Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—3rd Cir.: Doctors Express franchisees fail to establish franchise law violations, misrepresentation, (Apr 3, 2015)

By Greg Hammond, J.D.

Franchisee claims that Doctors Express Franchising misrepresented initial startup costs and capital requirements in its franchise disclosure documents and made “deleterious system-wide changes” failed to state a claim for violation of the Maryland Franchise Registration and Disclosure Law, violation of the New Jersey Franchise Practices Act, misrepresentation, or breach of contract. Dismissal of the claims by the federal district court in Trenton, New Jersey, was upheld by the U.S. Court of Appeals in Philadelphia (Fabbro v. DRX Urgent Care, LLC, April 1, 2014, Scirica, A.).

Doctors Express franchisees Laura Fabbro and Surendra Pai, along with their associated entities, alleged that Doctors Express Franchising, LLC violated the Maryland and New Jersey franchise laws; breached their franchise agreements; breached the implied covenant of good faith and fair dealing; and committed common law fraud and negligent misrepresentation.

Specifically, the franchisees asserted that Doctors Express misrepresented initial startup costs and capital requirements in its financial disclosure documents; their costs substantially exceeded Doctors Express’ estimates; and Doctors Express and current franchisor, DRX Urgent Care, LLC, made “deleterious system-wide changes.” The district court dismissed the action for failure to state a claim, and the franchisees appealed to the Third Circuit.

First, the appellate court affirmed that the dismissal of breach of contract claims because the franchisees did not cite a single provision of the franchise agreement that was allegedly breached. Rather, the figures challenged by the franchisees were expressly estimates based on an affiliate in Maryland, with a caveat that the franchisees’ costs would depend on various factors, such as local economic and market conditions. The franchisees also failed to allege why understating the required initial start-up costs, capital investment, and operating “working capital” constituted a breach of contract.

The breach of implied covenant of good faith and fair dealing claim failed under both Maryland and New Jersey law because Maryland does not recognize an independent cause of action and the franchisees failed to allege bad motive or intention as required by New Jersey law.

The court determined that because the alleged misrepresentations were not actionable, the common law fraud and negligent misrepresentation claims were also correctly dismissed. According to the court, predictions or promises concerning future events are necessarily approximate. Statements that are merely promissory in nature and expressions concerning future events are not actionable as fraud under Maryland law. Statements concerning future events, expectations, or intended acts do not constitute misrepresentations under New Jersey law, unless they were made with the intent to deceive.

The appeals court upheld the dismissals of the franchise law claims. Contrary to the franchisees’ contentions, their franchise was not “constructively terminated” by the franchisor in violation of the New Jersey Franchise Practices Act. The franchisor was alleged to have constructively terminated the franchise by making material changes to the business model “that have harmed, rather than helped, franchisees” and by stubbornly enforced strict requirements. The Third Circuit found no constructive termination because the franchisor did not manifest an intent to cease doing business with the franchisees. “We have found no allegations from which to reasonably infer DRX would want to terminate plaintiffs’ franchises, and plaintiffs have identified none.” To the contrary, the franchisees alleged that they continued making weekly royalty payments and were “in good standing.”

Claims brought under Maryland Franchise Registration and Disclosure Law were properly dismissed on statute of limitations grounds, since they were not brought within three years of the grant of the franchise.

The case numbers are 14-1734 and 14-1735.

Attorneys: Gerald A. Marks (Marks & Klein) for Laura Fabbro and Surendra Pai. Andrew J. Hughes (Blank Rome) and James C. Rubinger (Plave Koch) for DRX Urgent Care LLC.

Companies: DRX Urgent Care, LLC; Doctors Express Franchising, LLC

Cases: FranchisingDistribution DelawareNews NewJerseyNews PennsylvaniaNews