As 2007 drew to a close, a New York appellate court struck a blow to the growing use of compliance questionnaires that include disclaimers. In Emfore Corp. v. Blimpie's Assocs., Ltd., 2007 WL 4442375 (N.Y.A.D. Dec. 20, 2007), the court held that disclaimers in compliance questionnaires are prohibited by the anti-waiver provisions of the New York Franchise Law, N.Y. Gen. Bus. Law §§ 687(4) and (5). Thus, the decision of the trial court in Emfore, which we reported on in our October 17, 2006 issue of Franchise Alert, has been reversed.
Emfore involved a compliance questionnaire presented to a Blimpie's franchisee in connection with the signing of its franchise agreement. The questionnaire asked the franchisee, among other things, to affirm that the franchisor had made no representations about actual or projected profits, sales or expenses. After the franchised business failed, the franchisee sued Blimpie's for violation of the New York Franchise Act, fraud and breach of contract, alleging in part that Blimpie's had made intentionally misleading earnings claims that were not contained in the disclosure document. The trial court granted summary judgment to the franchisor on all of the franchisee's claims under the New York Franchise Act. First, the trial court held that the disclaimers were not illegal because they were in an "interactive document," rather than in the mere boilerplate section of the franchise agreement. Second, the trial court held that the disclaimers precluded the franchisee from showing reasonable reliance on the alleged earnings claims, which was a necessary element of the franchisee's claims for statutory fraud.
The appellate court summarily rejected the trial court's conclusion that the disclaimers in the questionnaire were beyond the scope of the anti-waiver sections of the Franchise Act. The court also held that the franchisee's statutory fraud claim remained viable, since the disclaimers created an issue of fact as to the extent and reasonableness of the franchisee's reliance on the alleged earnings claims.
Thus, pending further judicial support for the inclusion of disclaimers in compliance questionnaires, franchisors should review their questionnaires to make sure they do not run afoul of the New York Franchise Act.