Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—M.D. Fla.: Travelodge franchisee's claim of negligent misrepresentation fails, (Jun 28, 2016)

By Edward L. Puzzo, J.D.

A franchisee's claim—that at the time of its hotel purchase, franchisor Travelodge negligently misrepresented the extent of repairs necessary to bring the facility into compliance with its standards—failed because the Franchise Agreement and Franchise Disclosure Document adequately disclosed the franchisee's responsibilities with respect to bringing the facility into compliance, the federal district court in Orlando, Florida, has ruled (Devayatan, LLC v. Travelodge Hotels, Inc., June 27, 2016, Mendoza, C.).

In February 2011, a Franchise Agreement was entered into between franchisee Devayatan, LLC and franchisor Travelodge Hotels, Inc. (THI) for the operation of a 134-room hotel. In December 2013, THI notified Devayatan that it was terminating the Agreement. Upon receiving the termination notice, Devayatan brought claims of negligent misrepresentation and violations of the Florida Deceptive and Unfair Trade Practices Act (FDUTPA) against THI, alleging that THI had negligently misrepresented the scope of work necessary to bring the hotel into compliance with THI’s brand standards. Devayatan moved for summary judgment.

Negotiations. At the time the Agreement was entered into, the hotel had already been operating as a Travelodge. During negotiations, THI disclosed to Devayatan that the hotel was not in compliance with its brand standards, was in default at the time of transfer, and that the transferor had not cured the default. Prior to purchasing the hotel and entering into the Agreement, Devayatan obtained an architect's estimate of the cost of certain repairs and upgrades and Devayatan representatives stayed in 2 or 3 guest rooms, but it did not have the property inspected by a building inspector nor did it obtain estimates from a contractor on how much it would cost to make the suggested renovations.

The Franchise Disclosure Document (FDD) provided an estimate that the cost to convert a 100-room facility could range up to $1.4 million. The hotel in question here was a 134-room facility, logically indicating that the projected costs were likely to be one-third higher, the court observed.

The Franchise Agreement included a punch-list specifying items identified by THI’s inspections at the facility that were not in compliance with THI standards. Further, the Agreement specified that the franchisee was "responsible for ensuring that the Facility is constructed, improved, maintained and operated in compliance with all applicable federal, state and local laws, codes, ordinances and regulations."

Although the Agreement called for all punch-list items to be completed within six months, THI did not conduct its first Quality Control inspection until 19 months after the Agreement was executed. Nevertheless, Devayatan had not completed all the punch-list items by that date. Despite having repaired or renovated many parts of the hotel, Devayatan also failed four subsequent inspections by THI. Subsequently, THI notified Devayatan that it was terminating the Franchise Agreement based on the franchisee’s failure to improve and maintain the hotel in accordance with THI’s brand standards.

Negligent misrepresentations. Despite the above-referenced disclosures set forth in the Franchise Agreement and FDD, Devayatan alleged that several of THI’s representations made during negotiations under-represented the scope of work that would be necessary in order to bring the facility into compliance with THI standards. Devayatan cited the fact that THI had not yet terminated the previous owner’s Franchise Agreement as an indication that the facility in its then-current state was close to compliance with THI standards. Devayatan also had viewed THI’s punch-list as a comprehensive list of all elements of the facility that were non-compliant, but instead discovered that virtually every guest room was non-compliant, and that much additional work, such as electrical and fire upgrades, were necessary in order to comply with state, city and county laws.

Under the New Jersey law applicable here, the court explained, negligent misrepresentation required that THI negligently made an incorrect statement; that Devayatan justifiably relied on that statement; and that Devayatan sustained damages as a result of the reliance.

First, the court noted, THI had put Devayatan on notice that the previous owners were in default under their Franchise Agreement and it was Devayatan’s responsibility to cure those defaults. Second, the punch-list only purported to be a random sample of facility non-compliance and not a comprehensive list. The punch-list itself also explained that compliance with all local ordinances was required in addition to the punch-list items. The court noted that Devayatan’s assumptions as to the extent of the repairs needed were not reasonable given the fact that its own architect noted that the property was "in a very poor state of disrepair" and that "it did not meet even some of the basic parameters of a similar functioning facility." Finally, the fact that Devayatan’s willful ignorance—its members admitted they had never read the Franchise Agreement or FDD—could not be used to transform THI’s otherwise clear statements into misrepresentations. Thus, Devayatan failed to show that it justifiably relied on any incorrect statements made by THI, and THI was entitled to summary judgment on the negligent misrepresentation claim, the court ruled.

FDUTPA. Since the FDUTPA claim must be based on the same factual matters that underlay its negligent misrepresentation claim, Devayatan’s FDUTPA claim also failed, and THI was entitled to summary judgment on that claim, the court further ruled.

The case is No. 6:14-cv-00561-CEM-TBS.

Attorneys: Christina Y. Taylor (Latham, Shuker, Eden & Beaudine, LLP) and Christopher Robert Thompson (Burr & Forman LLP) for Devayatan, LLC. Mary Leslie Smith (Foley & Lardner, LLP) for Travelodge Hotels, Inc.

Companies: Devayatan, LLC; Travelodge Hotels, Inc.

Cases: FranchisingDistribution StateUnfairTradePractices FloridaNews