Is a broker a "person" who can "offer" a franchise for sale? That arcane question is at the heart of more than a dozen lawsuits filed against franchise brokerage firm FranChoice and a handful of its individual brokers.
"These are the first cases holding that franchise brokers can be liable under franchise laws and state deceptive trade practices acts," says Elliot Ginsburg, Garner & Ginsburg, who is pressing the cases on behalf of plaintiffs. They claim FranChoice brokers misrepresented the facts when presenting the iLoveKickboxing.com franchise.
"I think it’s a big deal because it puts franchise brokers on notice that they can’t necessarily just recite verbatim what the franchisor tells them. They have to think of themselves as franchise sellers not just franchise brokers," Ginsburg said.
Garner & Ginsburg had already filed multiple lawsuits against the kickboxing gym concept founded by Michael Parrella, also alleging multiple fraudulent statements on the part of the franchisor. Calls to iLoveKickboxing.com headquarters for comment were not returned.
But Ginsburg started looking at a wider field. "State franchise laws refer often to franchise salespersons, and I think people took it for granted that that generally meant people working directly for the franchisor. We looked into it and the definition is a lot broader than that."
That’s where the parsing of words comes in, in one case, for example, exploring whether defendants are "persons" under the New York Franchise Sales Act and whether they made an "offer" or "offer to sell" under the act. I’ll spare you the several paragraphs of argument.
"I think it opens the door in the future for more claims like this," Ginsburg said.
‘FranChoice will prevail’
Jeff Elgin, CEO of FranChoice, did not agree to an interview but did send a statement. "Since 2000, we have helped many tens of thousands of candidates identify franchise opportunities. In these 20 years and tens of thousands of referrals, we have had only a handful of disputes, none of which resulted in any findings of fault on the part of FranChoice or its consultants," he wrote in part.
He called the 15 cases filed by Garner & Ginsburg "baseless, and we adamantly deny the allegations contained in all of them. They wholly disregard the role of consultants and the written and spoken guidance that our consultants provide to candidates to carefully conduct their own investigations of any potential franchise opportunities they are pursuing."
He continued, "The law and facts are on our side, and we will continue to vigorously defend ourselves against these meritless claims…We are confident that FranChoice and its consultants will prevail."
Sabrina Wall, CEO of Franchise Brokers Association, said she has reviewed the lawsuits and provided training about "red flags" to her association’s members, which number about 160 brokers and 300 franchisors that use brokers to sell franchises; FranChoice is not a member. "It’s the first time I’ve seen it, and I’ve been in the industry for 14 years," she said, referring to lawsuits targeting brokers. "I think everyone is paying attention to it."
About four years ago, she said the association "did a cleaning of the house," cutting members who did not meet standards. "We kept brokers who were going to abide by a code of ethics and conduct; we kept brokers who were going to take an FTC sales compliance certification; and we removed franchisors that weren’t participating in those same values."
A training program was beefed up from three weeks to five weeks, with a one-year mentoring program after that, and the association keeps legal advisers on hand to help with questions as they arise. The association also recommends brokers purchase errors and omission insurance.
"We wanted them to have the mindset of bringing clear and truthful guidance," she said. "It’s easy in this industry to look at the amount of the commission and try to do as little work as possible for that commission. We don’t want that culture. We want our brokers to earn that commission.
Watching for commission breath
Jania Bailey is CEO of FranNet, a franchise brokerage firm that itself is also a franchise; FranNet is not a target of any of the lawsuits. "Of course, I’m aware of the situation and it’s always scary and upsetting," she said. It’s also the reason she wrote a broker disclosure document similar to a franchise disclosure document for her franchisees to abide by, and is advocating for other brokers to do the same.
"You can ask anyone in the industry, all of a sudden there’s all these new groups and all these new brokers, it’s muddying the water to say the least," she said. "It’s a low cost of entry business. Any time you have a low cost of entry … it can look like easy money." Cost of investment for FranNet ranges from $75,000 to $150,000.
"The biggest thing that scares me … with the people out there, they get commission breath," she said. What’s commission breath? "Go to a used car lot, you’ll see what I’m talking about. The person that’s so desperate it’s, ‘I’ve got a deal for you.’"
She said Jeff Elgin, CEO of FranChoice, was part of the initial conversation about a broker disclosure document, "and I think he’s close to being ready to publish something.
Overall, I have a lot of respect for Jeff and his organization," she said.
Bailey said her attempts to get the International Franchise Association to back the push toward broker disclosure documents stalled out over the last year, "but I think it is re-surfacing, and will be revived. I’m disappointed that none of the other groups followed suit. We tried to pave the way, and I’ve actually sent three different groups a copy of ours, just to say here’s what we did, but no one has followed yet."
Her advice to the brokers in the FranNet system and beyond: "As we all know, people can sue for anything, and there’s a whole lot of ‘he said, she said.’ I try to do one foot in front of the other, and try to do the right thing."
Beth Ewen is senior editor of Franchise Times, and writes the Continental Franchise Review® column in each issue. Send interesting legal and public policy cases to firstname.lastname@example.org.