Despite a favorable outcome for a franchisor, Braatz, LLC v. Red Mango FC, LLC is a cautionary tale of how franchise sales can go sour. 3:14-CV-4516-G (N.D. Tex. Apr. 27, 2015).
In Braatz, franchisor Red Mango sent its FDD to potential franchisees (Peter and Elizabeth Braatz) on November 4, 2011. The Braatzes decided to purchase the franchise, and in late December they returned a signed franchise agreement and a check to Red Mango. The franchise agreement included a questionnaire, in which the Braatzes stated Red Mango provided them with financial projections that were not contained in the FDD.
Sometime in early January, Red Mango mailed a blank copy of the same questionnaire to the Braatzes with instructions to change their answers. They promptly did so, returning the questionnaire along with another required payment. Importantly, Red Mango did not provide the Braatzes with an additional 14 days to respond.
Wisconsin is one of a few states in which franchisors must provide FDDs to prospects a certain number of days in advance of signing a binding agreement or accepting payment, whichever occurs first. In Wisconsin, the magic number is 14 days.
In 2014, the Braatzes’ franchise closed and they declared bankruptcy. Shortly thereafter, the plaintiffs filed a suit against Red Mango, alleging that Red Mango’s failure to provide the Braatzes with 14 days to consider the revised questionnaire was a violation of the Wisconsin Franchise Investment Law (“WFIL”). The plaintiffs sought to rescind the franchise agreement.
However, the WFIL also requires a violation to be material to a franchisee’s decision to purchase the franchise. This, according to the Court, is where the plaintiffs fell short. The Court reasoned that the Braatzes changed the questionnaire as instructed and promptly resubmitted it. They paid an additional fee and almost immediately created the entity that operated the franchise business. Additionally, the court noted that the Braatzes’ original answers were inconsistent with their representations in the franchise agreement. Red Mango’s request to align the questionnaire with the franchise agreement did not create any new requirements for franchise ownership. Thus, Red Mango’s violation was not material to the Braatzes’ decision, and the plaintiffs could not rescind the franchise agreement.
Wisconsin law is unique and another court may have decided Braatz differently. But one takeaway applies across the board and bears repeating: Even a win in court can be a loss for a franchisor’s bottom line. Strict compliance with federal and state disclosure laws is the best (and most cost effective) policy.