Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION NEWS: Chicken restaurant franchisor charged with fraudulent pre-sale disclosure documents, (Oct 2, 2015)

By Linda O’Brien, J.D., LL.M.

The franchisor of a fast food chicken restaurant system made intentional and material misrepresentations in pre-sale disclosures in order to induce the purchase of the franchise opportunity, according to a complaint filed in the federal district court in Tampa, Florida (Cluck-U Chicken, Inc. v. Cluck-U Corp., September 30, 2015).

The complaint states that Cluck-U Corp. is a franchisor of a fast food restaurant system that features distinctive chicken recipes. In May 2013, Cluck-U Chicken, Inc. and its guarantor, Anthony Tartaglia, entered into a franchise agreement with Cluck-U Corp. for a Cluck-U Chicken franchise located in North Port, Florida. In connection with the sale of the franchise, the franchisor provided the franchisee and guarantor with a franchise disclosure document (FDD), dated October 2012. Under the FTC franchise rule, a franchisor is required to update its FDD annually. However, the FDD provided to the franchisee and guarantor allegedly did not have the required updates or current disclosures about the franchisor’s financial condition.

The franchisee and guarantor charged that they were unaware that the franchisor had violated its franchise disclosure obligations and had made material misrepresentations. Relying on the franchisor’s pre-sale disclosures, the franchisee and guarantor moved forward with franchise development and opened for business in February 2014. After building out the franchise and operating the restaurant location for a period of time, the plaintiffs began to realize that the franchisor had made numerous misrepresentations and material omissions about the franchise, the complaint states.

Contrary to the representations made by the franchisor in the FDD, the franchisor allegedly (1) had no formal training program or on-the-job training, (2) failed to provide advertising assistance or negotiate favorable pricing for food and supplies, (3) failed to provide lists of equipment and build-out requirements necessary to open a business, (4) failed to provide site and market criteria, and (5) required unnecessary expenditures for opening inventory.

The complaint also claims that the costs necessary to begin operations were not provided in good faith and the unexpected increased start-up costs left the plaintiffs without sufficient funding to cover operating losses. As a result of the defendants’ breaches of their legal obligations, the plaintiffs invested more than $925,000 in a business that operates at a substantial loss.

Further, the plaintiffs charged that the defendant created an unlawful tying arrangement by conditioning the sale of the franchise and license of Cluck-U marks on the franchisee’s agreement to purchase non-proprietary products, such as chicken, only from a designated supplier. The non-proprietary products were not produced by the defendant and had no special design. The prices for the products were significantly higher than prices for identical products available from alternate suppliers, the complaint claimed. Moreover, the illegal tying action ensured that the defendant received kick-backs from the suppliers. The conduct of the franchisor was not discoverable by the plaintiffs prior to entering into the franchise agreement since the agreement indicated that supplier competition was welcome as long as the prospective supplier met the franchisor’s standards and specifications. The franchisor’s tying arrangement threatens to substantially foreclose competition and interfere with customer choice, the complaint states.

The plaintiffs assert claims for fraudulent inducement, breach of contract and the implied covenant of good faith and fair dealing, negligent misrepresentation, and violations of Section 1 of the Sherman Act, the Florida Franchise Act, the Florida Sale of Business Opportunities Act, and the Florida Deceptive and Unfair Trade Practices Act. The action seeks declaratory and injunctive relief, rescission, damages, costs of suit, attorney fees, and any other just and proper relief.

The case is No. 8:15-cv-02274-SDM-MAP.

Attorneys: Mary M. Clapp (Clapp Business Law, LLC) for Cluck-U Chicken, Inc.

Companies: Cluck-U Chicken, Inc.; Cluck-U Corp.

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