Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Ariz.: Failure to open hearing aid franchise allegedly breached franchise agreements , (Dec 8, 2015)

By Michael Menzhuber, J.D., LL.M.

The failure to open a Zounds-branded hearing aid device franchise and to pay franchise fees constituted a breach of the franchise agreement, justifying termination of the franchise, according to a complaint filed in the federal district court in Phoenix (Zounds Hearing Franchising, LLC v. Zounds Metro of Chicago, LTD, December 5, 2015).

Background. Zounds Hearing Franchising, LLC granted third parties the right to own and operate Zounds franchises that featured and sold a proprietary line of Zounds-branded hearing aid devices and related accessories. Zounds Hearing, Inc. (ZHI) sold approved products to the franchisees.

The complaint alleges that Derek Rolison entered into franchise agreements with Zounds to open three franchises in the Chicago area. At the time the franchise agreements were signed, Rolison was required to submit a check for $75,000 to cover the initial $25,000 stock of approved products inventory for each of the three franchised businesses. A $40,000 initial franchise fee also was required for each of the three franchises. However, Zounds deferred payment of these fees until the time that the franchise businesses were opened.

Rolison secured premises for two of the franchises, albeit after the prescribed 90-day period for doing so, and submitted the initial franchise fee to Zounds upon the opening of each location. ZHI shipped the initial $25,000 worth of approved products to each store. Rolison was unable to secure a premise for his third franchise and he requested that, and Zounds agreed to have, ZHI ship the $25,000 worth of approved products that were intended for that franchise to his two open franchise locations, the lawsuit alleges.

According to the complaint, Rolison operated two franchise locations for several months, but had not opened the third franchise, when he sent Zounds a dispute notice claiming that the initial inventory payment constituted the collection of an initial franchise free, in violation of the Illinois Franchise Disclosure Act. After attempting to resolve the matter amicably, Zounds terminated the franchise agreement for Rolison’s failure to open the third franchise.

Zounds and ZHI filed an action against Rolison, the two franchisees that were opened, and the unopened franchise for breach of contract in connection with the failure to open the third franchise. The complaint seeks monetary damages amounting to: (1) the initial franchise fee; (2) royalties; (3) inventory payments; (4) other amounts that Zounds and ZHI would have been entitled to collect if the franchised business had been opened; and (5) attorneys’ fees and costs.

The complaint also seeks a declaratory judgment that: (1) the parties’ agreement to have Rolison pay ZHI for the initial stock of inventory for each franchise location did not constitute collection of an initial “franchise fee” in violation of the IFDA and (2) neither Zounds nor ZHI violated the IFDA in any manner when ZHI collected the initial inventory payment from Rolison.

The case is No. 2:15-cv-02483-SPL.

Attorneys: David P. Brooks (Brooks & Affiliates, PLC) and Jeffrey Zucker (Fisher Zucker LLC) for Zounds Hearing Franchising and LLC; Zounds Hearing, Inc.

Companies: Zounds Hearing Franchising, LLC; Zounds Hearing, Inc.; Zounds Metro of Chicago, LTD.; Zounds Metro of Chicago 2, LTD.; Zounds Metro of Chicago 3, LTD.

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