Franchise Agreement “Merger” Fraud

Anyone considering the purchase of a franchise should first review the helpful consumer’s guide published by the Federal Trade Commission (FTC). It provides, among other things, an overview of the 23 numbered “items” that must be included and discussed in the franchisor’s Franchise Disclosure Document (FDD). In its guide, the FTC says, “Don’t be shy about asking for explanations, clarifications, and answers to your questions before you invest.”

Can the Franchisee Actually Rely on the Clarifications and Answers?

There’s a problem: the Franchise Agreement that the parties subsequently sign contains an integration or “merger” clause. The clause says the franchise agreement represents the entire agreement between the parties, and that no representations made outside the four corners of the FDD and the Franchise Agreement may be relied upon. The purpose of these clauses is to protect the franchisor from wild representations made by a rogue salesperson. Their effect, however, is often to ban the presentation of any evidence as to what was said or claimed during the sales processes. Still want to rely on the franchisor’s “clarifications?”

Franchisee Often Still Has One Arrow in His or Her Quiver: The Allegation of Fraud

While allegations of fraud should not be lightly thrown about, a franchisee induced to enter into a franchise agreement based on lies and misrepresentations can sometimes prevail by filing a lawsuit alleging fraud. Under the parol evidence rule, an integration or merger clause prevents a party from basing a claim of breach of contract on oral or written understandings that the parties had reached during the negotiations that eventuated in the signing of a contract but which are not included within the contract itself. Fraud is a tort, however, and true allegations of fraud are not barred by the parol evidence rule.

In an important 7th Circuit case, the Court indicated that an integration or merger clause “has nothing to do with whether the contract was induced, or its price jacked up, by fraud … . And the majority rule is that an integration clause does not bar a fraud claim” [Vigortone Ag. Prods. V. AG Prods., 316 F.3d 641, 644 (7th Cir. 2002)].

Franchisee Can Argue That “Clarification” is Necessary Because FDD and Franchise Agreement Aren’t Clear

While one needs to be careful with this argument – the franchisor may counter that if the agreements were so murky, why did the franchisee sign them? – the franchisee can also argue that the strength of the integration/merger clause depends upon the clarity of the document. If the agreements are inherently ambiguous or unclear, parol evidence isn’t being offered to contradict the agreements, but to explain what they actually mean.

Experienced Legal Counsel is Important

The purchase of a franchise is a large and complicated investment. All too many franchisees choose not to hire an experienced franchise attorney to represent them. They shouldn’t be surprised with they encounter legal difficulties. Retaining sound legal counsel could be crucial to the resolution of the issues at hand. At Kerkman Wagner & Dunn, we have represented clients in all sorts of franchise situations. We have been involved with many kinds of complex business litigation in the greater Milwaukee area and throughout Wisconsin. We have over 50 years of combined legal experience representing business owners in Wisconsin. Our firm has big firm talent and provides small firm attention. Call us at 414-278-7000 or complete our online contact form.

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