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A Lesson Learned from Pro-Cuts Franchisee Lawsuit?
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Although the outcome of a recent lawsuit filed by several franchisees against Pro-Cuts Sports franchises is at the early stages, there are some lessons to be learned about Item 19 disclosures. In the complaint the franchisees allege that they were provided the FDD of a competitor. From the complaint: "Most shockingly, Pro-Cuts provided to all of the Franchisees, except Borjesson, a Supercuts Franchise Disclosure Document ("Supercuts FDD") before these Franchisees signed their Franchise Agreements, and told these Franchisees to refer to Item 19 of the Supercuts FDD, which contained data on the financial performance of Supercuts brand salons, to see the financial performance the Franchisees could expect if they signed up as Pro-Cuts Sports franchises."  Further allegations, "Not only was the provision of the Supercuts FDD and Supplemental Disclosure illegal, because they were financial performance representations outside of Item 19 of the ProCuts FDD, the financial performance representations were also misleading, as the Franchisees' salons have failed to achieve financial performances anywhere near that represented by Pro-Cuts. Indeed, on a January 8, 2015, conference call between the Franchisees and Pro-Cuts representatives, Paul Plate, Regis' Senior Vice President and Chief Financial Officer for the Franchise Division, recognized that the Franchisees were financially struggling and stated that the corporate-owned Pro-Cuts Sports salons were experiencing similar struggles. The Franchisees relied on the false and illegal financial performance representations, and other misrepresentations detailed below, in deciding to enter into their Pro-Cuts Sports Franchise Agreements."

Although the final outcome is yet to be determined, the basis of the lawsuit should be a warning to franchisors regarding financial performance representations.

Posted on October 8, 2015 at 10:33 AM
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