Communicating false or misleading information to prospective franchisees is not without risk for the franchisor.
The sanctions usually imposed in such cases are the nullity of the franchise agreement, involving the reimbursement of sums paid by the franchisee to the franchisor.
But a judge of the United States District Court in Pennsylvania went further[1].
He sentenced the head of a franchising company to 3 years and 6 months’ imprisonment and 3 years’ “probation” for defrauding prospective franchisees of a total of $2.1 million, on the grounds that he had provided them with misleading or erroneous pre-contractual information.
In this case, the owner of New York Bagel Enterprises, Inc. operating the “New York Bagel” franchise, was accused of having:
- falsely promised candidates that he could provide them with financing to help them in their franchise business,
- falsely stated costs for opening a “New York Bagel” franchise,
- provided a false network statement, and
- provided misleading financial performance data for existing franchisees.
- To top it all off, the franchisor was also accused of using company funds for personal expenses (house rent, travel, personal vehicles, etc.) and of committing various tax frauds.
While the parties involved in this case denounced the franchisor’s elaboration of a real scheme to defraud prospective franchisees – which probably explains the prison sentence handed down – the fact remains that any franchisor who communicates a pre-contractual information document to a prospective franchisee must make absolutely sure that it is up to date and contains no erroneous or misleading information.
[1] https://www.justice.gov/usao-edpa/pr/ny-bagel-company-owner-sentenced-3-years-prison-scamming-prospective-franchisees-out
