Accidental franchises: Sue franchisor and their lawyer

When a franchisor and their lawyers pretends that a franchise is a license or distributorship, sometimes they end up shooting themselves in the foot.

An interesting article on FranchiseChat.com this week demonstrates how an Accidental franchise happens. And the consequences can be very profound.

Kevin Tampone of The Central New York Business Journal (Make & Take, franchisees battle in court) starts off pretty hum-drum [Gosh, not another franchise misrepresentation case?]

It warms up substantially when Michael Einbinder’s name is dropped as he is a very heavy-duty lawyer.

Okay…These guys are very good. What next? So it seems the allegations are that the franchisor lied and failed to make a legal franchise offering: No disclosure documents were given and…

State law, he says, forbids companies from making such earnings claims unless they’re contained in a specific document, called a uniform franchise offering circular. Make & Take did not provide the franchisees with that document before actually selling them franchises, Einbinder says.

…the system was not registered to offer franchises in New York state (although there was a legal requirement to do so). The U.S. law defines a franchise very, very broadly and intentionally so, as to stop this weasel marketing efforts.

This is why the franchisor’s lawyers are being sued:

The firm helped Make & Take circumvent state requirements by creating licensing agreements for the company, the suit charges. The actions were part of a “schemeto sell franchises in violation of the law, according to the suit.

While none of these allegations are proven, this is good example of an Accidental franchise (sometimes called hidden, inadvertant or unintentional franchises).

  • Accidental franchises are disguised as distributorships or licenses so as to avoid state and federal legal requirement and obligations [read: consumer protection laws].

There is, of course, seldom nothing accidental or unintentional about these situations. These are all grown-up gentlemen and lady lawyers who have a duty to their client and their Courts not to be engaged in a conspiracy to commit fraud against specific investors and the good people of New York state.

And the old “ignorance of the law” chestnut applies to everyone, right? Even lawyers in limited liability corporations, right?

  • With the operating losses in the $2-million for each of the three plaintiffs, you’d wonder why the lending institutions were not named in the lawsuit because they should have not released any funds without having on file the appropriate client paperwork [releasing the funds would have breached their lending duty]
  • Statements of Claim can always be amended, I suppose but…
  • Richard Solomon explains how proving predatory franchise lending is so tough.
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