Fraud & Disclosure Violations
Most fraud claims in franchising arise in the sales process when the franchisee comes to believe that the franchisor or sales agent intentionally misrepresented the franchise’s value in order to induce a purchase. Claims also arise when franchisees believe franchisors omitted material facts that, if known, would have dissuaded the buyer from purchasing on the same terms.
Fraud claims may can occur at other stages of the franchise relationship when on party believes that it was deceived by the other and incurred damage because of it.
Carmen has extensive experience bringing and defending against claims for fraud in franchising. These claims may be brought under franchising statutes such as
- The Illinois Franchise Disclosure Act;
- The “Little FTC Acts” that create state law claims for violations of the Federal Trade Commission Franchise Rule; and
- In severe cases, the federal Racketeer Influenced & Corrupt Organizations Act (RICO), as well as under the common law.
Carmen and his team have reviewed hundreds of Franchise Disclosure Documents (or their predecessors, Uniform Franchise Offering Circulars) and comparable prospectuses for other forms of business. They know what to look for to prove or disprove fraud in franchising or similar relationships involving dealerships, business opportunities or other distribution arrangements.
Some highlights from his fraud experience include:
- Success in a federal court evidentiary hearing defending an international retailing franchisor from claims that it defrauded its Texas franchisee in the sales process and for alleged post-sale fraud regarding the franchisee’s bank financing.
- Success in obtaining a multi-million-dollar recovery for six owners of consumer electronic dealerships on proof that the manufacturer had made false financial performance representations and overstated the past success of its supposedly proven retail concept.
- Recovery of substantial damages in a confidential settlement on behalf of a U.S. franchisee and area developer who alleged fraud based on the inclusion by a U.S. sub-franchisor in its offering circular of false and misleading financial statements from an Australian parent company.
- Success in obtaining damages in a confidential settlement for franchisees who owned the Chicago market of a national steakhouse restaurant chain. They alleged fraud in the inducement of the restaurant franchises and failure to maintain system standards.
- Success in proving in a bench trial that one of the world’s largest oil companies committed fraud by omission in offering its company-owned gas stations for sale as PMPA franchises. This created the false impression that purchasing franchisees would earn more profit margin on every gallon of gasoline to be sold than the company would allow.
The Illinois Franchise Disclosure Act and the Illinois Consumer Fraud & Deceptive Business Practices Act (as well as similar statutes in other states) protect the prospective franchisee from a franchisor’s failure to comply with franchise disclosure laws even when the disclosure violation would not rise to the level of fraud..
Carmen has protected numerous franchisees who were victims of disclosure violations, often successfully negotiating the rescission of the franchise agreement without the need to sue.
He has also protected franchisors from outside of Illinois who found themselves in violation of the Illinois Franchise Disclosure Act by negotiating successful outcomes with the Illinois Attorney General and affected franchisees.