Video Transcription

Hi, my name’s Jeff Goldstein of the Goldstein Law Group. We represent franchisees on a national basis. What I wanted to do today, very briefly, is to discuss a recent case that has interest from a franchisee attorney’s perspective.

The first aspect of the case dealing with fraud is somewhat rudimentary, and that involves the franchisee argument that the franchisor had misrepresented the earnings the franchisee could make if he were a franchisee.

The court basically held that the franchisee could not have reasonably relied on those representations, because of a clause in the franchise agreement, called an integration clause, where the franchisee admitted by signing the contract that he had not relied on anything the franchisor told him. This is a standard provision in all franchise agreements. And this is why it’s so terribly difficult to make out a fraud claim against a franchisor.

What was interesting about this case is that the franchisee made a claim that the franchisor acted in bad faith, had violated a good faith requirement under the Washington State Franchise Act. Most claims of good faith are very difficult to make out. A little easier than a fraud claim, but they require that the franchisee show that the franchisor had acted in a way that stripped the franchisee of all of his benefits under the franchise agreement.

The second claim of the franchisee stating that the franchisor acted in bad faith, or failed to meet his good faith requirement, is found in the Washington Franchise Practices Act. That is a unique act that very few states have that include a good faith requirement by the franchisor. Here, the franchisee argued that the franchisor had violated the covenant of good faith and fair dealing, which was embodied in the statute, by failing to provide good opening support, failed to provide ongoing operational support, and required that the franchisee sign a 10 year lease when the franchise term was only for 5 years.

The court found that this type of claim could support the franchisee’s overall argument that the franchisor actually had no interest in having the franchisee be successful. And that was because it was possible that under the evidence that would be shown later at court, that the franchisor actually harbored an interest in the franchisee failing so that the franchisor could swoop in and buy the franchise back at a highly discounted rate.

This is a case that, again, is somewhat unique. A good faith breach case is relatively difficult to make nowadays. Although it’s much easier than a fraud claim, it still has been caverned in very narrowly by courts over the last 10 years.

Thanks for joining me today, and I look forward to seeing you on our other videos.

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