Store Openings Projection Could Have Violated Disclosure Law

by Peter Reap, Legal Editor, CCH Business Franchise Guide.

A pharmacy franchisor could have breached the anti-fraud provisions of the North Dakota Franchise Investment Law (NDFIL) by allegedly making a material misstatement of fact in a Franchise Disclosure Document (FDD) filed with the North Dakota Securities Commissioner in 2009 when it projected the opening of 0-1 stores in North Dakota, the federal district court in Fargo, North Dakota, has ruled.

In reality, the franchisor did not intend to offer any franchises in North Dakota of the type and trade name described in the FDD so as to avoid triggering the “most favored nations” clause in the franchise agreements of current franchisees, such as the two plaintiffs. In addition, the plaintiff franchisees argued that they were induced to enter into renewal agreements with the franchisor specifically because they were assured that, by virtue of the “most favored nations” clauses in their renewal agreements, they were assured that if a better deal came along, they would be able to convert to it. If a factfinder determined that the franchisor employed such a scheme as a way to defraud or commit deceit, it could also find a violation of the statute. Thus, genuine issues of fact existed with regard to whether the franchisor violated the NDFIL, the court held.

The franchisor’s contention that there was no private right of action under the NDFIL was rejected. The plain language of the statute provided that a franchisee or subfranchisor could bring an action against “any person who violates any provision of this chapter,” the court observed.

JMF, Inc. v. Medicine Shoppe Int’l, Inc., DC N.D.,, ¶14,692,

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