a. If the purpose of the offering circular is to ensure that the franchisor discloses all relevant facts, was that purpose achieved with the Rocky Mountain offering circular?
b. Why did Stanford Evavold ask the Rocky Mountain sales person his opinion about their budget?
c. What is wrong with that?
Rocky Mountain is a franchisor of stores that sell chocolate and other candies. Kristine and Scott Kieland's Rocky Mountain store failed four years after they purchased it. Kathleen and Stanford Evavold's franchise was not as profitable as they thought it would be. Rocky Mountain had given both the Kielands and the Evavolds a uniform franchise offering circular (UFOC) before they signed their franchise agreements.
Rocky Mountain required that its franchisees purchase a point of sale cash register system (POS system). At the time the Kieland's signed their agreement the POS system was $3,000 per register with an annual maintenance fee of $773. Their agreement stated, "We may require you to upgrade or update your POS Systems. No contractual limitation exists on the frequency or cost of this obligation."
Shortly after signing their agreement, the Kielands learned that they would have to purchase a new POS System (referred to as AIM) for $20,000 per register with an annual maintenance fee of almost $2,000.
Stanford Evavold e-mailed a pro forma budget to Kraig Carlson, a Rocky Mountain salesperson. The email stated, "I don't believe you can state if these (numbers) appear reasonable, but maybe you can tell me if it is a "rainy day" or a "sunny day". Carlson responded that the numbers "did not raise any issues with him." Based on this, the Evavold's signed another agreement that stated "The Franchisee acknowledges and agrees that no representations have been made to it by the Franchisor regarding projected sales volumes, market potential, revenues, or profits of the Franchisee's Store."
The Kielands and the Evavolds sued Rocky Mountain for violating the Minnesota Franchise Act by failing to disclose the cost of the new AIM system and by approving Evavold's earnings estimate. Had they known all the relevant facts, the Kielands and the Evavolds would not have purchased a Rocky Mountain franchise. Rocky Mountain filed a motion for summary judgment.