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Under Illinois Law, Projections as to Future Sales Figures Given to Franchisees by a Franchisor to Entice Them to Purchase Franchises Were Held Not Actionable As Fraud

An Illinois court recently held that projected sales figures contained in pro formas given to franchisees by the franchisor, presumably to entice the franchisees to purchase a franchise, were statements of opinion rather than fact, and thus could not be the basis of the franchisees’ fraud and negligent misrepresentation claims when the franchisees actual sales figures never met expectations. 

In Avon Hardware Co., et al.  v. Ace Hardware Corp, 2013 IL App (1st) 130750, 2013 WL 5783335 (Ill. App. 1 Dist.), two hardware franchisees sued Ace Hardware alleging they had been fraudulently induced to enter franchise agreements based on Ace’s project sales estimates that were never achieved once the stores were in operation.   The plaintiffs entered into franchise agreements with Ace to operate new hardware stores to compete with big box retailers such as Lowes and Home Depot.  Presumably to entice them to purchase the franchises, Ace provided plaintiffs with a “pro forma” document containing sales and cash flow forecasts as well as historical data concerning the sales and revenues of existing stores.  The plaintiffs allege that the pro forma document led them to believe their stores would be successful, thereby inducing them to purchase the franchises.  

Unfortunately, the plaintiffs’ stores never approached the forecasted sales and revenue figures contained in the projections and ultimately failed.  Plaintiffs then sued Ace, alleging that Ace knew the stores would never make meet the sales projections and alleging that Ace intentionally used fraudulent and misleading historical sales and projected figures to entice the Plaintiffs to purchase the franchises.

On appeal, the Illinois Appellate Court explained that the basis of a fraud or negligent misrepresentation claim must be a statement of fact, not an expression of opinion.  The Court further explained that, generally speaking, financial projections are considered to be statements of opinion, not fact.   Accordingly, the court had to decide whether Ace’s alleged manipulation of the financial data contained in the pro forma constituted false statements of fact.  Ultimately, the court agreed with Ace that the plaintiffs’ allegations based on the projected sales figures, such as those contained in the pro forma document, were not actionable because they were merely an expression of opinion about future performance.  

The court did caution, however, that certain of Ace’s representations as to historical financial performance of its stores could be actionable, although the court ultimately determined that the historical data Ace provided in this case was not false or misleading.