On the first day of the course on corporations in law school (more years ago than we would care to admit), we learned that one of the advantages of creating a corporate entity was the "limited liability" protection from company debts and obligations that this business structure affords to company officers and employees. With respect to tortious acts such as fraud or misrepresentation, however, an exception swallows this general rule.
The common and statutory law of many states allow for the imposition of personal liability upon corporate officers who actively participate in tortious conduct such as fraud. See e.g., Frontier Management Co. v. Belboa Ins. Co., 658 F.Supp. 987, 991 (D. Mass. 1986) (noting the well established principle in Massachusetts that corporate officers are personally liable for any tortious activity in which they personally participate).
This is no less true in the franchise arena. For example, as recently noted in KC Leisure v. Haber, 972 So.2d 1069, 1073 (Fla.App. 2008), an individual defendant may be liable under the FTC Act for the deceptive practices of a corporation, where corporate liability is established and where that individual actively participated in or had some measure of control over the corporation's deceptive practices. Similarly, in Vysovsky v. Glassman, 2007 WL 3130562 (S.D.N.Y. 2007), the court held that the defendant franchisor's sole shareholder, who was also its director and president, could be found jointly and severally liable under the New York Franchise Sales Act for materially aiding in the alleged statutory violations.
The longstanding policy behind these cases and statues is embodied within the Amended FTC Franchise Rule. Under the Amended Rule, it is an unfair or deceptive act or practice in violation of Section 5 of the FTC Act for any "franchise seller" to engage in certain prohibited acts or omissions, such as making an oral claim that contradicts the information contained in the franchisor's disclosure document. 16 CFR 436.9. It is the FTC's clarification of the Rule's broad scope that we find to be particularly noteworthy: the Amended Rule applies to all persons engaged in franchise sales activity.
To prevent deceptive sales practices, the FTC intended to clearly delineate all parties that are subject to the provisions of the Amended Rule as "franchise sellers". The FTC accordingly defined "franchise sellers" to include not only persons who offer for sale, sell, or arrange for the sale of a franchise, but also "the franchisor and the franchisor's employees, representatives, agents, subfranchisors, and third-party brokers who are involved in franchise sales activities." 16 CFR 436.1(j). The FTC can likewise obtain consumer redress against individuals who merely prepare disclosure documents, so long as such individuals have the authority to control the preparation of the disclosure documents (such as a sales manager) and have knowledge that the disclosures are false or otherwise inaccurate. 72 Fed. Reg. 15445, 15515 (Mar. 30, 2007).
Under the Amended Rule, a franchisor must identify and include on its disclosure document receipt page contact information for those particular sellers "offering the franchise." That means those persons who receive a sales commission if the deal is consummated, as well as individuals who have significant contacts with the prospective franchisee, such as providing assistance with the franchise application or engaging in ongoing conversations.
The net result is that the FTC considers most franchise brokers and referral companies to be "franchise sellers" under the Amended Rule and must be disclosed as such within the disclosure document's Item 23 receipt page. As stated in the Amended Rule's Statement of Basis and Purpose, the disclosure of franchise sellers is "helpful for law enforcement purposes, identifying who may be responsible for furnishing the disclosures." 72 Fed. Reg. 15445, 15513 (Mar. 30, 2007).
The recent changes to the FTC Rule thus place franchisor officers, directors, brokers, referral companies and even middle management employees in a comparable position to corporate officers and employees generally, to wit: one's active participation in deceptive franchise sales practices may well result in the imposition of individual liability.
