Proving franchise fraud and real damages is difficult. Despite helpful laws and regulations concerning the offer and sale of franchises, even where actual violation of these laws and regulations exist, recovery of an entire investment and lost profits is increasingly rare. Most of these cases are resolved by arbitration, and franchisee losses are rarely reported. Those resolved by courts give us a glimpse of reality. The federal case of MTR Capital v. Lavida Massage Franchise from the U.S. District Court in the Eastern District of Michigan is instructive.

  • Regulation and laws are designed to prevent fraud.

The Federal Trade Commission rule governing the offer and sale of franchises requires formal and uniform disclosures of basic information deemed important to prospective franchisees in a franchise disclosure document (FDD). The FDD of a mature franchisor contains 23 separate items of disclosure, together with three years of audited financial statements and metrics concerning the history of the franchisor and its leaders, their litigation and bankruptcy history, operational requirements, financial representations, audited financial statements for three years, contact information for the prospect to contact franchisee that are in the system and who have left the system, and all contracts reasonably anticipated to be signed in connection with the franchise relationship. The prospective franchisee uses the FDD as a starting point to begin its diligence.

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