Cause of Action Alchemy: Little FTC Act Claims Based on Alleged Disclosure Violations
The Federal Trade Commission Franchise Rule (FTC Rule)1 does not provide a private right of action,2 but its detailed disclosure standards are a siren call for franchisees looking for a good cause of action. In the fifteen states with state franchise disclosure laws providing a private right of action, franchisees generally assert claims under those statutes.3 In states without their own disclosure laws, however, franchisors and other businesses have seen a recent proliferation of lawsuits alleging FTC Rule violations as the basis of a state law unfair trade practice claim, or "Little FTC Act" claim. Many of these claims assert that the failure to provide a compliant Franchise Disclosure Document (FDD) before entering into a franchise business relationship violated the FTC Rule, which in turn violated the state's Little FTC Act. This article addresses state statutory claims, other than state disclosure law claims, predicated on a violation of the FTC Rule and some potentially powerful defenses to those claims. Part I briefly discusses the basics of the FTC Rule's FDD requirement. Part II discusses the types of parties that commonly claim a violation. Part III discusses claims made under state Little FTC Acts for FTC Rule violations. It also addresses potential defenses and provides other practice tips for franchisors that find themselves the target of such claims. Part IV discusses whether a contract is "illegal," and therefore void or voidable, when the franchisor fails to comply with the FTC Rule's disclosure requirements.
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1. Federal Trade Commission, Disclosure Requirements and Prohibitions Concerning Franchising, 16 C.F.R. § 436.
2. See, e.g., Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunities; Final Rule, 72 Fed. Reg. 15444, 15478, n.350 (Mar. 30, 2007) (providing FTC Statement of Basis and Purpose) ("We note that there is no private right of action to enforce the Franchise Rule."); Yumilicious Franchise, LLC v. Barrie, No. 3:13-CV-4841-L, 2015 WL 2359504 (N.D. Tex. May 18, 2015) (no private right of action is available to franchisee for franchisor's failure to furnish required information under FTC Rule), aff 'd, 819 F.3d 170 (5th Cir. 2016); A Love of Food I, LLC v. Maoz Vegetarian USA, Inc., 70 F. Supp. 3d 376, 382 (D.D.C. 2014) (same); Robinson v. Wingate Inns Int'l, Inc., Civil Action No. 13–cv–2468, 2013 WL 6860723, at *2 (D.N.J. Dec. 20, 2013) ("It is well-settled that there is no private cause of action for violation of the FTC franchise disclosure rules."); Hidden Values, Inc. v. Wade, No. 3:11-cv-1917-C, 2012 WL 1836087, at *7 (N.D. Tex. May 18, 2012) (collecting cases); Vino 100, LLC v. Smoke on the Water, LLC, 864 F. Supp. 2d 269, 281 (E.D. Pa. 2012) (same).
3. The fifteen states are California, Hawaii, Illinois, Indiana, Maryland, Michigan, Minnesota, New York, North Dakota, Oregon, Rhode Island, South Dakota, Virginia, Washington, and Wisconsin. 1 FRANCHISE AND DISTRIBUTION LAW AND PRACTICE § 5A:45. The private right of action may apply only to certain claims under the disclosure law and not others, for example, claims based on fraud or misrepresentation but not a failure to disclose. See, e.g., Maoz, 70 F. Supp. 3d at 395 (New York provides a private cause of action for the selling of a franchise without timely disclosure of the offering prospectus where Maryland does not); Cont'l Basketball Ass'n, Inc. v. Ellenstein Enters., Inc., 669 N.E.2d 134, 137 (Ind. 1996) (private right of action under the Indiana Franchise Disclosure Act arises only upon allegations of facts supporting an inference of fraud, deceit, or misrepresentation and not violations of disclosure provisions).