Franchise Lawyer Blog

Franchisor Liability When a Franchisee Fails

Not all franchises succeed and some industries are inherently riskier than others. Perhaps none is more risky than start-up restaurants. Although the risks and obstacles to success in these types of ventures are well known, it is human nature to look for someone (other than yourself) to blame when failure occurs. In the franchising universe, sometimes the franchisor is to blame. But not always.

A United States District Court in Georgia has ruled in favor of a franchisor, Raving Brands, in a lawsuit filed against it last year by a group of franchisees. The franchisees had each claimed fraud and misrepresentations against the former franchisor in the purchase of a Mama Fu franchise. Mama Fu’s is a restaurant serving pan-Asian cuisine.

The federal judge ruled that there are natural risks associated with the acquisition of a franchise, particularly a restaurant, and that it was these economic conditions that caused the failure of the franchisees’ locations, not any misrepresentations by the franchisor. The court found that the franchisor had clear intentions of building a chain as successful as their hugely popular Moe’s Southwest Grill. But various conditions prevented that from happening. Franchisee lawyers take issue with the decision, noting that clear evidence was presented demonstrating some misrepresentations in the sale of the concept.

Raving Brands has since sold the system to Murphy Adams Restaurant Group. That franchisor continues to push the sale of updated models of its franchise.

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