Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—5th Cir.: Franchisees’ deceptive trade practices counterclaims properly dismissed, (Apr 7, 2016)

By Linda O’Brien, J.D., LL.M.

Franchisees could not maintain deceptive trade practices and FTC Franchise Rule violation counterclaims against a frozen yogurt franchisor because its deceptive trade practices claims were time-barred and the FTC Franchise Rule does not provide a private right of action, the U.S. Court of Appeals in New Orleans has ruled. Thus, the district court’s dismissal of the franchisees’ counterclaims was affirmed (Yumilicious Franchise, L.L.C. v. Barrie, April 6, 2016, Elrod, J.).

Yumilicious is a Texas-based self-serve frozen yogurt franchisor. In 2010, Why Not, LLC and three individual principals entered into two franchise agreements with Yumilicious to open two yogurt shops in South Carolina. The individual principals signed a principals’ guaranty and assumption agreement, guaranteeing that Why Not would pay all of its obligations under the franchise agreements in a timely fashion.

Yumilicious filed suit, alleging that Why Not and its principals breached the franchise agreement by closing a yogurt store without prior authorization, failing to pay royalties, and failing to pay for yogurt products they ordered. The principals filed counterclaims for breach of contract, fraud, negligent misrepresentation, and violations of the Texas Deceptive Trade Practices Act (DTPA) and FTC Franchise Rule. In August 2014, the court dismissed the defendants’ DTPA counterclaim as time-barred. In May 2015, the defendants’ counterclaim against the franchisor based on violations of the FTC Franchise Rule was also dismissed. The defendants appealed the dismissal of its counterclaims.

DTPA. The appellate court determined that the district court’s dismissal of Why Not’s DTPA claims was appropriate. Why Not alleged that Yumilicious did not disclose information regarding approved vendors for required products and underestimated start-up costs. Why Not also alleged that a Yumilicious executive indicated that the franchisor was negotiating with a national distributor that would offer fair shipping costs. According to the court, Why Not failed to allege that Yumilicious knew any details about the start-up costs and that Why Not acknowledged that it was aware throughout distributor negotiations that it would have to obtain supplies from the current supplier in certain quantities. Thus, there was no liability under the DTPA for failure to disclose facts about which Yumilicious did not know.

The statements made by the Yumilicious executive did not constitute misrepresentations under the DTPA, since it was undisputed that Yumilicious was engaging in negotiations with the distributor at that time. The failure of those negotiations did not make the prior statements false, in the court’s view.

FTC Franchise Rule. Why Not’s counterclaim alleged that Yumilicious violated the FTC Franchise Rule by making the same incomplete disclosures that were that the basis of its DTPA claim. According to the court, the FTC Act does not provide for private causes of action. Why Not’s argument that the DTPA incorporates the FTC Act and any violation of an FTC rule is a per se violation of the DTPA was rejected. The court noted that no provision of Texas law declared violations of the Franchise Rule an actionable deceptive trade practice under the DTPA or directly incorporated the requirements of the Franchise Rule. Furthermore, even if a violation of the Franchise Rule was a deceptive trade practice, Why Not failed to plead the other elements of the DTPA—status as a consumer, detrimental reliance, and injury. Therefore, the district court did not err in dismissing Why Not’s counterclaim for FTC Franchise Rule violations, the court concluded.

The case is No. 15-10508.

Attorneys: Todd C. Donohue (Wolf Law Firm, PC) and Aaron Douglas Davidson (Klemchuk, LLP) for Yumilicious Franchise, LLC. Gary E. Smith (Gary E. Smith, PC) for Matthew Barrie.

Companies: Yumilicious Franchise, L.L.C.

Cases: FranchisingDistribution LouisianaNews MississippiNews TexasNews