’s representations that the franchise could be profitable in the future, and reasonable because there was insufficient time for due diligence.
Franchisor moved to dismiss the complaint, arguing in part, the franchisor’s financial documents and seller documents disclosed to franchisee, which included an audit, operations assessment, and financial statements disclosed the true state of the seller’s franchises, including all of sellers’ liabilities. Franchisor further argued that the royalty documents provided did not provide any representation of estimated earnings or revenue and were only provided as an example of how the royalty structure mechanically works using historical data from 2016.
The federal court denied franchisor’s motion, ruling that the documents and royalty models provided about future earning probability is a factual question that the jury must resolve. The court held a reasonable jury could find that the documents and spreadsheets were “projections of earnings” because they contained future looking dollar values and revenue could be inferred. In addition, the court found that the reasonableness to forego a full due diligence check was a material issue of disputed fact and a reasonable jury could conclude franchisee reasonably relied on franchisors representations.
Franchise counsel should be consulted when a franchisee is seeking franchisor’s approval of franchisee’s sale of franchise(s) when financial information is provided that is outside of the franchisor’s disclosures and/or the existing franchise seller’s books and records. Where, as here, a purchaser of an existing franchise relies on such financial information there could be factual questions over whether such financial information must be provided as part of the franchisor’s FDD and form a basis for claims of misrepresentation, noncompliance with the FTC’s Franchise Rule and various fraud theories.
(Cmty. Care Companions, Inc. v. Interim Healthcare, Inc. (E.D.N.Y. Mar. 27, 2025, No. 19-CV-4870 (PKC) (LGD)) 2025 U.S.Dist.LEXIS 57761.)
