Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Ky.: Contract, deceptive practices, FTC disclosure rule claims fail, (May 6, 2016)

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

A prospective cycling studio franchisee’s claims for breach of contract, deceptive practices, and failure to comply with the FTC franchise disclosure rule—brought after a franchisor refused to grant a franchise—were dismissed by the federal district court in Lexington, Kentucky (859 Boutique Fitness LLC v. Cyclebar Franchising, LLC, May 5, 2016, Caldwell, K.).

After a period of negotiations with Cyclebar Franchising, LLC for a ten-year franchise for an indoor cycling studio, 859 Boutique Fitness LLC members signed a franchise agreement. The agreement was not signed by Cyclebar. Two days after Boutique signed the franchise agreement, Cyclebar informed Boutique that it would not be granted a franchise and that the franchise fees Boutique had paid would be refunded.

Boutique filed a complaint against Cyclebar for damages for lost profits and detrimental reliance. The complaint alleged: (1) breach of contract; (2) promissory estoppel; (3) breach of warranty; (4) misrepresentation; (5) false, misleading, and deceptive representation in violation of Kentucky’s Consumer Protection Act; (6) deceptive trade practices based on violation of the FTC franchise disclosure rule; and (7) punitive damages. Cyclebar responded by filing a motion to dismiss all seven counts.

The court determined that Boutique’s breach of contract claim was barred by Kentucky’s statute of frauds because the franchise agreement was never signed by Boutique or any of its authorized representatives. Boutique’s promissory estoppel claim failed because promissory estoppel cannot be used to enforce an agreement that is left otherwise unenforceable by Kentucky’s statute of frauds. Boutique’s breach of warranty claim also failed because Cyclebar never signed the franchise agreement. As such, there was no enforceable contract between the parties, and Boutique did not offer any theory for relief under Kentucky’s Uniform Commercial Code.

Boutique’s misrepresentation claim failed because it did not satisfy the particularity requirements of Federal Rule of Civil Procedure 9(b). Specifically, the court found that Boutique failed to allege any damages that stemmed from reliance on any of Cyclebar’s alleged misrepresentations. Although the court dismissed the claim, it did so without prejudice and with leave to amend.

The claim for relief under the Kentucky Consumer Protection Act failed because the statute provides a private cause of action only to an individual who purchases or leases goods or services primarily for personal, family, or household purposes. The deceptive trade practices allegations based on the FTC franchise disclosure rule were dismissed because the rule does not create a private right of action. Boutique’s cause of action for punitive damages was rejected because a claim for punitive damages is not a separate cause of action but, rather, an available remedy, according to the court.

The case is No. 5:16-cv-018-KKC.

Attorneys: Masten Childers, III (McBrayer, McGinnis, Leslie & Kirkland, PLLC) for 859 Boutique Fitness, LLC. Emily Larish Startsman (Stites & Harbison PLLC) for Cyclebar Franchising, LLC.

Companies: 859 Boutique Fitness, LLC; Cyclebar Franchising, LLC

Cases: FranchisingDistribution StateUnfairTradePractices KentuckyNews