Home -> Law Blog Directory -> International Law Blogs -> Misleading Advertising Law

International Law

: Misleading Advertising Law

How to Misunderstand Earnings Claims

Any prospective franchisee wants to know how much money that they can make when buying a franchise.

Unfortunately, this simple question is rife with difficulties.

For example, over at the Blue Mau Mau site, one poster, Patricia, asks about getting information about breakeven points:

As Mr. Franchise points out, many franchise owners work long hours and operate at or below minimum wage financial performance, yet think they are "profitable" and "successful." Much better questions to ask: (1) how much money did it take (total investment) to get your business operational; (2) when did you hit the breakeven point; (3) how many hours a week do you work in the business; and (4) what?s your pre-tax net income from the business?

I agree that this is the type of practical advice that prospective franchisees want, in particular the the break even numbers.

But it is quite unlikely that a prospective franchisee will get this information from the UFOC, and if they get it from another source, while that information may be true, the prospect cannot legally rely on it - meaning that if it is false, they are likely barred from suing for misrepresentation.

1. Earnings Claims: From the UFOC Guide on Item 19. An earnings claim is defined as "any information from which a specific level or range of actual or potential sales, costs, income or profit from franchised or non-franchised units may be easily ascertained." Clearly, any information which allows you to easily calculate the break even point will allow you to calculate a specific level of actual or potential sales. Earnings claims have to be disclosed in item 19, and only item 19.

Even if a franchisor makes an item 19 disclosure, would you expect information detailed enough to determine what your break-even period would be?

No - much of what determines individual performance is not knowledge that the franchisor has or could be reasonably held to know.

The Law Firm Fisher Zucker has a very nice article on earnings claims.

2. Start-up Costs and Item 7 Disclosure

While you cannot get break-even figures for your location, you arguably entitled to location specific information about your start-up costs via item 7.

Again from the NASAA guidelines,

ii. Disclose payments required by the franchise agreement and all costs necessary to begin operation of the franchise and operate the franchise during the initial phase of the business. A reasonable time for the initial phase of the business is at least 3 months or a reasonable period for the industry. Include an entry titled "additional funds" and disclose the length of the initial phase in the entry.

Note that you will provided with information for 3 months or a reasonable period for the industry - but most franchisors simply ignore the second option and give you data for 3 months.

3. Integration clause and Material Information Not Found in UFOC.

Franchise contracts have "four corners" clauses which aslo state that the franchisee has not relied upon any representation outside the contract. In practice, what this means is that even if you found information which was useful but did not have to be disclosed in the UFOC, you might find it very hard to maintain an action from misrepresentation if you found that information to be false.

This is different from the situation in which a UFOC representation is later found out to be false. In that case, you would have to look to your local state laws, the so-called little FTC Acts, because there is no private cause of action for a violation of the FTC Franchise Rule - an absence which makes no sense.

Full post as published by Misleading Advertising Law on January 02, 2008 (boomark / email).