Topics in the following two sections may be uncomfortable to discuss. But it is far better to disclose something on your terms, and tell your side of the story, versus not being transparent and having it come back later that you not only had the issue, but you withheld it from prospective franchisees. The coverup is worse than the crime.
In this section of the FDD, for the franchisor, predecessor, parent, any affiliate that either financially backs the franchisor or offers franchises using the franchisor’s trademarks, or anyone disclosed in Item 2, you need to disclose the following litigation:
If your eyes glazed over reading the above, you are not alone. That is why you hired us to exercise our judgment into what needs to be disclosed and what doesn’t. If anyone mentioned in Item 2 or any entities associated with the franchisor has been a party to any litigation in the last ten years, just let us know, and we will talk through whether or not it needs to be disclosed.
For the required disclosures of litigation, we need the case number, parties, a brief description of the underlying circumstances, and the current status or how it was resolved. Even if there was a settlement and the settlement says that it’s confidential, it still needs to be disclosed according to the guidelines. That is why you have a franchise law firm helping you prepare your FDD, for us to walk you through this part of the disclosure. And remember, we are your lawyers and bound by confidentiality. So, like the privilege you have with your doctor, you can feel free to tell us anything related to an ugly event in your past that we will work through as your advocate.
ITEM 3: LITIGATION
Pending Actions
Blank v. Belmont Mufflers, Inc., No. 06-111 (M.D. Fla. filed August 1, 2007).
Five franchisees filed suit against us for breach of contract, alleging that we failed to furnish equipment in the time period stated in our franchise agreement. These franchisees seek damages of $350,000. A trial is scheduled for later in 2007.
Prior Actions
Doe v. Belmont Mufflers, Inc., No. 05-312 (IRT) (S.D.N.Y. filed March 1, 2005).
Our franchisee, Donald Doe, sought to enjoin us from terminating him for nonpayment of royalty fees. On April 3, 2006, Doe withdrew the case when we repurchased his franchise for $90,000 and agreed not to enforce non-compete clauses against him.
Governmental Actions
Indiana v. Belmont Mufflers, Inc., No. 05-123 (S.D. Ind. filed April 1, 2005).
The Attorney General of Indiana sought to enjoin us, our president Jane Doe, and franchise coordinator Phillip E. Smith, from offering unregistered franchises and using false income representations. The court found that we had offered franchises, that the offers were not registered, and that we had made the alleged false representations. The court enjoined us from repeating those acts.
FTC v. CFT, International Inc., No. 03-222 (D. Minn. filed March 1, 2003).
The Federal Trade Commission filed suit against our parent CFT International, Inc., that guarantees delivery of pipe and equipment to our franchisees. The Commission alleged that CFT violated the Commission’s Mail or Telephone Order Merchandise Rule. The Commission obtained an injunction and a civil penalty of $20,000.
Litigation Against Franchisees in the Last Fiscal Year
During fiscal year 2007, Belmont Mufflers initiated seven lawsuits against franchisees as follows:
Suits to Collect Royalty Payments
Belmont Mufflers vs. Smith, No. 457-123 (E.D. La. 2007) Belmont Mufflers vs. Jones, No. 07-890 (S.D. Fla. 2007) Belmont Mufflers vs. Taylor, No. 07-123 (D. Nev. 2007)
Suits to Enforce System Standards
Belmont Mufflers vs. Stevenson, No. 28-098 (C.D. Cal. 2007)
Belmont Mufflers vs. Rogers, No. 2244 (D. R.I. 2007)
Suits to Enforce Covenant-Not-To-Compete
Belmont Mufflers vs. Baker, No. 07-123 (S.D. Fla. 2007)
Belmont Mufflers vs. Harris, No. 072244 (D. Nev. 2007)
Other than these actions, no litigation is required to be disclosed in this disclosure document.