The document compares common law fraud remedies, state franchise investment laws, and state consumer protection ("Little FTC") acts regarding misrepresentations in franchise offerings. It discusses elements of claims under each, including reliance, scienter, remedies, and defenses. It also covers personal liability for officers/directors and choice of law/venue clauses. The purpose is to analyze legal protections and risks around misrepresentations in franchise sales across different areas of law.

1. Comparison of the Trilogy: Common Law Fraud, Franchise Investment Laws, and Little FTC Laws Remedies for Misrepresentations and Omissions in the Offer and Sale of Franchises

2. Lord of the Rings

3. Fellowship of the Ring

4. The Trilogy Common Law Fraud Franchise Disclosure Laws Little FTC Acts

5. Gandalf and the Federal Trade Commission Act Section 5 of the FTC Act prohibits “unfair and deceptive acts or practices” and “unfair methods of competition.”

6. The Breadth of the FTC Act and Purpose of the FTC Franchise Disclosure Rule Showing of capacity to deceive sufficient. No showing of actual deception required. The FTC Franchise Disclosure Rule’s Statement of Basis and Purpose found the following landscape at original enactment: rampant misrepresentations false earnings claims by franchisors “ informational disparity” “ economic disparity” between franchisors and franchisees.

7. State Franchise Disclosure Laws California Franchise Investment Law addresses “numerous problems from an investment and business point of view …” In enacting the New York Franchise Sales Act, the New York Legislature found “franchise sales fraud was endemic … [S]ince 1972 alone, an estimated 14,000 New Yorkers had been victimized by fly-by-night and unethical franchisors …”

8. State Little FTC Acts “ With the enactment of the Tennessee Consumer Protection Act (“TCPA”) in 1977, Tennessee joined the growing number of states that had passed so called ‘little FTC Acts.” Consumers or businesses covered? Goods or services limitations? State geographic limitations?

9. ACTIONABLE MISREPRESENTATIONS

10. Actionable Misrepresentations Misrepresentations of Fact Intentional False statement about a past or present material fact Knowledge of falsity or recklessly made Defendant intended that plaintiff would rely Plaintiff did rely to his or her detriment

11. Actionable Misrepresentations Misrepresentations of Fact Negligent Defendant supplied false information Plaintiff was justified in relying Defendant did not exercise reasonable care Special relationship?

12. Actionable Misrepresentations Half-Truths “ To tell half a truth only is to conceal the other half.” Rochester Methodist Hospital v. Travelers Ins. Co ., 728 F.2d 1006, 1017-1018 (8 th Cir. 1984).

13. Actionable Misrepresentations Material Omissions Concealment of a fact material to a transaction Duty to disclose?

14. Actionable Misrepresentations Earnings Claims and Projections Representations pertaining to past or present facts? or Predictions or opinions as to possible future events?

15. Actionable Misrepresentations False Opinions “ Actual language used and the context in which the comment is made” Cal. Bagel Co., LLC v. Am. Bagel Co., No. 97-8863, 2000 U.S. Dist. LEXIS 22898, *28 (C.D. Cal. June 9, 2000). Superior knowledge?

16. Actionable Misrepresentations False Promises Positive intent not to perform Promise made without present intent to perform Past or present material fact Superior knowledge?

17. Proving Fraud Against Lord Sauron: Scienter and Intent to Deceive

18. Reliance

19. Causation / Reliance Some state franchise disclosure laws use the word reliance in remedy provisions. Some state franchise disclosure laws use causation or a derivative in remedy provisions. Some Little FTC Acts do not require proof of reliance, others do.

20. Justified Reliance A number of judicial decisions have added a justified reliance requirement under several state franchise disclosure statutes though those statutes do not use the words justified or reasonable in their remedy provisions. Justified reliance is likely not required under the Minnesota Franchise Act. Randall v. Lady of America Franchise Corp.

21. Remedies Actual Damages Statutory Damages Non-Economic Damages Punitive and Exemplary Damages Rescission Injunctive Relief Declaratory Relief Attorney’s Fees

22. Sauron’s Forces Attack With Integration, No Representation, and No Reliance Clauses Important to distinguish integration, no representation and no reliance clause. Fraud vitiates all versus enforcement of contract terms at common law Anti-waiver provisions of statutes

23. Choice of Law and Venue Clauses Enforceability: At common law Under state disclosure laws Under Little FTC Acts

24. Select Defenses Statutes of Limitations Waivers and Releases Could Not Have Known Defense Claim Sounds In Contract Rather Than Tort

25. PERSONAL LIABILITY OF OFFICERS, DIRECTORS AND SALESPERSONS

26. Personal Liability of Officers, Directors and Salespersons Common Law Direct Liability Piercing the Corporate Veil

27. Personal Liability of Officers, Directors and Salespersons Common Law Direct Liability Direct personal involvement Establish each element of common law fraud claim

28. Personal Liability of Officers, Directors and Salespersons Common Law Piercing the Corporate Veil Individual exercised significant control Use of control for improper purpose Fact-specific inquiry

29. Personal Liability, Officers of Directors and Salespersons State Franchise Statutes 14 states expressly extend liability Typically directors, officers, & employees

30. Personal Liability of Officers, Directors and Salespersons State Franchise Statutes “ Materially aid” Defense: did not know or could not have reasonably known of the wrongful conduct

31. Personal Liability of Officers, Directors and Salespersons Little FTC Acts Individual’s direct, active participation in the wrongful conduct of the corporate entity

32. Personal Liability of Officers, Directors and Salespersons Little FTC Acts Broad definition of “person” “ Knowing acquiescence” may be enough

33. DRAFTING AND PLANNING CONSIDERATIONS

34. Drafting and Planning Considerations Elements of Claims Common Law State Franchise Investment Law Little FTC Act Reliance Scienter Remedies Choice of Law/Venue Waiver/Release Integration, No Reliance, and No Representation