According to the Franchise Times, the CEO of the company that owns Fatburger, Johnny Rockets, Twin Peaks, Fazoli’s and other restaurant chains is under investigation by the U.S. Securities & Exchange Commission (SEC) for securities fraud and other crimes. At present, the SEC’s investigation remains ongoing, and no charges have been filed. However, the publicity surrounding the investigation (which has also been reported by the Los Angeles Times and other media outlets) is almost certainly having a negative impact on the company’s brands. So, what does this mean for these brands’ franchisees? National franchise lawyer Jeffrey M. Goldstein explains.
Franchisees’ Rights When Their Franchisor is Accused of Fraud
When a franchisor (or its CEO) is accused of fraud, the implications for the system’s franchisees depend on the specific circumstances involved. When the allegations involve franchise fraud – as in the pending U.S. Federal Trade Commission (FTC) lawsuit against Burgerim – the implications are more obvious. If the allegations prove true, franchisees will often be entitled to recission and a refund, although they may need to file claims themselves in order to recover damages.
In cases involving other types of fraud allegations, however, the implications for franchisees can vary. Generally speaking, franchisees’ options will be limited. When a franchisor (or CEO) does not defraud the system’s franchisees directly, franchisees must determine if they can file lawsuits or initiate arbitration on other grounds. Some examples of potential grounds include:
- Antitrust and Securities Private-Right-of-Action Claims – Federal antitrust and securities laws give franchisees (and others) the right to file private lawsuits when they are harmed by others’ statutory violations.
- Franchise Disclosure Violations – If a franchisor fails to disclose a pending investigation or lawsuit against the company or one of its executives in its Franchise Disclosure Document (FDD), this can give rise to a claim for a franchise disclosure violation.
- Fraudulent Inducement and Other Claims – Franchisees who purchase or renew their franchises when a franchisor knows of (and fails to disclose) a pending legal matter with the potential to harm the brand may be able to pursue fraudulent inducement and other contractual and/or common law claims.
In today’s world, allegations can spread very quickly. Even if allegations do not lead to charges, they can still lead to a conviction in the court of public opinion. Most people are not familiar with the franchisor-franchisee relationship, and they don’t realize that franchisees have nothing to do with (and are often harmed by) their franchisors’ misdeeds. As a result, fraud allegations against franchisors and their executives can have very real consequences for franchisees; and, when this happens, franchisees must work with their legal counsel to determine what options they have available.
Request a Free Consultation with National Franchise Lawyer Jeffrey M. Goldstein
Is your franchise struggling due to your franchisor’s (or its CEO’s) misconduct? If so, we encourage you to contact us to discuss your legal options in confidence. To schedule a free consultation with national franchise lawyer Jeffrey M. Goldstein, please call 202-293-3947 or tell us how we can reach you online today.