A federal court in Texas found that franchisor OsteoStrong Franchising, LLC fraudulently induced franchisees to enter franchise agreements and development agreements when it omitted information concerning an officer’s bankruptcy filings and conviction of felony bankruptcy fraud in FDD Items 3 and 4. Simpson v. OsteoStrong Franchising, LLC, 2026 WL 2938504 (S.D. Tex. Sep. 30, 2026). Two groups of franchisees alleged that OsteoStrong obtained its franchise agreements through fraudulent inducement and therefore the agreements were unenforceable. Specifically, the franchisees alleged that OsteoStrong failed to disclose that one of its officers had a criminal history of felony bankruptcy fraud. OsteoStrong asserted counterclaims against the franchisees, alleging that they breached the franchise agreement and development agreements by failing to pay royalty and advertising fees owed, and that one group failed to meet their development schedules.
The court concluded that OsteoStrong’s representations that it had nothing to disclose in Items 3 and 4—which require certain disclosures concerning litigation and bankruptcies—were knowingly or recklessly false given the officer’s criminal history and bankruptcies. Among other findings, the court observed that the officer knew of his own background, his knowledge could be imputed to the company, and no exception applied to avoid the imputed knowledge. The franchisees’ acknowledgement that they had conducted an independent investigation of the opportunity did not abrogate their reliance on OsteoStrong’s representations because the FDD did not contain statements that contradicted the representations in Items 3 and 4. The court’s finding of fraudulent inducement excused the franchisees from performance under the franchise agreements and development agreements; thus, OsteoStrong’s breach of contract counterclaims were dismissed. The court awarded damages to the franchisees that asserted affirmative fraud claims.