6th CIRCUIT RULES THAT "FRANCHISOR" MUST REFUND ALL PAYMENTS AND COSTS AND PAY ATTORNEY FEES TO "UNINTENDED" FRANCHISEE

 On January 27, 2017 the Sixth Circuit Court of Appeals affirmed a trial court verdict, holding that the relationship between plaintiff and defendant constituted a franchise.  Then, it held that where a franchisor had not provided a Franchise Disclosure Document (FDD), under Michigan law, the franchisee was entitled to refund of all fees, attorney fees and costs, plus a refund of payments made for any equipment that was used and returned to the franchisor.  Lofgren v AirTrona Canada  ---Fed. Appx. --- (2017).

The defendant denied that it was a franchisor, but the court found to the contrary.  The court noted that while the franchisee had relative autonomy over day-to-day operations, since  the business was reliant of the use of the AirTrona name, the training AirTrona provided, assistance with obtaining business relationships and the requirement for certain business equipment and uniforms, that the relationship was, indeed a franchise. Further, the court held that payment for goods at over market rates was sufficient to establish that a franchise fee was paid.

The court then held that since the relationship was a franchisor-franchisee one, under the Michigan Franchise Investment Law, the franchisee was entitled to a refund of all the amount paid for the franchise and the costs for equipment which was purchased and returned (even though it had been used).  The court also held that the defendant had to pay 12% interest as provided by MCL 445.1531 and the plaintiff's attorney fees.

This case serves as a warning to franchisors that there are severe financial ramifications for a failure to provide a timely FDD.  Further, it should serve as a warning to all businesses who allow others to use their ideas equipment or business systems, that great care should be taken with the contractual relationship between the parties to insure that an unintended franchise relationship isn't created.