The Georgia Court of Appeals recently upheld a judgment entered on a jury verdict against a franchisor for violating the Federal Trade Commission’s Franchise Rule, 16 CFR Parts 436 and 437 (the FTC Rule), finding that the FTC Rule created a legal duty on the part of franchisors that is actionable under Section 51-1-6 of the Georgia Code (OCGA § 51-1-6).

In Legacy Academy, Inc. et al. v. Mamilove, LLC et al.,1 the franchisee plaintiffs filed suit against the franchisor, Legacy Academy, Inc., and its officers (collectively, Legacy) asserting a claim under OCGA § 51-1-6 that was based on Legacy’s violations of the FTC Rule; a claim that Legacy violated Georgia’s RICO Act; and claims for fraud, negligent misrepresentation and rescission.  The plaintiffs alleged that during their discussions with Legacy about opening a Legacy Academy daycare franchise, Legacy provided them with an earnings claim2 in the form of an income and expense statement that was purportedly based on the actual income and expenses of Legacy Academy franchises in operation.  Relying on this earnings claim, the plaintiffs decided to open a Legacy Academy daycare franchise.  About three months later, on September 13, 2001, Legacy provided the plaintiffs with a franchise offering circular and the franchise agreement.  The plaintiffs alleged they were pressured by Legacy to sign the documents before they had a chance to read the documents or consult with an attorney.  During their first years of operation, the plaintiffs’ Legacy Academy franchise lost money or had lower earnings than anticipated. 

The earnings claim

At trial, the plaintiffs presented evidence that the earnings claim was not a historical representation of the actual revenues and expenses of the existing Legacy Academy franchises, but was based on assumptions concerning the total revenues and expenses a franchise might experience.  Legacy denied that it had provided the plaintiffs with an earnings claim for the franchise before the plaintiffs signed the franchise agreement on September 13, 2001.  Legacy also claimed that it had given the plaintiffs a franchise offering circular prior to providing them with the earnings claim.  Finally, Legacy denied that it had pressured or otherwise prevented the plaintiffs from reading the franchise agreement before the plaintiffs had a chance to sign the agreement.

The jury rendered a general verdict in favor of the plaintiffs on all of their claims and awarded damages and attorneys’ fees.  The jury also found that Legacy’s officers were personally liable for the judgments.  The court entered judgment on the verdict, and Legacy appealed.

Arguing the plaintiffs were not entitled to bring their action

In one of its many arguments on appeal, Legacy contended that the trial court erred in denying its motion for a directed verdict on the plaintiffs’ claim for violation of OCGA § 51-1-6, which provides that “[w]hen the law requires a person to perform an act for the benefit of another or to refrain from doing an act which may injure another, although no cause of action is given in express terms, the injured party may recover for the breach of such legal duty if he suffers damage thereby.”  Because the FTC Rule requires a franchisor to provide to prospective franchisees a complete and accurate disclosure document at least 14 calendar days before the franchisee signs any franchise or other binding agreement or pays any consideration to the franchisor and requires that a franchisor deliver to the franchisee the completed franchise agreement at least 7 calendar days before the date on which it is actually signed, the plaintiffs claimed that Legacy’s failure to have done so breached a legal duty under OCGA § 51-1-6. Legacy argued that although the Federal Trade Commission Act (the FTCA) does not create a private right of action in favor of an aggrieved franchisee, it allows franchisees to file a complaint with the Federal Trade Commission asserting a franchisor’s alleged violations of the FTC Rule and that, if the plaintiffs had done so, the FTC could have filed a cause of action on their behalf.  Legacy contended that because OCGA § 51-1-6 only applies when a cause of action is unavailable to the injured party, the plaintiffs were not entitled to bring their action against Legacy. 

The Georgia Court of Appeals found no merit to Legacy’s argument.  The court reasoned that the phrase “cause of action” in OCGA § 51-1-6 refers to an injured party’s right to bring a privateaction to recover damages for a breach of a legal duty.  The court found that the plain language of the FTCA “clearly shows that the statute does not provide a private cause of action.”  Rather, if the Federal Trade Commission believes that a franchisor has intentionally violated the FTC’s rules against unfair or deceptive acts, it will conduct a hearing and, depending on the evidence, issue a cease-and-desist order to the franchisor.  At most, the Federal Trade Commission may issue a civil penalty to be paid to the United States, not to the injured party, in the event that the franchisor violates the cease-and-desist order.  Therefore, the court found that the Federal Trade Commission could not have filed a cause of action on behalf of the plaintiffs because there is no private right of action under the FTCA to enforce Legacy’s legal duties of disclosure under the FTC Rule.

Accordingly, the Georgia Court of Appeals concluded that the plaintiffs were entitled to pursue a claim under OCGA § 51-1-6 based on Legacy’s violations of the FTC Rule.  Because there was evidence to support the jury’s verdict against Legacy on that claim, the court held that the trial court did not err in denying Legacy’s motion for a directed verdict.

No longer just a matter of best practice

The case is important because the Georgia Court of Appeals ruled for the first time that franchisees can bring a private cause of action under OCGA § 51-1-6 for violations of franchisors’ duties arising under the FTC Rule

Georgia now joins a list of states that indirectly provide for a private cause of action for violations of the FTC Rule.  Other states have enacted separate statutes that proscribe unfair or deceptive trade practices, including, as courts have held in some states, violations of the FTC Rule. The Georgia Court of Appeals decision, notably, has read this right into the state’s general tort statutes.  

Strict compliance with the FTC Rule in the sale of franchises in Georgia is no longer simply a matter of best practice. Failure to do so, even unintentionally, creates legal exposure under state law.