In a surprising decision from a usually franchise-friendly jurisdiction, the Georgia Court of Appeals recently held that a Georgia statute provides a method for franchisees to bring private lawsuits for violations of the FTC Rule. See Legacy Academy, Inc. v. Mamilove, LLC, 761 S.E.2d 880 (Ga. Ct. App. 2014). As the franchise world is well aware, the FTC Rule does not itself authorize private lawsuits. Instead, the FTC can conduct a hearing if it believes a franchisor is engaging in unfair or deceptive acts. 15 U.S.C. § 45(b). If it finds a violation, it can issue a cease and desist order. And if that cease and desist order is also violated, the FTC can bring a civil action to recover a civil penalty (up to $10K per violation). 15 U.S.C. § 45 (l).
Enter the Georgia Court of Appeals and its interpretation of Section 51-1-6 of the Official Code of Georgia, a statute that empowers a party to recover damages for the breach of a legal duty arising from laws that–like the FTC Rule–do not authorize private lawsuits.
In the context of franchise law, Georgia franchisees can now use Section 51-1-6 to sue privately for violations of the FTC Rule. In Legacy Academy, prior to the sale, the franchisors gave the franchisees a financial performance representation for Legacy. The franchisors’ earnings claim was purportedly based on actual income and expenses of operating Legacy franchises. According to the franchisors, new franchisees would have approximately $260K in net income after the first year of operation and approximately $440K after each of the second and third years.
According to the allegations recited in the opinion, the franchisees’ experience was anything but what was promised. After the first year they allegedly had lost $212,300. Moreover, during their seven years in operation, the most they netted in a single year was $103,692.
The franchisees sued under Section 51-1-6, claiming that the franchisors had violated the FTC’s Disclosure Requirements and Prohibitions Concerning Franchising, 16 C.F.R. §§ 436.1-436.5. Evidence at trial led to a conclusion that the earnings claim in the FPR was “mere speculation” rather than a historical representation of actual revenues. In fact, one of the franchise locations on which the franchisors based their earnings claim in had recently lost $430K. This fact, apparently, was never disclosed.
A jury awarded the franchisees over $1 million in damages. On appeal, the franchisors argued that Section 51-1-6 should not apply because the FTC could bring a claim on behalf of the franchisees. The Georgia Court of Appeals rejected this approach, reasoning that the FTC’s ability to collect a civil penalty (payable to the United States) for violating a cease and desist order was not the same as bringing a suit on the franchisees’ behalf.
What makes this outcome very troubling is that the appeal granted by the Georgia Supreme Court of this case does not include review of the private cause of action question. As such, franchisors operating in Georgia, and other states with similar laws, should be prepared for new state court actions alleging violations of the FTC Rule, which are now much more likely than ever before.