Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D.N.C.: Alleged franchisor of children’s newspaper may be liable for nondisclosure of financial information, (Jan 6, 2015)

By Jody Coultas, J.D.

An alleged franchisor of a free children’s newspaper might be liable under the North Carolina Unfair and Deceptive Trade Practices Act (UDTPA) for failing to disclose financial information prior to entering a license and distribution agreement, according to the federal district court in New Bern, North Carolina (Hometown Publishing, LLC v. Kidsville News!, Inc., January 5, 2015, Flanagan, L).

Kidsville News!, Inc. agreed to grant Hometown Publishing a non-exclusive, non-transferable license to use Kidsville’s trademarks in connection with publishing KIDSVILLE NEWS! ®. Hometown alleged that Kidsville violated the North Carolina Unfair and Deceptive Trade Practices Act (UDTPA) by failing to provide a disclosure documents required by the FTC Franchise Rule and holding itself out as a licensor rather than a franchisor.

Hometown argued that the parties’ relationship was one of franchisor-franchisee rather than licensor-licensee. Under the Franchise Rule, franchisors are required to disclose certain financial information prior to the sale of a franchise. The lack of required disclosures allegedly prevented Hometown from fully evaluating whether there were any red flags that Hometown should know about the opportunity being offered by Kidsville.

Kidsville brought a motion for summary judgment, but a magistrate judge entered a memorandum and recommendation that the motion be denied. Kidsville objected to the magistrate judge’s determination that the UDTPA applied, contending that Hometown suffered no harm in North Carolina. It further objected to the conclusion that Kidsville did not challenge the sufficiency of the allegations supporting the UDTPA claim.

Kidsville’s argument that application of the UDTPA in this case violated the Due Process and/or Commerce Clause of the United States Constitution was dismissed by the court. Hometown’s complaint clearly alleged that “all or a substantial portion of the events” giving rise to the UDTPA claim transpired in North Carolina. The parties’ agreement was executed and performed in North Carolina, applied North Carolina law, and any violation of the Franchise Rule governing disclosures constituted an act in North Carolina.

Hometown sufficiently alleged a UDTPA claim, according to the court. In order to establish a UDTPA claim, a plaintiff must show the defendant committed an unfair or deceptive act or practice in or affecting commerce, and that the act proximately caused injury to the plaintiff. Kidsville objected to the magistrate judge’s determination that Hometown sufficiently pleaded the “commerce” element. The argument depended entirely on whether commerce requires a substantial detrimental impact on Hometown’s North Carolina business operations. Commerce, as defined by the statute, refers to “all business activities, however denominated, but does not include professional services rendered by a member of a learned profession.” Hometown satisfied this element by alleging that it was engaged in business with Kidsville, which does not provide professional services.

Kidsville also argued that Hometown failed to sufficiently plead substantial aggravating circumstances. A plaintiff must allege egregious or aggravating circumstances when the UDTPA claim arises from a contractual obligation. However, the facts of the case did not require Hometown to allege aggravating or egregious circumstances, according to the court. The court reserved ruling on whether further factual developments may necessitate evidence of egregious or aggravating circumstances to support a UDTPA claim in this case.

Based on the above analysis, the court overruled Kidsville’s objections and adopted the memorandum and recommendation.

The case is No. 5:14-CV-76-FL.

Attorneys: Mario L. Herman (Law Office of Mario L. Herman) for Hometown Publishing, LLC. Kidsville News!, Inc., pro se.

Companies: Hometown Publishing, LLC; Kidsville News!, Inc.

Cases: FranchisingDistribution StateUnfairTradePractices NorthCarolinaNews