Thinking about being your own boss? Generally, you have two options—start your own business and do the hard work of creating your own brand to build your customer base, or purchase a franchise and get the advantage of a well-known brand. It’s likely that most people understand there are many risks in starting your own business and that owning a franchise is often a safer investment. But what if a franchise seller makes false statements or omits important facts in selling a franchise that doesn’t operate as advertised? Whether you’re the franchise buyer or the seller, the Oregon Franchise Act (“OFA”) has the answer.
In 1973 the Oregon legislature passed the OFA to protect the public from franchise sellers (“franchisors”) who mislead would-be franchise purchasers (“franchisees”) into purchasing a franchise that is not as advertised. The OFA requires franchisors “to make a full disclosure to the [franchisee] of all the things he should know to make an intelligent business determination.” Specifically, the OFA imposes liability on a franchisor who makes “any untrue statement of fact” or omits material facts necessary to render untrue statements not misleading.
The OFA allows franchisees to recover the amounts paid to the franchisor and reasonable expenses they incurred under the agreement, or their “restitution” damages. That is, the goal is to put the franchisee back in the financial position she was in before she signed the franchise agreement. The OFA also grants courts the discretion to let franchisees recover their attorney fees from franchisors who violate the OFA. Finally, the OFA imposes joint and several liability on every officer, director, partner, or person who occupies a similar status, thus allowing franchisees to recover their damages from personal assets when the company itself might otherwise be bankrupt.
The Oregon legislature modeled the OFA after the Oregon Securities Law (“OSL”), which regulates the sale of securities, e.g., stocks, bonds, investment contracts, etc., and contains a liability provision nearly identical to the liability provision in the OFA. Consistent with the legislature’s intent, Oregon courts have interpreted the OFA according to its prior interpretations of the OSL. Importantly, Oregon courts have interpreted the nearly identical OSL provision as imposing strict liability on sellers who make untrue statements or omit material facts in the sale of a security, which means the purchaser would not need to prove that the seller intentionally made untrue statements or omitted facts. Because the OFA parallels the OSL, a franchisee may not need to prove that a franchisor intentionally made an untrue statement in selling a franchise; rather, the franchisor could have negligently made the untrue statement, and the franchisor could nonetheless be liable under the OFA.
If you are considering purchasing a franchise, you should contact CLG to discuss the pitfalls and risks of becoming a franchisee before signing a franchise agreement. Or if you have already purchased a franchise and there are discrepancies between what you’re experiencing and what the franchisor described prior to signing the franchise agreement, you should contact CLG to discuss your legal options under the OFA.