Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.Y. Sup.: Claims based on late delivery of Financial Disclosure Documents may proceed, (Jun 9, 2015)

By Edward L. Puzzo, J.D.

Claims that a real estate franchisor violated the New York Franchise Sales Act by failing to present Financial Disclosure Documents to prospective franchisees until after meetings with franchisor representatives could not be dismissed, the New York Supreme Court in New York City has ruled. However, franchisee claims based on oral representations were dismissed based on non-reliance disclaimers in the franchise agreements (EV Scarsdale Corp. v Engel & Voelkers N. E. LLC, June 5, 2015, Kornreich, S).

Engel & Voelkers North East LLC (EV-NE) and its affiliates license "Engel & Voelkers Property Shops," real estate brokerages specializing in selling upscale residential properties. In consolidated actions, franchisees EV Scarsdale and Riverside Homes Realty brought actions under the New York Franchise Sales Act (NYFSA) against franchisor EV-NE, which EV-NE sought to dismiss. The court ruled that claims relating to the timing of Financial Disclosure Documents could not be dismissed, while claims based on oral misrepresentations should be dismissed.

EV Scarsdale. In July 2008, EV Scarsdale, a New York corporation, entered into a license agreement with EV-NE, giving it the right to operate an Engel & Voelkers Property Shop in Scarsdale. EV Scarsdale’s owner acknowledged receiving a Financial Disclosure Document (FDD) from EV-NE in March 2008, prior to entering into the license agreement. In November 2008, EV Scarsdale entered into another license agreement with EV-NE, giving it the right to operate an Engel & Voelkers Property Shop in Southampton. EV Scarsdale’s owner acknowledged receiving a Financial Disclosure Document (FDD) from EV-NE in October 2008, prior to entering into the license agreement. In April 2011, EV Scarsdale commenced an action seeking rescission of the contracts.

Riverside Homes. In March 2009, Riverside Homes, a New York corporation, entered into a license agreement with EV-NE, giving it the right to operate an Engel & Voelkers Property Shop in Hastings-on-Hudson. In June 2011, Riverside canceled the License Agreement and brought claims against EV-NE.

Financial Disclosure Documents. The principals of EV Scarsdale and Riverside Homes claimed that they personally met with EV-NE representatives before they received FDDs, a violation of NYFSA. EV-NE argued that, even if these allegations were true, the plaintiffs suffered no damages because they did receive FDDs prior to signing their license agreements.

The argument—that one cannot possibly suffer a legally compensable loss when an FDD is provided between the first meeting and the signing of the contract—was at odds with the NYFSA, the court stated. Section 683(8) mandates that the FDD be provided, not only before the final decision to open a franchise, but before the franchisor can unleash its sales pitch on the prospective franchisee, the court stated. From the wording that the FDD was to be provided at "the earlier of" the events listed, it appeared that the legislature believed that advance written disclosures can prospectively mitigate the persuasive influence of in-person solicitation, the court opined. Once the sales presentations begin, subsequent written disclosure may have less of an influence on the decision-making process of a prospective franchisee. That the legislature saw fit to expressly require pre-meeting disclosure raises, at least for the purposes of this motion to dismiss, a reasonable inference that a compensable injury may be sustained if pre-meeting disclosure does not occur. Ascertaining the existence and magnitude of the injury suffered by not having pre-meeting disclosure is a fact-specific inquiry that cannot be resolved on this motion to dismiss.

Non-reliance disclaimers. EV-NE also argued that the plaintiffs waived their right to claim reasonable reliance on defendants' oral representations because of a merger clause in the franchise contract in which they were required to affirm that they relied only on the written contracts and the FDDs in deciding to execute their license agreements and did not rely on any of defendants' pre-contractual oral representations.

Outside of the franchise context, there is no question that a plaintiff could not maintain a claim for fraudulent inducement of a commercial contract in the face of the non-reliance disclaimers such as those present in this case. The court stated that New York precedent states that the agreement’s non-reliance disclaimer is not proscribed per se by the NYFSA.

Refusing to enforce non-reliance disclaimers would violate the sanctity of contracts and discourage their use, the court observed. Ironically, refusing to enforce non-reliance disclaimers would undermine the goals of the NYFSA, since the disclaimers help franchisors root out dishonest sales personnel and avoid sales secured by fraud by requesting franchisees to disclose whether a franchisor's representatives made statements concerning the financial prospects for the franchise during the sales process. Accordingly, the disclaimer must be given effect, and plaintiffs cannot successfully allege the element of reasonable reliance.

The case is Civil Action No. 2015 NY Slip Op 25188.

Attorneys: (Jardim Meisner & Susser PC) for EV Scarsdale Corp., and Jonathan Lemer. (Kaufmann Gildin & Robbins LLP) for Engel & Voelkers North East LLC, Engel & Voelkers NY LLC, Engel & Voelkers US Holdings Inc., Engel & Voelkers US Holdings GmbH, and Engel & Voelkers AG.

Companies: EV Scarsdale Corp.; Engel & Voelkers North East LLC; Engel & Voelkers NY LLC; Engel & Voelkers US Holdings Inc.; Engel & Voelkers US Holdings GmbH; Engel & Voelkers AG

Cases: FranchisingDistribution NewYorkNews