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Unique Yogurt Mixes

In selling a franchise, the seller is usually required in Canada and the US to provide the purchaser with information about the franchise and operation of the system.

At common law, much of what is required by statute would not be required.

But what happens if the information that the franchisor provides is wrong? Do you automatically get out of the contract?

One answer to this question was discussed in Washington Supreme Court's decision in Morris v. International Yogurt, 107 Wn. 2d 314, 729 P. 2d 33 (1986).

On June 21, 1977, Vernon and Marilyn Morris entered into a franchise agreement with International Yogurt Company.

In the agreement, IYC granted the Morrises a franchise to operate a store to sell frozen yogurt and related products under IYC's trade name, "The Yogurt Stand". The franchise agreement also granted the Morrises the right to purchase and use IYC's yogurt mix.

The agreement stated that "[t]he yogurt mix . . . is unique, and its formula and process for manufacture may be regarded as a trade secret."

Before the execution of the franchise agreement, IYC gave the Morrises a copy of a franchise offering circular, which it had completed on May 1, 1977. The franchise offering circular stated, "The yogurt mix used in the preparation of 'The Yogurt Stand' frozen yogurt is considered a unique and special formula . . ."

As it turned out the franchisor would sell their unique mix to non-franchisees. Not exclusive to the franchisees.

And after 3 years, the franchise failed and the Morrises brought a suit alleging that this misrepresentation or lie was a violation of the Washington Franchise Investment Protection Act and caused them damages.

Since the franchisees had sold their store, their sole remedy was for damages and not rescission.

"Thus, the franchisee must show that the violation actually caused him to suffer damages, not merely that a violation occurred."

Below the Supreme Court, the Washington Court of Appeal decided:

"even if the franchisor had violated the statute by failing to disclose a material fact, the Morrises could not recover damages for the violation.

It reasoned that the Morrises had the burden of proving that their losses resulted from the lack of exclusive access to the mix, and they had not met that burden."

But the Supreme Court of Washington rejected this burden of proof argument and instead analyzed the damages claim for an omission in a manner similar to securities law.

"The rule does not mean that proof of omission of a material fact conclusively resolves the causation question, but rather that it establishes a rebuttable presumption of reliance.

The defendant may rebut the presumption by proving that the plaintiff's decision would have been unaffected even if the omitted fact had been disclosed."

The matter was referred back to the trial court for a determination of this issue.

This case and these type of cases show the difference between a material omission and a material misrepresentation -arguably in the latter case, the standard waiver clause in the franchise contract will preclude reliance.

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Full post as published by Misleading Advertising Law on July 14, 2008 (boomark / email).