Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—5th Cir.: Franchisee denied rescission of Red Mango franchise agreement; 14-day disclosure requirement not violated, (Mar 31, 2016)

The U.S. Court of Appeals in New Orleans affirmed a district court’s dismissal of an action, which sought to rescind a franchise agreement with Red Mango FC, L.L.C. While the district court determined that Red Mango’s alleged violation of Wisconsin’s 14-day disclosure rule was not “material,” the appellate court found that no violation occurred because the document questionnaire at issue was not an “offering circular” for purposes of the 14-day rule (Braatz, L.L.C. v. Red Mango FC, L.L.C., March 30, 2016, Per Curiam).

After experiencing financial difficulties, resulting in the closing of their Red Mango frozen yogurt store franchise in Wisconsin and their filing for bankruptcy, Peter and Elizabeth Braatz filed an action, seeking rescission of their franchise agreement. The basis for their action was that Red Mango violated Wisconsin’s 14-day rule, which requires a franchisor to provide potential franchisees with a copy of an “offering circular” at least 14 days before selling them a franchise. According to the plaintiffs, Red Mango violated the 14-day rule when, after they had submitted the signed franchise disclosure document (FDD) they had received along with a check, they were instructed to change two answers to the questionnaire portion of the FDD and Red Mango did not allow 14 days to pass before accepting the new answers.

The district court denied Red Mango’s motion to dismiss for lack of standing. However, it granted Red Mango’s motion to dismiss for failure to state a claim after it found that the alleged violation was not material to their decision to purchase the franchise.

The appellate court affirmed the district court’s determinations that the plaintiffs had standing but failed to state a claim. Rather than addressing whether the alleged violation of the 14-day rule was material, the appellate court considered whether a violation of the 14-day rule occurred. The appellate court determined that no violation of the 14-day rule occurred because: (1) an “offering circular” specifically refers to disclosure documents a franchisor files with the state when it registers; and (2) nothing in the text of the 14-day rule suggested that it applied to “new information” about the franchise agreements.

The appellate court further determined that the text of the 14-day rule did not require a franchisor to give a potential franchisee 14 days with the franchising documents any time a material change is made or distinguish between the “specific” offering circular that Red Mango would accept and the copy of the offering circular that plaintiffs initially received.

The case is No. 15-10498.

Attorneys: Joseph S. Goode (Pia Anderson Dorius Reynard & Moss) for Braatz LLC. Gregory H. Dimmick (Mullin Russ Kilejian PC) for Red Mango FC, LLC and Red Mango, Inc.

Companies: Braatz LLC; Red Mango FC, LLC; Red Mango, Inc.

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