Franchise Lawyer Blog

Representations, Statements of Fact and Statements of Opinion

A case was recently decided in the Illinois Appellate Court, a mid-level appellate court in that state, which has interesting implications for franchisees and franchisors in that jurisdiction and provides some food for thought in analyzing these issues in other jurisdictions.

In Avon Hardware Co. v. Ace Hardware Corp, the court held that franchisors are not liable for common law fraud or negligent misrepresentation, or under either the Indiana Franchise Disclosure Act or the Illinois Consumer Fraud and Deceptive Business Practices Act, for representations made to a franchisee unless the representations were false statements of material fact, or unless the franchisor concealed material facts. The court emphasized that representations of future income are statements of opinion, and not actionable. Representations of a business’ past income, historical financial data from other franchisees, or even a statements that a business is “profitable”, however, are all statements of fact, and, if untrue, can expose the franchisor to liability.

The court also made reference to the “bespeaks caution” doctrine, which provides that cautionary language in a document can negate the materiality of an alleged misrepresentation. Under that doctrine, a franchise disclosure document (FDD) or other financial representation provided to a franchisee which contains plainly worded language stating that the representations are not to be relied upon, can later thwart a cause of action for fraud, because the franchisor can argue that the franchisee had notice that the figures were not reliable.

The Avon court found that the ‘bespeaks caution’ doctrine applied to cautionary statements in an FDD, but only to future projections. Cautionary language cannot cause a party to waive its reliance on statements of fact, which are presumed to be true. Therefore, parties are always entitled to rely on historical earnings representations, or other factual statements, including statements that a business is “profitable”.

Courts have frequently distinguished between future projections and factual representations. However, the Avon case made an additional important distinction, holding that the franchisee’s reliance on historical data as evidence of the likely future performance of stores was unreasonable. This is crucial, as it allows franchisors to make future financial projections with adequate disclaimers, and to also make historical representations as to the past performance of its stores. Pursuant to theAvon decision, franchisees cannot claim that they relied on the past performance representations as evidence that the future projections were reasonable. The court stated that, because the representations did not contain false statements of fact, “any reliance [by the franchisee] upon the historical data as evidence of the performance of all [of the franchisor’s] stores or [future stores] was unreasonable.”

The case is interesting, as it allows franchisors greater leeway to disclose more historical factual information, as long as it is accurate, and to also disclose financial projections to franchisees, as long as they are accompanied by a waiver. This could lead to greater transparency for franchises in Illinois during the sales process, but franchisees should be wary and be certain to review the cautionary language accompanying the representations made to them.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top