Paul Porvaznik

Fisher Kanaris, P.C.

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You are here: Home / Business Torts / Franchisor’s Financial Projections Don’t Equal Fraud – Ill. Law

Franchisor’s Financial Projections Don’t Equal Fraud – Ill. Law

November 19, 2013 by PaulP

In many fraud cases, defendants reflexively assert some variant of the “forward looking” or “promissory” fraud defense: that the misstatement relates to a future event and is therefore a non-actionable statement of opinion.

Illinois fraud rules require a misrepresentation to be material and present-tense factual  to be actionable.  Statements of future intent – like a forecast or projection (“this company is gonna make millions within its first year!”) are considered opinions and do not equal fraud under the law.

The First District delves into the scope of promissory fraud in Avon Hardware v. Ace Hardware, 2013 IL App (1st) 130750, a franchise dispute between an independent store against a national chain.

The plaintiffs, two hardware store franchisees, sued Ace on various fraud theories after their franchises failed.  Plaintiffs claimed that Ace made false statements of past and future financial performance in several documents supplied by the hardware giant.

The documents all contained cautionary language warning the plaintiffs not to rely on them and said the financial projections were “mere estimates.”  They also contained a non-reliance clause explicitly stating the franchisee was not relying on any sales or profits guarantees.  ¶¶ 5-7.

Despite the rampant warnings, Plaintiffs sued Ace for fraud when the stores failed.  Plaintiffs claimed that in order to entice their investment, Ace painted a too-rosy financial picture of what plaintiffs could expect to earn from the franchises and distorted results of similar Ace franchisees.

Ace moved to dismiss based on the documents’ cautionary language and disclaimers. The trial court granted Ace’s motion to dismiss all complaint counts.

Held: Affirmed.

Rules and Application:

In Illinois, a fraud plaintiff must prove:  (1) a false statement of material fact; (2) knowledge of or belief in the statement’s falsity; (3) intention to induce the plaintiff to act on the statement; (4) reasonable reliance on the statement’s truth by the plaintiff; and (5) damage to the plaintiff resulting from the reliance. ¶ 15.

Negligent misrepresentation has the same elements as fraud except instead of proving defendant’s knowledge of falsity, plaintiff only has to show that defendant was careless or negligent in ascertaining the truth of the challenged statement.  ¶ 15.

Fraud and negligent misrepresentation claim must be based on a present statement of fact.  Financial projections are generally considered statements of opinion, not fact.  And while statements of future income are not actionable, statements of historical income of a business are sufficiently factual for fraud claims. ¶¶ 16-17.

The Court dismissed plaintiffs’ fraud claims because much of the challenged data was forward-looking and contained expansive cautionary language: the documents were “replete with warnings” that defendants shouldn’t rely on them.  Moreover, Ace’s documents contained anti-reliance language that stated that plaintiffs hadn’t received or relied on any Ace guarantees of future sales, profits or success.  ¶¶ 9, 21.

Taken together, the Ace documents’ glaring disclaimers prevented plaintiff from alleging Ace’s material misstatement or reliance – two necessary fraud elements.

Take-aways: Cautionary language or anti-reliance clauses in a contract will be upheld if the terms are textually clear and there’s no disparity in bargaining power between the parties.

The case also reaffirms that statements of future economic prospects are considered opinions; while statements of historical financial performance are factual enough for a fraud claim.

 

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Filed Under: Business Torts Tagged With: anti-reliance clause, bespeaks caution, fraud in the inducement, non-reliance, promissory fraud

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