Sunday, September 8, 2013

Franchisee Who Ignored His Disclosure Document Loses Lawsuit

A franchisee who sued his franchisor for fraud learned the hard way why it’s important to read the Franchise Disclosure Document, cover to cover, before buying a franchise. A California franchisee of Big O Tires sued the company in California court, alleging that Big O defrauded him when it sold him a franchise. The California Court of Appeals ruled against him because the disclosure document Big O gave to the franchisee before he bought contradicted each and every one of his claims. 
Mr. Hailemariam purchased his Big O Tires franchise in February 2008. Before he bought the franchise, he received Big O’s Uniform Franchise Offering Circular (“UFOC”). The UFOC was similar in content and structure to the Franchise Disclosure Document that franchisors are now legally required to give prospective franchisees.
After operating a store for little more than a year, Mr. Hailemariam closed it down due to financial difficulties. In August 2009, Mr. Hailemariam sued Big O in California state court alleging that the franchisor fraudulently induced him into purchasing a franchise. Specifically, the franchisee alleged that Big O: (1) told him (falsely) that he did not need experience to operate a tire store; (2) provided exaggerated earnings claims; (3) concealed from him that many of its franchisees had failed; (4) told him that it would sell him tires at competitive prices, when the same tires were often available for less money from other sources; (5) falsely stated that it develops new products and services; and (6) had expertise in locating and outfitting stores.
Big O moved for summary judgment on the franchisee’s claims. Based on a Colorado choice-of-law provision in the franchise agreement, the trial court held that Colorado law (and not California law) applied. 

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