Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D.N.J.: Frozen yogurt franchisor not liable for alleged breaches of contract, (Mar 16, 2015)

By Dan Selcke, J.D.

Franchisor Yogo Factory Franchising, Inc. was entitled to dismissal of an amended counterclaim raised by a Yogo Factory franchisee that was nearly identical to the counterclaim dismissed earlier in the litigation, the federal district court in Trenton, New Jersey, has decided (Yogo Factory Franchising, Inc. v. Ying, March 10, 2015, Wolfson, F.).

Frozen yogurt franchise purchases. Yogo Factory Franchising brought claims for trademark infringement, unfair competition, misappropriation of trade secrets, breach of a certain franchise agreement, and tortious interference against Edmond Ying, a franchisee of three Yogo Factory frozen yogurt outlets in New Jersey, one located in Howell, one in Galloway, and one in Manahawkin. Before purchasing the Galloway and Manahawkin stores, Ying alleged that Yogo’s President, as well as its Franchise Coordinator, represented to him that Yogo would provide, among other things, advertising for the franchises, “effective pre-opening services,” and training programs. Yogo also allegedly provided Ying with expense statements indicating that the stores’ financial performance was “outstanding” and assured him that at least one of the stores was a “turn key” operation.

Ying alleged that Yogo made these representations in an attempt to persuade him to buy the franchises, but there were plenty of indications that he should be wary. For example, with respect to the Galloway store, a franchise disclosure document sent to Ying emphasized, among other things, that the store’s individual performance may differ from those of other franchises in the area, and urged Ying to review the relevant figures with a business advisor before making the purchase. Before buying the Manahawkin store, Ying filled out a questionnaire indicating his understanding that no one at Yogo had made promises regarding the store’s revenue, profits, or operating costs.

Ying signed franchise agreements for the purchase of the Howell and Manahawkin stores, but only signed a “Business Sale Agreement” (BSA) for the purchase of the Galloway store. The BSA included a provision providing that Ying could sell back the franchise to Yogo at the same price at which he purchased it ($650,000.00). About a month into running the Galloway store, Ying became frustrated and exercised this option, although Yogo allegedly still owed him $140,000.00 of the $325,000.00 he had already turned over at the time this opinion was written.

Procedural history. Yogo brought claims for trademark infringement, unfair competition, misappropriation of trade secrets, breach of contract, and tortious interference with contractual obligations. Ying brought a counterclaim for fraud, negligent misrepresentation, and breach of contract. His wife, who had opened her own frozen yogurt business and was also a defendant, brought claims for malicious use and abuse of process. Ying also alleged that Yogo violated the Racketeer Influenced and Corrupt Organizations Act (RICO) as well as the New Jersey Consumer Fraud Act (NJCFA). The court dismissed Ying’s counterclaim, but gave him leave to amend. Ying’s amended counterclaim contained all of the same claims as his first one, except that he added a claim for breach of fiduciary duty. Yogo filed a motion to dismiss Ying’s amended counterclaim.

Breach of fiduciary duty. Although the court had previously given Ying leave to amend his counterclaim, it did not give him leave to bring any new claims. Therefore, it quickly dismissed the claim for breach of fiduciary duty.

Arbitration. Next, the court dismissed all of Ying’s claims—contractual, statutory, and tort—as they related to the Howell franchise, since the Howell franchise agreement contained a provision that required him to resolve those claims in arbitration. The BSA also had an arbitration provision that covered all claims “arising under this contract.” That language was broad enough to cover all of the claims related to the BSA, and the court dismissed those as well.

Manahawkin franchise. The court then turned to the claims made in relation to the Manahawkin franchise agreement, the only claims remaining. It dismissed Ying’s fraud claim for the same reason it had previously been dismissed: Ying failed to show that his reliance on any of Yogo’s alleged misrepresentations concerning the ease with which he would be able to run the franchise was reasonable. The court dismissed Ying’s RICO claim and his claim for negligent misrepresentation along these same lines, indicating that they had already been discussed in detail in the prior opinion.

Breach of contract. Next, Ying alleged that Yogo breached the Manahawkin franchise agreement by failing to follow through on its representations regarding advertising, pre-opening services, training, and the like. None of these obligations were contained in the franchise agreement, which actually specified that Yogo was not obligated, for example, to administer the advertising fund, or to ensure that any franchisee benefits directly from expenditures from the advertising fund. Yogo could not be found liable for alleged contractual obligations that had no basis in the underlying agreement. Accordingly, the court dismissed Ying’s breach of contract claim.

Remaining claims. Wrapping up, the court dismissed Ying’s claim that Yogo had violated the NJCFA, since that statute did not apply to the offer or sale of franchises. As for his wife’s malicious use of process claim, the court dismissed it—just as it had previously dismissed it when considering the initial counterclaim—because a necessary element of that claim was for the other claims to be determined in her favor, which had not happened. The malicious use of process claim, meanwhile, failed as a matter of law because it did not implicate the misuse of any issued process, but rather the filing of Yogo’s claims generally.

The court granted Yogo’s motion to dismiss Ying’s amended counterclaim in its entirety.

The case number is: 13-630

Attorneys: Joyann Kenny (Kenny Law LLC) for Yogo Factory Franchising, Inc. Frank C. Fusco for Edmond Ying and OMG Froyo, LLC.

Companies: Yogo Factory Franchising, Inc.; OMG Froyo, LLC

Cases: FranchisingDistribution NewJerseyNews