How does the litigation history involving Chatime's affiliate (Item 3) potentially affect the franchisee's ability to secure financing, given the lack of financing options from the franchisor (Item 10)?
Chatime Franchise · 2025 FDDAnswer from 2025 FDD Document
[Item 3: Litigation]
In re Chatime USA, LLC, State of Washington, Department of Financial Institutions, Securities Division, Consent Order No. S-19-2701-19-0001. On or about August 4, 2016, our affiliate Chatime USA LLC entered into a five-year Master Franchise Agreement with a Canadian company based in Edmonton, Alberta (the "Alberta Master Franchisee") pursuant to which our affiliate Chatime USA LLC granted the Alberta Master Franchisee master franchise rights in Washington. In 2019, the Washington Department of Financial Institutions (the "Department") began an investigation into our affiliate Chatime USA LLC's prior franchising activities in connection with its application for franchise registration. The Department concluded that the sale to the Alberta Master Franchisee violated Washington franchise law because (i) Chatime USA LLC granted master franchise rights to the Alberta Master Franchisee in Washington without first obtaining franchise registration in Washington, and (ii) Chatime USA LLC did not provide the Alberta Master Franchisee with a U.S. disclosure document. Under the terms of a consent order dated September 16, 2019, our affiliate Chatime USA LLC agreed to cease and desist from the sale of franchises in Washington in violation of Washington franchise law and paid the Department $2,500 for the costs of its investigation.
Item 3: Litigation
Investigation by Letitia James, Attorney General of the State of New York, of La Kaffa International Co., Ltd., Chatime USA, LLC, and Yao-Hui Wang. In December 2018, the Attorney General of the State of New York (the "NYOAG") began to inquire into the activities of our affiliate Chatime USA LLC and La Kaffa pursuant to New York General Business Law, Article 33, §680 et seq., also known as the New York State Franchise Sales Act (the "NY Franchise Sales Act"). The inquiries were made in connection with the issues of whether our affiliate Chatime USA LLC and La Kaffa sold franchises from or in New York without satisfying the pre-requisite of registering the franchise offerings with the NYOAG or otherwise having a franchise registration
exemption. The NYOAG found that our affiliate Chatime USA LLC and La Kaffa sold franchises from or in New York without being registered or exempt from registration. On November 25, 2019, our affiliate Chatime USA LLC, La Kaffa, and Yao-Hui Wang entered into an Assurance of Discontinuance with the NYOAG (the "Assurance of Discontinuance") prohibiting our affiliate Chatime USA LLC and La Kaffa from engaging in, or attempting to engage in, conduct in violation of the NY Franchise Sales Act. Further, pursuant to the Assurance of Discontinuance, (i) our affiliate Chatime USA LLC and La Kaffa were required to offer rescission to franchisees that were sold franchises in violation of the NY Franchise Sales Act, and (ii) our affiliate Chatime USA LLC and La Kaffa were required to pay $25,000 in penalties and costs to New York.
What This Means (2025 FDD)
According to Chatime's 2025 Franchise Disclosure Document, Item 3 details the litigation history of Chatime's affiliate, Chatime USA LLC. Specifically, it mentions two instances: one involving the Washington Department of Financial Institutions and another involving the Attorney General of the State of New York. These legal issues could raise concerns for potential lenders.
The Washington case involved Chatime USA LLC granting master franchise rights in Washington without proper registration and disclosure, resulting in a consent order to cease sales in Washington and a $2,500 payment for investigation costs. The New York case found that Chatime USA LLC and La Kaffa sold franchises in New York without proper registration, leading to an Assurance of Discontinuance, required rescission offers to affected franchisees, and $25,000 in penalties and costs.
Since Chatime does not offer direct financing to franchisees (as noted in the question), franchisees must seek funding from third-party lenders. These lenders will conduct due diligence, which includes reviewing the franchisor's litigation history. The legal issues involving Chatime's affiliate could make lenders hesitant to provide financing due to perceived risks. A prospective franchisee should discuss these litigation matters with Chatime to understand the current status and potential impact on their ability to secure financing.