Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Ariz.: Former franchisee fails to state consumer fraud claims against pizza restaurant franchisor, (May 9, 2014)

By Linda O’Brien, J.D., LL.M.

Former pizza restaurant franchisees failed to state a claim against a pizza restaurant franchisor for violations of the FTC Act and Arizona Consumer Fraud Act in relation to the alleged breach of the franchise agreement, the federal district court in Phoenix has ruled (Cornelis v. B&J Smith Associates, LLC, May 8, 2014, Bade, B.).

In 2006, Terrance and Yvonne Cornelis entered in a franchise agreement with B&J Smith Associates to operate an Eatza Pizza franchise. The franchise offering document stated that the franchise had developed a successful business plan and a distinctive restaurant design and food items. The document also stated that the restaurant system featured the highest standards of management training, supervision, merchandising, and quality food products. Under the agreement, the couple paid franchise fees, leased business space, and prepared to open an Eatza Pizza restaurant. In 2007 B&J sold Eatza Pizza to International Franchise Associates, Inc. (IFA), which later filed for bankruptcy.

The Cornelises filed suit against B&J, alleging breach of contract, fraud, and violations of the FTC Act and Arizona Consumer Fraud Act. The plaintiffs alleged that Eatza Pizza and, subsequently IFA, failed to provide them with training, support, or a viable business plan to help them develop a profitable restaurant. The plaintiffs also alleged that they were unaware of the sale of Eatza Pizza to IFA and that IFA was an undercapitalized company formed to avoid Eatza Pizza’s contractual obligations. Due to Eatza Pizza’s failure to comply with its franchisor obligations, they were forced to cease operating their Eatza Pizza restaurant. B&J moved for dismissal.

FTC Act. The court found that the plaintiffs could not assert a cause of action under the FTC Act. The FTC Act prohibits unfair and deceptive acts or practices in or affecting commerce. The protections against unfair trade practices under the Act vests solely with the FTC and the Act does not create a private right of action.

Arizona Consumer Fraud Act. The Arizona Consumer Fraud Act prohibits any deceptive or unfair act or practice, fraud, misrepresentation, or omission of a material fact with the intent that others rely on such omission, in connection with the sale or advertisement of any merchandise. A consumer fraud action must be initiated within one year after the cause of action accrues. In this case, the plaintiffs alleged that they discovered the fraud in June 2008. Thus, their consumer fraud claim was time barred since their suit was initiated in 2013, after the one-year statute of limitations expired, the court concluded.

The case is No. CV-13-00645-PHX-BSB.

Attorneys: Terrance Cornelis, pro se. Jeremy Michael Goodman (Goodman Law PLLC) and Theodore Floyd Stokes (Law Offices of JD Denny PLLC) for B&J Smith Associates LLC and B&J Smith Investments Inc.

Companies: B&J Smith Associates, LLC; B&J Smith Investments Inc.

Cases: FranchisingDistribution ArizonaNews