Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Ga. Sup. Ct: Daycare franchisees who failed to read franchise agreement not entitled to rescission of agreement, (Apr 21, 2015)

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

The Georgia Supreme Court held that a court of appeals erred when it affirmed a trial court’s denial of a daycare franchisor’s motion for a directed verdict on Georgia Racketeer Influenced and Corrupt Organizations (RICO) Act and other claims brought by the owners for a daycare franchise (Legacy Academy, Inc. v. Mamilove, LLC, April 20, 2015, Thompson, H.). The merger clause in the franchise agreement precluded any subsequent claim of deceit based upon the parties’ pre-contractual negotiations.

Michele Reymond, who held a master’s degree in business and worked for a large corporation, and her sister, Lorraine Reymond, who worked for WebMD, met with the officers for Legacy Academy, Inc., Frank and Melissa Turner, to discuss purchasing a daycare franchise. At that meeting, the Reymonds received an earnings claim which purported to state the historical earnings of existing franchises. The Reymonds subsequently created Mamilove, LLC as an entity for holding title to the real and personal property used in their operation of the franchise. The Reymonds received an offering circular along with the franchise agreement. They signed the agreement that same day without reading it or the offering circular.

Ten years after entering into the agreement, they brought an action against Legacy Academy, Inc. and Frank and Melissa Turner (collective “Legacy) alleging that Legacy had fraudulently induced them to sign the agreement by providing false information about the historical earnings of existing Legacy franchisees. They sought to rescind the agreement and recover damages for claims based on fraud, negligent misrepresentation and violation of certain Georgia statutes including the Georgia RICO Act. The trial court denied Legacy’s motion for a directed verdict as to the claims and the Reymonds received jury awards for compensatory damages, RICO damages, and the cost of litigation. On appeal, the court of appeals affirmed the decision.

Fraudulent Inducement. The failure to read the agreement precluded, as a matter of law, the Reymonds’ claim for rescission based on fraudulent inducement, according to the court. A party, who had the capacity and opportunity to read a written contract, cannot claim fraud in the procurement based on representations that differ from the terms of the contract. Also, a party to a contract can only be relieved of the obligation to read and be bound by its terms if an act of fraud prevents the party from reading the contract.

The court of appeals held that the Reymonds’ failure to read the agreement was excused because a jury would have found that Legacy rushed them into signing the contract by threating the loss of their desired franchise location. However, the court determined that this evidence was insufficient to support a finding that the Reymonds were prevented from reading the agreement through fraud or misleading artifice. The Court further determined that the Reymonds’ complaint, arguments and evidence that they presented at trial demonstrated that they were not prevented from reading the agreement but, rather, blindly relied on Legacy’s representations regarding expected income. In addition, the Court noted, that if they had read the agreement, they would have found that, by signing the agreement, they were acknowledging that Legacy made no representations as to earnings or sales. Because the pre-contractual earnings claim upon which the Reymonds alleged that they relied on was expressly contradicted by the disclaimer and acknowledgment provisions of the agreement, their reliance on the representations, as a matter of law, was unreasonable.

Merger Clause. The Reymonds’s fraud, negligent misrepresentation, and RICO claims were precluded, as a matter of law, by the agreement’s merger clause because the claims depended entirely on pre-contractual representations, according to the court. The agreement’s merger clause provided that the agreement constituted the entire agreement of the parties. The court of appeals had held that the merger clause did not bar their remaining claims for fraud, negligent misrepresentation, and RICO violations because the Reymonds were entitled to rescission of the agreement. However, because the agreement was not subject to rescission, the merger clause precluded any reliance on pre-contractual representations.

Jury Award for Compensatory Damages. The Reymonds argued that, even if Legacy was entitled to directed verdicts on their claims, the jury award for compensatory damages could be upheld as an award of damages on their tort law claim under OCGA § 51-1-6. The Court disagreed and reversed the jury verdict because it could not ascertain, from the general verdict returned, whether the jury based any of its award of damages on grounds the Court determined should not have been submitted to the jury.

The case is No. S14G1891

Attorneys: Charles L. Bachman, Jr. (Gregory, Doyle, Calhoun & Rogers, LLC), and Charles David Joyner (C. David Joyner PC) for Legacy Academy, Inc. Cary Ichter (Ichter Thomas, LLC) for Mamilove, LLC.

Companies: Legacy Academy, Inc.; Mamilove, LLC

Cases: FranchisingDistribution RICO StateUnfairTradePractices GeorgiaNews