Robert Zarco Delivers Crucial Advice For Franchise Owners In America (Part 1)

Photo Credit: Zarco Einhorn Salkowski & Brito, P.A.

Attorney Robert Zarco, Founder of the law firm Zarco, Einhorn, Salkowski, & Brito, P.A., has been at the forefront of protecting the legal rights and interests of business clients in the USA and overseas for over 35 years, handling complex Franchise, Commercial, and Business legal matters and trials in Federal and State Courts, as well as Arbitration and Mediation. As a very active Trial Lawyer in Franchise, Hospitality, Dealership, Distributorship, Trademark, and Commercial Real Estate disputes, Zarco is frequently awarded prestigious distinctions, including “Lawyer of the Year” in 2020 for Franchise Law by Best Lawyers of America©, “Top Dealmakers of the Year” for Real Estate/Land by Daily Business Review, “Legal Eagle” by Franchise Times, and “South Florida’s Top Lawyers” by Miami Herald. He recently was honored the ‘Lifetime Achievement Award’ by the American Association of Franchisees & Dealers (AAFD), and became a distinguished Fellow in the Trial Lawyers Honor Society Litigation Counsel of America (LCA). The Firm is repeatedly listed in U.S. News & World Report among “Best Law Firms” in Franchise by Best Lawyers of America ©.

Zarco recently sat down with Keith Miller, the Director of Public Affairs and Engagement from the American Association of Franchisees and Dealers (AAFD). Miller and Zarco hosted the second general sessions for AAFD TV, the AAFD’s YouTube channel. The start of Miller and Zarco’s conversation  revolved around the Federal Trade Commission’s (FTC) unfair practices of authority.

Keith MillerLet’s talk about the FTC’s unfair practices of authority. Let’s talk about some of the current part of the franchise rule and what you see franchisees can do, what has been done and what we are pushing to do. It can be fairly simple things, for example, I was given numbers that were not disclosed in Item 19. I was told I would do $1M in sales and I find out all we did was $300 thousand in sales and I am going broke. What can I do?

Robert Zarco: The reality is that in courtrooms, the judges as well as congress and the people have a wrong impression with regard to the relationship between franchise and franchisee in this country and whether or not franchisees are being abused in certain circumstances, but it is still an unequal playing field. We have been working with the legislature in efforts to level the playing field. I think that Commissioner Chopra’s (FTC Commissioner Rohit Chopra) attitude and view is a breath of fresh air, because we all know the perception of franchising in America, both in Congress and in the courtrooms. The impression is one where franchisees, especially those of well-known brands, are very wealthy. The reality is, that is not the case most of the time.

In fact, franchisees are victims of abuse from arbitrary, capricious practices by franchisors, where the franchisors are making decisions based off what is good for their own bottom line without taking into account the impact that has on the franchisees’ bottom line.

I remember years ago I was speaking to franchisees in these large conferences. I was telling them, “Guys, as much as you’re concerned today about the relationship between you, the franchisee and the franchisor, I foresee that over the next five to seven years, we’re going to have an onslaught of private equity.” And I explained what private equity is going to do in terms of the impact that that is going to have in the relationship. I anticipated it was going to be worse and the reality is, it is worse. The reason links back to your first question, where franchisees were provided numbers, performances and perspectives in terms of how their particular business was going to fare, yet item 19 in the Franchise Disclosure Document (FDD) that was disclosed says that they do not make any financial performance representations.

First and foremost, that can give rise to a claim of representation by the franchisor to put in item 19, that there is not any financial performance representation being made, when in fact, they are being made. They are being made by their own executives, they’re being made by their brokers, they are being made by people that have either actual authority or apparent authority in the mind of the franchisee.

The question there becomes one of reliance. Does the franchisee have the right to rely on the representations made by the franchisor’s representative before signing the franchise agreement when item 19 says they would not? Then you get to the issue of whether the reliance is reasonable or unreasonable. There are cases that go both ways in that regard, depending on the circumstances and depends on the knowledge and how you can connect whether the person that made the representation for the company was one that understood that the FDD had this no-representation statement.

That said, this is a common problem. Judges go both ways. A lot of them give a lot of weight to the FDD. And don’t forget, when you sign the franchise agreement, there are merger and integration clauses in those contracts. And those are the provisions at the end of the agreement that a lot of people do not look at because the lawyer that reviewed their franchise agreement for them might have been a person who handled the real estate closing or prepared their will and was not necessarily a franchise expert and said, “Oh don’t worry about it, this is all just standard boiler plate.” The reality is, that standard boiler plate can later become a huge defense for the franchisor where they could say, “You are not to rely on anything that was said to you prior to getting into this relationship.”

So, be very wary of any financial performance representations. Frankly, I would not rely on any one of them because later you will see there are a lot of questionnaires in many of these franchise agreements, where they ask you to sign a document that reflects that you in fact acknowledge that you were not given any financial performance representation and you did not get any statement from anyone  that would tell you what you can or cannot expect. In all of these documents, the more things you sign, the more things will come back to haunt you later, when the time comes and a dispute arises.

Be on the lookout for part two of Robert Zarco’s conversation with Keith Miller.
If you wish to view the entire general session, CLICK HERE.

To learn more about Robert Zarco and his practice, head to his website, HERE.