Minnesota Franchise Act Violations: Your Remedies

What counts as a violation of the Minnesota Franchise Act?

Violations of the Act include selling an unregistered franchise, failing to deliver the disclosure document on time, selling through false or misleading statements, and unfair practices during the relationship. Minn. Stat. § 80C.02 provides: “No person may offer or sell any franchise in this state unless there is an effective registration statement on file in accordance with the provisions of sections 80C.01 to 80C.22 or unless the franchise or transaction is exempted under section 80C.03.”

Each violation rests on its own provision:

1. Selling without registration. An offer or sale made in Minnesota with no effective registration and no exemption violates § 80C.02. An offer counts as made here “whether or not either party is then present in this state, when the offer originates from this state or is directed by the offeror to this state and received by the offeree in this state.” Minn. Stat. § 80C.19, subd. 2.
2. Late or missing disclosure. For a franchise subject to registration, Minn. Stat. § 80C.06, subd. 5 requires the seller to give you the current public offering statement and “a copy of all proposed agreements relating to the sale of the franchise” at least seven days before you sign any agreement or pay any consideration, whichever occurs first. The seller must also obtain your signed receipt.
3. Misrepresentation. Minn. Stat. § 80C.13, subd. 2 bars selling a franchise by any written or oral communication “which includes an untrue statement of a material fact or which omits to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading.” Subdivision 3 adds that “no person may represent that a franchise is registered or exempted from registration when in fact, such is not the case.”
4. Unfair practices during the relationship. Minn. Stat. § 80C.14 and Minn. R. 2860.4400 govern the running relationship, including the rule that “No person may terminate or cancel a franchise except for good cause.” The termination, nonrenewal, and transfer rules and the rules on consent to sell your franchise have their own pages.

The day-to-day rights and obligations of franchisors and franchisees come mostly from the franchise agreement and its operations manual, not from the Act. The agreement typically sets what the franchisor provides, such as training, support, and brand standards, and what the franchisee owes, such as following the operating system, paying royalties, and funding local marketing. Both sides must also comply with the law that governs their businesses. The Act sets a floor beneath those contract terms: section 80C.14 limits termination to good cause, and Minn. R. 2860.4400 bars the franchisor from requiring releases and waivers of the Act’s protections.

The state can act separately. Under Minn. Stat. § 80C.16, subd. 2, a person who violates sections 80C.02, 80C.06, 80C.09, 80C.13, or 80C.14 “shall be subject to a fine of not more than $2,000 for each violation,” imposed in a civil action by the attorney general, with the fines deposited into the state treasury. A willful violation can be a crime under subdivision 3. Those fines go to the state, so your own recovery comes from the private claim in section 80C.17.

How do you know whether your deal is a franchise under Minnesota law?

The core definition of a franchise in Minnesota has three elements: the right to use the franchisor’s name or marks, a community of interest in marketing, and a franchise fee. In the first of its four clauses, Minn. Stat. § 80C.01, subd. 4 defines a franchise as “a contract or agreement, either express or implied, whether oral or written, for a definite or indefinite period, between two or more persons” with each element listed.

The three elements, in the statute’s words:

1. “(i) by which a franchisee is granted the right to engage in the business of offering or distributing goods or services using the franchisor’s trade name, trademark, service mark, logotype, advertising, or other commercial symbol or related characteristics”
2. “(ii) in which the franchisor and franchisee have a community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement, or otherwise”
3. “(iii) for which the franchisee pays, directly or indirectly, a franchise fee”

The same subdivision has exclusions: paragraph (c) excludes “any contract, lease or other agreement whereby the franchisee is required to pay less than $100 on an annual basis, except those franchises identified in paragraph (a), clause (2),” and paragraph (b) excludes “any business which is operated under a lease or license on the premises of the lessor or licensor as long as such business is incidental to the business conducted by the lessor or licensor on such premises.”

A dealership, license, or consulting deal can meet that test without being called a franchise. In Martin Investors, Inc. v. Vander Bie, 269 N.W.2d 868 (Minn. 1978), a “consultant” agreement for a loan-matching service was a franchise. The Minnesota Supreme Court said “The statute requires only that the franchisee be granted the right to use the franchiser’s name, not that it be permitted to hold itself out as the franchiser,” and, on the franchisor’s 1 percent share of loan proceeds, “The statutory definition contains no substantiality requirement.” In Chase Manhattan Bank, N.A. v. Clusiau Sales & Rental, Inc., 308 N.W.2d 490 (Minn. 1981), an “Exclusive Dealership Trademark and License Agreement” for a muffler shop was a franchise. More on a licensing deal that turns out to be a franchise is on its own page.

The fee element is broad, but it has exclusions. Under subdivision 9, a franchise fee is “any fee or charge that a franchisee or subfranchisor is required to pay or agrees to pay for the right to enter into a business or to continue a business under a franchise agreement,” and the statute excludes, among others, “(a) the purchase of goods or agreement to purchase goods at a bona fide wholesale price.” Under Minn. Stat. § 80C.03, “The registration requirement imposed by section 80C.02 shall not apply to the following provided that the method of offer or sale is not used for the purpose of evading sections 80C.01 to 80C.22,” followed by a list of exempt sales. If the franchisor says an exemption or exclusion applies, Minn. Stat. § 80C.12, subd. 4 puts “the burden of proving an exemption or exception from a definition” on “the person claiming it.”

What damages can a franchisee recover under the Act?

You can recover the actual damages the violation caused, plus costs and reasonable attorney’s fees. Under Minn. Stat. § 80C.17, subd. 3, a suit may recover “the actual damages sustained by the plaintiff,” and the fee-shifting section covers the costs and fees the same subdivision allows.

Actual damages can include lost future profits when out-of-pocket losses would not make you whole. In Hughes v. Sinclair Marketing, Inc., 389 N.W.2d 194 (Minn. 1986), the franchisor’s misrepresentations led service-station franchisees to give up their renewal rights and lose their business, and the trial court found no out-of-pocket loss. The Minnesota Supreme Court held: “We hold that, under the circumstances of this case, lost future profits may be recovered by the respondents as “actual damages” for misrepresentation under the act.” The court measured the lost-profit figures by “reasonable certainty,” not absolute certainty, so the numbers need a sound basis, such as the business’s actual operating history.

The damages must flow from the violation itself. Subdivision 1 limits recovery to “damages caused thereby,” and the Act does not create other private claims by implication: subdivision 4 provides that “no civil liability in favor of any private party shall arise against any person by implication” from a violation, except as section 80C.17 provides. The same subdivision preserves your other claims: “Nothing herein shall limit any liability which may exist by virtue of any other statute or under common law if sections 80C.01 to 80C.22 were not in effect.” A common-law fraud or breach-of-contract claim can therefore proceed alongside the Act claim, as the common-law fraud claim did in Hughes.

How does rescission of a franchise agreement work in Minnesota?

Rescission undoes the franchise agreement and returns what you paid, so both sides go back to where they stood before the deal. In Martin Investors, the Minnesota Supreme Court affirmed “rescission of its contract with restitution of sums expended in setting up a business under the contract in order to place both parties at status quo ante the contract,” a remedy it called “specifically authorized by § 80C.17, subd. 1.”

Three rules from the Minnesota Supreme Court’s decisions shape what rescission returns, and a fourth, from Minn. Stat. § 80C.14, applies to unfair-practices violations:

1. The agreements are treated as void. In Clusiau, the court construed section 80C.17 to give a harmed franchisee “the right to have his agreements with the franchisor treated as entirely void and to be restored to the position he occupied prior to his involvement with the franchisor.” The rescission reached an equipment lease that the franchise agreement required, and the franchisor’s assignee could not use the lease’s waiver-of-defense clause against the franchisee.
2. Setup costs come back, less what you keep. The Martin Investors franchisee got back its $10,000 cash payment, had its $20,000 promissory note declared void, and recovered its business-formation legal costs as restitution. The court reduced the award by $250 for a projector the franchisee kept, because restitution covers amounts “for which no significant redeemable value has been retained.”
3. Prejudgment interest can be added. In Nauman v. J’s Restaurants International, Inc., 316 N.W.2d 523 (Minn. 1982), franchisees obtained rescission of unregistered franchise sales and a refund of franchise fees with costs and attorney fees, and the court held that “that portion of the trial court’s decision which excluded prejudgment interest is reversed.”
4. An injunction can hold things in place. Minn. Stat. § 80C.14, subd. 1 provides: “A violation of this section is enjoinable by a court of competent jurisdiction.” It adds that “Irreparable harm to the franchisee will be presumed if there is a violation of this section by a person who is required to register under section 80C.02, but who fails to do so.” A temporary injunction under that section may issue “without requiring the posting of any bond or security,” but a temporary restraining order requires one.

The process in Martin Investors shows the steps one franchisee took. After a state examiner’s letter said the franchisor was under investigation for failing to register, the franchisee stopped operating, mailed a notice of rescission to the franchisor, and then sued for rescission and restitution. A franchisee weighing rescission should also weigh what it gives up, because rescission ends the business relationship along with the obligations.

Are there specific forms required for filing rescission?

No. Minnesota prescribes no rescission form: neither chapter 80C nor the Commerce Department’s franchise rules in Minn. R. chapter 2860 set one. The steps are the notice of rescission and the lawsuit that the Martin Investors franchisee used, described in the rescission section.

How long the rescission process takes depends mostly on whether the franchisor contests it. A franchisor that accepts the notice of rescission may settle by refunding what was paid, which can close the matter quickly. A franchisor that refuses leaves the franchisee to sue, and a contested lawsuit runs on the court’s schedule through discovery, motions, and trial. The three-year limit in section 80C.17, subdivision 5, discussed below, also caps how long a franchisee can wait before filing.

When does the Act shift your attorney’s fees to the franchisor?

The Act shifts reasonable attorney’s fees to the franchisor in any suit under section 80C.17 in which you recover some relief under the Act, whether damages or rescission. Minn. Stat. § 80C.17, subd. 3 provides: “Any suit authorized under this section may be brought to recover the actual damages sustained by the plaintiff together with costs and disbursements plus reasonable attorney’s fees.”

The fee right is not limited to damages cases. In Martin Investors, the franchisor argued that fees were available only in a damages suit, and the court disagreed, holding that the subdivision’s opening words cover a rescission case, a phrase “which plainly includes a suit for rescission and restitution.”

Proving a violation is not enough by itself. In Dunn v. National Beverage Corp., 745 N.W.2d 549 (Minn. 2008), the jury found the franchisor terminated the franchise without good cause but awarded nothing for that violation, while awarding contract damages. The court held: “We hold that an award of attorney fees under section 80C.17, subdivision 3, requires that the plaintiff seek and recover some relief under the franchise act.” I suggest presenting damages for the Act violation itself, because Dunn denied fees where the jury awarded nothing under the Act.

Who besides the franchisor is personally liable?

Liability under the Act reaches the people who control the franchisor, its partners, and its principal executive officers and directors. They are liable jointly and severally and to the same extent as the franchisor, unless the person had no knowledge of or reasonable grounds to know of the facts behind the violation. Minn. Stat. § 80C.17, subd. 2 provides that “Every person who directly or indirectly controls a person liable under subdivision 1, every partner in a firm so liable, every principal executive officer or director of a corporation so liable, every person occupying a similar status or performing similar functions and every employee of a person so liable who materially aids in the act or transaction constituting the violation is also liable jointly and severally with and to the same extent as such person, unless the person who would otherwise be liable hereunder had no knowledge of or reasonable grounds to know of the existence of the facts by reason of which the liability is alleged to exist.”

Three points decide who is exposed:

1. Control persons, partners, principal executive officers, directors, and persons “occupying a similar status or performing similar functions” are liable by position, jointly and severally and to the same extent as the franchisor, unless the knowledge defense in item 2 applies. An employee is liable only if the employee “materially aids in the act or transaction constituting the violation.”
2. The defense is lack of knowledge of the facts. Under subdivision 2’s final clause, a listed person who neither knew nor had reasonable grounds to know the facts behind the violation is not liable.
3. The courts apply it. In Martin Investors, the franchisor’s chairman of the board and its president “were properly held liable along with CCC for the restitution of sums due Martin Investors under the express provisions of § 80C.17, subd. 2.”

This matters when the franchisor is thinly capitalized or near insolvency, because the people behind it may be the only collectible defendants.

How do earnings claims and contract disclaimers affect a misrepresentation claim?

A false earnings claim made to sell you the franchise can violate the Act even when the franchise agreement says you relied on no outside promises. Section 80C.13, subd. 2 reaches “any written or oral communication which includes an untrue statement of a material fact,” and the franchisor may answer with the agreement’s disclaimer and integration clause.

One federal court applying Minnesota law gave those clauses limited weight. In Randall v. Lady of America Franchise Corp., 532 F. Supp. 2d 1071 (D. Minn. 2007), franchisees claimed they were induced by false earnings claims, and the franchisor moved for summary judgment on the strength of a detailed disclaimer. The court denied the motion on that ground, stating that “General disclaimers and integration clauses are given no effect in misrepresentation cases under Minnesota law” and that “even fairly specific disclaimers are typically held to create jury questions about reliance, rather than to negate reliance as a matter of law.” The court was also “not convinced that justifiable or reasonable reliance is an element of a claim for misrepresentation under the Minnesota Franchise Act,” while noting that “some kind of reliance” is required because damages must be caused by the violation. That ruling is one federal district court’s decision at summary judgment, so other courts may weigh disclaimers differently.

The evidence for this claim sits in the sales file, not in the franchise agreement. When a franchisee whose business was running behind its projections sent me the franchise agreement, its addenda, and the loan papers, I asked for the disclosure document itself, specifically its Item 19. I also asked for any other earnings or performance figures the franchisor gave during the sales process, because those speak to a different set of questions than the franchise agreement does. What the disclosure document says about Item 19 financial performance representations is the baseline against which every figure a salesperson gave you gets measured.

How does the FTC Franchise Rule fit with the Minnesota Act?

The federal FTC Franchise Rule sets a national disclosure timetable that only the government enforces, while the Minnesota Act adds registration and gives you your own lawsuit. Under 16 C.F.R. § 436.2(a), it is an unfair or deceptive practice “For any franchisor to fail to furnish a prospective franchisee with a copy of the franchisor’s current disclosure document, as described in subparts C and D of this part, at least 14 calendar-days before the prospective franchisee signs a binding agreement with, or makes any payment to, the franchisor or an affiliate in connection with the proposed franchise sale.” The rule reaches the offer or sale of a franchise to be located in the United States “unless the transaction is exempted under subpart E of this part,” and a paper copy sent by first-class mail counts only if it “was sent to the address specified by the prospective franchisee by first-class United States mail at least three calendar days before the required date.”

A second federal deadline covers changes to the contract. Under 16 C.F.R. § 436.2(b), it is also a violation “For any franchisor to alter unilaterally and materially the terms and conditions of the basic franchise agreement or any related agreements attached to the disclosure document without furnishing the prospective franchisee with a copy of each revised agreement at least seven calendar-days before the prospective franchisee signs the revised agreement.” The rule adds: “Changes to an agreement that arise out of negotiations initiated by the prospective franchisee do not trigger this seven calendar-day period.”

The federal rule frames a violation as “an unfair or deceptive act or practice in violation of Section 5 of the Federal Trade Commission Act.” Private parties cannot sue under that Act. In Holloway v. Bristol-Myers Corp., 485 F.2d 986 (D.C. Cir. 1973), a consumer class action, the court stated that “The central ruling in this case holds that private actions to vindicate rights asserted under the Federal Trade Commission Act may not be maintained.”

Minnesota law fills that gap. Minnesota requires an effective registration or an exemption before a franchise is offered or sold here (§ 80C.02). For a franchise subject to registration, it also requires delivery of the public offering statement and all proposed agreements at least seven days before you sign or pay (§ 80C.06, subd. 5). Both duties are described under what counts as a violation. A violation of either is a violation of chapter 80C, which section 80C.17 makes actionable. The federal rule leaves room for these state rules. Under 16 C.F.R. § 436.10(b), “The FTC does not intend to preempt the franchise practices laws of any state or local government, except to the extent of any inconsistency with part 436. A law is not inconsistent with part 436 if it affords prospective franchisees equal or greater protection, such as registration of disclosure documents or more extensive disclosures.” The details of Minnesota’s registration and disclosure requirements are on their own page.

How do other states’ franchise laws compare, including Mississippi?

Minnesota is one of several states that add their own pre-sale disclosure duty to the FTC Rule, and the deadlines differ from state to state. Illinois requires delivery, for a franchise required to be registered, “at least 14 days prior to the execution by the prospective franchisee of any binding franchise or other agreement, or at least 14 days prior to the receipt by such person of any consideration, whichever occurs first” (815 ILCS 705/5). Washington requires delivery “at least fourteen calendar days prior to the execution by the prospective franchisee of any binding franchise or other agreement, or at least fourteen calendar days before the prospective franchisee signs a binding agreement with, or makes any payment to, the franchisor or an affiliate in connection with the proposed franchise sale” (RCW 19.100.080). Michigan requires delivery “at least 10 business days before the execution by the prospective franchisee of any binding franchise or other agreement or at least 10 business days before the receipt of any consideration, whichever occurs first” (MCL 445.1508). In each of those states, a payment made before signing starts the clock too. Hawaii requires an offering circular “at least seven days prior to the sale of the franchise” (HRS § 482E-3). Rhode Island requires delivery “Fourteen (14) calendar days prior to the execution of an agreement or payment of any consideration relating to the franchise relationship” (R.I. Gen. Laws § 19-28.1-8). Oregon imposes its duty by administrative rule: “No franchisor shall sell or offer to sell a franchise in this state unless the franchisor delivers” the required disclosure document (Or. Admin. R. 441-325-0020). Those are examples, not a complete list, so a franchisee buying outside Minnesota should check that state’s own statute.

Mississippi has no registration or pre-sale disclosure statute for franchises, but it regulates how a franchise ends. Under Miss. Code Ann. § 75-24-53, a franchisor may not cancel or terminate a franchise “without notifying such person of the cancellation, termination or failure to renew in writing at least ninety (90) days in advance.” The notice is not required when “criminal misconduct, fraud, abandonment, bankruptcy or insolvency of the franchisee, or the giving of a no account or insufficient funds check is the basis or grounds for cancellation or termination.” Under Miss. Code Ann. § 75-24-57, a franchisee who prevails “may be awarded a recovery of damages sustained to include loss of goodwill, costs of the suit, and any equitable relief that the court deems proper.” The FTC Rule’s disclosure timetable still applies to a Mississippi franchise.

Which contract terms cannot take away your Minnesota claims?

A franchise agreement cannot waive the Act’s protections for a franchisee the Act covers, including through a choice-of-law clause. Minn. Stat. § 80C.21 provides that any provision, “including any choice of law provision,” that waives or has the effect of waiving compliance with sections 80C.01 to 80C.22 “is void” if it binds a covered person.

Section 80C.21 covers three groups: a person who, “at the time of acquiring a franchise is a resident of this state”; a partnership or corporation “organized or incorporated under the laws of this state”; and “a person acquiring any franchise to be operated in this state.” A franchisee outside all three groups should not assume the protection applies, because a valid choice-of-law clause may then put the relationship under another state’s law. The Department of Commerce rule adds specific limits. Minn. R. 2860.4400 makes it unfair and inequitable to:

1. Require a franchisee “to assent to a release, assignment, novation, or waiver that would relieve any person from liability imposed by” the Act, with the proviso “that this part shall not bar the voluntary settlement of disputes.”
2. Require a franchisee “to waive his or her rights to a jury trial or to waive rights to any procedure, forum, or remedies provided for by the laws of the jurisdiction, or to consent to liquidated damages, termination penalties, or judgment notes,” with the proviso “that this part shall not bar an exclusive arbitration clause.”

The Minnesota Supreme Court applied the same idea to financing paper in Clusiau. When the franchisor’s assignee tried to use waiver-of-defense provisions in a franchise-required equipment lease against a franchisee entitled to rescission, the court stated: “We hold the provisions contrary to public policy in such circumstances.”

These conflicts can show up in the signing package. A prospective franchisee sent me a disclosure document and franchise agreement package. The national form agreement sent disputes to arbitration in another state under that state’s law and shortened the time to bring a claim. The Minnesota rider said something different on several of those points. Which document controls each point was part of the analysis, so a franchisee should read the Minnesota rider or addendum side by side with the form agreement.

How long do you have to bring a Franchise Act claim?

The Act sets its own limitation period for claims under section 80C.17, measured from when the cause of action accrues. Minn. Stat. § 80C.17, subd. 5 provides: “No action may be commenced pursuant to this section more than three years after the cause of action accrues.” Check the current text before relying on that period.

When a claim accrues depends on the violation and the facts, so the start date for an unregistered sale, a misrepresentation, and a wrongful termination may differ. Common-law fraud and contract claims preserved by subdivision 4 carry their own limitation periods, and a franchise agreement may also contain a clause that tries to shorten the time to sue. More on deadlines for franchise claims is on its own page.

What should you do if you suspect a Franchise Act violation?

A franchisee with a Franchise Act claim has strong remedies in Minnesota. They include rescission and restitution, actual damages that can include lost profits, and fee shifting when the Act claim succeeds. The franchisee may also have claims against the franchisor’s control persons, principal executive officers, and directors. Before deciding which remedy to pursue, I suggest gathering the disclosure document, the date you received it, and your signed receipt, because they show whether and when disclosure happened. I also suggest gathering the franchise agreement with every rider and addendum and every earnings figure or projection the sales team gave you, because they show what you were told. It is also worth checking whether the franchisor was registered or claims an exemption. The deal’s tie to Minnesota matters too: the Act applies to a sale or offer to sell made here, an offer to purchase made and accepted here, or a franchise located here. More on franchise disputes and the franchisee’s side of the relationship is in my franchise law section. I can review your disclosure document, franchise agreement, and sales materials and tell you whether the Act appears to have been violated and which remedies fit. If you would like that review, email aaron@aaronhall.com with a brief description of the situation.