Franchises Expert Witness

Overview

About Franchises Expert Witnesses

A franchise expert explains how a franchise system is supposed to work and whether this franchisor or franchisee acted within those norms. Most disputes come down to one of three things: what the buyer was told before signing, whether the franchisor kept its side of the agreement after signing, and what the broken relationship cost. Each needs a different witness. Someone who has run a franchise system addresses practice, and an accountant or economist addresses the loss.

The first question is whether the arrangement is a franchise at all, because the label does not control. Under the FTC Franchise Rule, a franchise is any continuing commercial relationship, whatever it may be called, in which the franchisee gets the right to operate under the franchisor's trademark, the franchisor will exert a significant degree of control or provide significant assistance in the method of operation, and the franchisee makes a required payment as a condition of starting ¹. A license or dealership that meets all three elements may be a franchise under the rule ¹. An expert can compare the actual relationship to those elements, since the promises made and the control exercised are facts.

What the Buyer Was Told

The rule requires disclosure, not fair terms. The FTC describes it as a pre-sale disclosure rule that requires franchisors to give prospective franchisees material information ⁵. A franchisor must furnish its current disclosure document at least 14 calendar days before the buyer signs a binding agreement or makes any payment ². The document has required items, and several recur in litigation ³:

• Item 3, Litigation. Past and pending actions that may have warned the buyer
• Item 7, Estimated Initial Investment. A table of what opening was expected to cost
• Item 12, Territory. Whether the franchisee has any exclusive territory. If it does not, the document must say so in stated words
• Item 17, Renewal, Termination, Transfer, and Dispute Resolution. A table tying each right to the contract
• Item 19, Financial Performance Representations. What, if anything, the franchisor says about sales or earnings
• Item 20, Outlets and Franchisee Information. Tables of franchised and company-owned outlets for the last three fiscal years

Earnings Claims

The sharpest disputes concern numbers. A franchisor may not give a financial performance representation unless it has a reasonable basis and written substantiation at the time it is made, and the representation must carry an admonition that a new franchisee's individual results may differ ⁴. The franchisor also may not disclaim, or require a buyer to waive reliance on, any representation in the disclosure document or its exhibits or amendments ⁴. An expert tests the claim against the underlying unit data: which outlets were counted, which were left out, how long they had been open, and whether the figures are sales or profits. Item 20's outlet tables can also reveal closure and transfer trends that an earnings claim did not mention.

After the Sale

Once the deal is signed, federal disclosure rules say little about the relationship. The contract and state law govern. State statutes vary widely, and some reach further than the FTC rule. Washington's franchise statute, for example, says the parties shall deal with each other in good faith, makes it unlawful to terminate a franchise before its term expires except for good cause, and limits requirements to buy from approved suppliers unless the franchisor proves they are reasonably necessary for a lawful purpose ⁶. Common disputes include:

• Encroachment, where a new outlet or channel takes sales from an existing one
• Termination and non-renewal, including whether a default was real and whether a cure was offered
• Supplier rebates and required purchasing
• System standards, and whether they were applied evenly
• Marketing fund use, and whether collected money was spent as promised

The FTC has also addressed post-sale speech. A policy statement says clauses that prohibit a franchisee from reporting potential law violations to the government are unfair, and so are threats of retaliation for doing so ⁵.

Damages

A franchisee's claim is often for lost profits or lost business value, and a franchisor's for lost royalties. The unit's records and a comparison with similar units usually drive the number. New outlets have little history, so the expert must explain why the comparison is fair. Royalty relief is another common fight: a terminated franchisee's obligation for future royalties may depend on the contract and state law.

Who Is Qualified, and Who Does What

No license applies to franchise expertise. Strong witnesses have held senior operating, development, or compliance roles in franchise systems, or have run multi-unit operations. A franchise lawyer may be barred from opining on the law itself, so ask how the witness will be presented. For money, a forensic accountant reads the unit data, and a valuation expert or economist measures the loss. Choose a witness from the same kind of system: a restaurant operator may not fit a home services case.

Qualifications

Qualifications to Look For

• ✓Senior operating, development, or compliance experience in a franchise system
• ✓Experience preparing or reviewing Franchise Disclosure Documents
• ✓Working command of 16 CFR Part 436 and the state franchise laws in the case
• ✓Direct knowledge of the industry sector at issue
• ✓Experience with unit economics, item 19 substantiation, and outlet data
• ✓For damages, accounting or valuation credentials and unit-level analysis
• ✓Prior deposition and trial testimony experience in franchise disputes

FAQ

Frequently Asked Questions