Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—DNJ: Franchisee’s Fraud, New Jersey Consumer Fraud Act, Florida Franchise Act Claims Against Franchisor Dismissed, (Oct 25, 2012)

By John W. Arden, J.D., LLM.

A terminated hotel franchisee’s counterclaims alleging fraudulent inducement, violation of the New Jersey Consumer Fraud Act, lost income, violation of Georgia Fair Business Practices Act, and violation of the Florida Franchise and Distributorship Law were dismissed by the federal district court in Newark, New Jersey (Wingate Inns International, Inc. v. Swindall, October 22, 2012, Cecchi, C.).

In October 1999, Margaret Swindell entered a franchise agreement with Wingate Inns for the operation of a 116-room guest lodging facility in Tallahassee, Florida, for 20 years. The agreement required Swindell to make various payments to Wingate, including royalties, service assessments, taxes, interest, reservation user fees, and annual conference fees. Wingate alleged that Swindell transferred control of the facility and, as a result, terminated the franchise effective November 4, 2010.

On January 12, 2012, Wingate filed an action, seeking an accounting of the revenues earned at the lodging facility during the time it was operated as a Wingate hotel and recovery of outstanding fees. Swindell brought the following counterclaims: (1) fraud based on promises that the hotel would be profitable, (2) violation of the New Jersey Consumer Fraud Act, (3) breach of contract, (4) breach of the implied duty of good faith and fair dealing, (5) lost income, (6) violation of the Georgia Fair Business Practices Act, and (7) violation of the Florida Franchise and Distributorship Law. Wingate then filed a motion to dismiss the first, second, fifth, sixth, and seventh counterclaims.

Fraud

Swindell’s fraudulent inducement claim alleged that, prior to her purchasing the franchise, Wingate’s sales person assured her that the facility would be “an extremely profitable business” and that she would receive “extra marketing dollars” if she built a 116-room facility. Contrary to these promises, Wingate never provided marketing or other support, Swindell alleged.

In order to state a claim for fraudulent inducement, a claimant must establish (1) a material representation of a presently-existing or past fact; (2) knowledge or belief of its falsity; (3) an intent that the other party rely on it; (4) reasonable reliance by the other party; and (5) resulting damage to the other party. Wingate argued that Swindell could not establish the fourth factor, reasonable reliance on a false representation, in light of the express terms of the franchise agreement.

These express terms include (1) a statement that neither Wingate nor its representative has made a representation or promise that is relied on that is not in the written agreement; (2) a statement that no salesperson has made a promise about projected sales, revenues, income, profits, or expenses beyond what is stated in Section 19 of the Uniform Franchise Offering Circular; and (3) a statement that there are no express or implied covenants or warranties, oral or written, between the parties.

Based on these integration clauses, Swindell’s reliance on the alleged prior representations was not reasonable, according to the court. Thus, the fraud in the inducement claim was dismissed.

New Jersey Consumer Fraud Act

Swindell’s claim that Wingate violated the New Jersey Consumer Fraud Act was dismissed on the ground that the Act was inapplicable to the franchise sale. The New Jersey Consumer Fraud Act is intended to protect consumers who purchase “goods or services generally sold to the public at large,” the court noted.

In this case, Swindell did not qualify as a “consumer” and a franchise was not considered “merchandise” within the Act, according to the court.

In J&R Ice Cream Corp. v. CA Smoothie Licensing Corp., the Third Circuit specifically addressed the question of whether the New Jersey Consumer Fraud Act applied to franchises. The appeals court found that it did not because franchises “are businesses, not consumer goods or services. They never are purchased for consumption. Instead, they are purchased for the present value and cash flows they are expected to produce in the future and . . . [and] bear no resemblance to the commodities and services listed in the statutory definition of ‘merchandise’ or the rules promulgated by the Division of Consumer Affairs.”

Application of principles set forth in J&R Ice Cream required dismissal of Swindell’s New Jersey Consumer Fraud Act claim.

Lost Income

Swindell’s claim that Wingate was responsible for her lost opportunity to obtain employment in excess of $100,000 per year, to work for at least 25 years, and to purchase a competing franchise were more appropriately addressed during the damages phase of the litigation, the court held. Thus, the claim for lost income was dismissed.

Georgia Fair Business Practices Act

A claim that Wingate engaged in deceptive practices in violation of the Georgia Fair Business Practices Act was dismissed because the Act did not cover the sale of a franchise, according to the court. The statute prohibits unfair and deceptive acts or practices intended to encourage consumer transactions. “Consumer transactions” refers to “the sale, purchase, lease, rental of goods, services, or property, real or personal, primarily for personal, family, or household purposes.”

Submissions of the parties clearly indicated that Swindell purchased and operated the Wingate franchised hotel as a business and not for personal, family, or household purposes, the court found. Thus, the Georgia Fair Business Practices Act claim was dismissed.

Florida Franchise and Distributorship Law

Finally, Swindell’s counterclaim for violation of the Florida Franchise and Distributorship Law was barred based on a franchise agreement provision requiring application of New Jersey law.

It was clear that New Jersey had significant contacts with the parties and the transaction, since Wingate’s principle place of business was in New Jersey and the parties agreed that any action between them would be heard in Morris County, New Jersey, the court held. The application of the choice-of-law provision was not contrary to Florida public policy because the Florida statute did not contain an anti-waiver provision.

District courts in Florida considering the issue have allowed choice-of-law agreements to bar the application of the Florida franchise statute, the court concluded. Thus, the counterclaim was dismissed.

To the extent that the deficiencies in Swindell’s counterclaims could be cured by way of amendment, the court granted her 14 days to file an amended answer solely for the purposes of amending counterclaims.

The case is Civil Action No. 12-248 (CCC).

David S. Sager (Lowenstein Sandler) for Wingate Inns International, Inc. Mitchell J. Kassoff (Offices of Mitchell J. Kassoff) for Margaret Swindell.

Cases: FranchisingDistribution StateUnfairTradePractices NewJerseyNews