Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D. Tex.: Rescission of Red Mango franchise agreement not appropriate for immaterial disclosure violation, (Apr 28, 2015)

By Edward L. Puzzo, J.D.

A violation of the disclosure requirements of the Wisconsin Franchise Investment Law by the franchisor of a Red Mango frozen yogurt store was not material to the franchisees and could not be the basis for rescission of the franchise agreement, the federal district court in Dallas has ruled (Braatz, LLC v. Red Mango FC, LLC, April 27, 2015, Fish, A.).

Peter and Elizabeth Braatz operated a franchised Red Mango frozen yogurt store in Wisconsin, beginning on September 4, 2012. Due to financial difficulties, plaintiffs closed the franchised store on March 2, 2014 and subsequently filed for bankruptcy. They then brought an action seeking rescission of the franchise agreement and other relief, alleging that the franchisor violated Wisconsin law during the contracting process. Red Mango denied violating the Wisconsin Franchise Investment Law, and the court granted its motion to dismiss.

Wisconsin franchise law. The Wisconsin statute governing the sale of franchises requires that the prospective franchisee receive an offering circular at least 14 days prior to the execution of a franchise agreement.

Plaintiffs recounted a sequence of events where they received a franchise disclosure document (FDD), followed about six weeks later by an official franchise agreement, which they signed and submitted with a check on January 6, 2012. Sometime within the next ten days, the franchisor returned the questionnaire portion of the agreement, asking that two answers be changed to make them consistent with the agreement. Plaintiffs immediately made the changes and resubmitted the questionnaire along with an additional check. Plaintiffs now seek rescission of the franchise agreement based upon this alleged violation of the 14-day disclosure period required by the statute.

The court explained that the statute provides for the remedy of rescission for violation of the disclosure provision only where the violation was material in the franchisee’s decision to purchase the franchise. Under the statute, the materiality requirement must be evaluated based upon the franchisee’s actions specifically, and not by the hypothetical actions of an objectively reasonable person.

Even if Red Mango was required to provide plaintiffs with an additional 14 days before submitting the revised questionnaire, this violation would not be material, the court found. After resubmitting the questionnaire, the plaintiffs almost immediately created a limited liability company for the purpose of operating the franchised business, demonstrating that their decision-making was not affected in the least by Red Mango’s violation. The change requested by the franchisor was only to ensure consistency between the agreement and the questionnaire, and did not represent any new requirement for franchise ownership. Thus, the violation cannot be considered material, ruled the court.

The court further rejected plaintiffs’ assertion that they were required to do no more than plead that the violation was material. Under the Rule 12 (b)(6) standard, the plaintiff must show, as well as plead, that the pleader is entitled to relief.

The case is Civil Action No. 3:14-CV-4516-G.

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

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

Cases: FranchisingDistribution TexasNews