Our franchisor files a 10K with the SEC and fails to disclose monthly minimum royalties that franchisees would be responsible in paying. They disclose a % due, but not the minimums also required by them. I was mislead as to these minimums along with other issues, and I never saw it on the SEC disclosures. Since I am now being asked to pay these unsustainable minimums that I was not aware of, but have now located in my contract, I am wondering if they were legally required to disclose it to the SEC. As of their last filings it still does not state a minimum weekly amount would be due. If so would this be grounds to get out of a franchise agreement.
The SEC filings state that franchisees are required to pay a certain percentage of "the amount received from the operation of the franchise"
As a franchise attorney I can predict the critical issue is not the 10k SEC filings, but what was disclosed (or not) in the FDD Franchise Disclosure Document that accompanied your franchise agreement. If not, you likely have a case. If they were properly disclosed, then probably not - at least on this issue.
There are many, many things that must be disclosed (and sometimes are not) in an FDD. That's the document the law assumes you relied on in purchasing your franchise - not 10k filings with the SEC.
Your best course of action is to show everything to a good franchise attorney for advice.
Kevin B. Murphy, B.S., M.B.A., J.D.
Attorney at Law & Franchise Expert
Director of Operations - Mr. Franchise
FRANCHISE FOUNDATIONS APC
As you should have gathered from the reaponses by my colleagues. the 10K is not what you should be focused on. The franchisor was obligated to give you its Franchise Disclosure Document("FDD" at least 14 days before you signed the franchise agreement or paid the franchisor any money. Item 6 of the FDD, which lists all the fees you are to pay in tabular form should have disclosed the monthly minimum royalties. Since, as noted, you now say you have found that requirement in your franchise agreement, it certainly should have been disclosed in Item 6.
If you spent all your time on the 10K and not the FDD, you probably have few, if any, options. Failing to read the FDD and franchise agreement, is as they say "bad on you".
See an experieced franchise lawyer for advice and to explore any possible, albeit likely remote remedies you can pursue.
Franchise law is very complex and dependent on certain state and federal rules. You say you were not aware of the royalties. So are you saying that these were not disclosed in the FDD and the franchise agreement? I would be stunned if the answer was no. If no, you have lots of options.
If what you are saying is that, instead, you did not understand or realize the extent of the minimum royalties and that impact, that is not the same of not having disclosure. So unless you have defective disclosures at the outset, the 10K claims will do nothing to support terminating this agreement. Now, it may certainly be relevant to the SEC (assuming what you claim is true), but that is a totally separate matter from whether your franchise agreement is enforceable.
Since you are unhappy with this arrangement, you need to speak with an experienced franchise attorney to see if there is a viable means to terminate. This will involve review of copious amounts of documents and facts. Good luck.
I think you are confusing the franchise disclosure requirements and the SEC disclosure requirements. Under the FTC, a franchisor must disclose to a potential franchisee various information in a document called an "FDD" - Franchise Disclosure Document. SEC disclosure laws are separate and quite different. In the FDD the franchisor should have disclosed to you monthly minimum royalties in Item 6, among other places. Item 6 is the disclosure that states the royalties, advertising fees and other fees a franchisee is required to pay to the franchisor or its affiliates. If the franchisor did not disclose this information in the FDD or you were not given an FDD at least 14 days prior to paying the franchisor any monies or signing the franchise agreement, you should consult a franchise attorney and speak with the Florida Attorney General's office to file a private complaint.
I have had over 20 years of experience as a franchise attorney and would be happy to speak with you about this situation if you would like to call me (215-525-1165 x101).
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A thorough review of SEC filings may yield interesting and helpful information about the franchisor, its business dealings, recent financial activity, etc. This type of review is recommended as part of a prospective franchisee's due diligence investigation of publicly-traded franchisors before buying a franchise. But, SEC filings are NOT the best source for information about the details of the business relationship between the franchisor and franchisee.
The best source for this type of information is the franchisors's franchise disclosure document ("FDD" or before 2008 called a "Uniform Franchise Offering Circular" or "UFOC") which includes a copy of the standard franchise agreement form. Item 6 of the FDD must contain a summary of all ongoing fees payable to the franchisor (and its affiliates). For a royalty payment that is based on percentage of revenues with periodic minimum payments, both the percentage and the minimums must be disclosed in FDD Item 6 (and in the franchise agreement itself).
Apparently, the franchise agreement you signed DOES describe the minimum royalty payments, because you say that you have now located the relevant provision in your contract. If the obligation to pay the minimum royalties (and the amount of minimum royalties) are clearly spelled out in your franchise agreement, then it is practically impossible for you to claim that you were not aware of the minimum royalties. Mentally-competent adults are legally bound by the provisions of written contracts they sign -- even if they did not read or understand the contract.
You MIGHT have a slight chance of getting out from the requirement to pay weekly minimum royalties if (1) the writtem provision in the franchise agreement is ambiguous; or (2) the franchisor did or said things that misled you about the minimum royalties; or (3) if you were not timely provided with an FDD before you bought the franchise. The easiest of these to prove is the last one (and the burden of proof may be on the franchisor to proove that it DID timely provide an FDD to you). The first two are more complicated, but an expreienced franchise lawyer will be able to help you assess whether you have a legitimate claim or excuse.
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