Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION NEWS: Franchisor alleges legal malpractice for inadequate review of disclosure document, (Oct 10, 2013)

By Tobias J. Gillett, J.D., LL.M.

A franchisor has filed a complaint in the federal district court in Fort Myers, Florida, alleging that an attorney and his law firm committed breach of contract and professional negligence through their inadequate review of the franchisor’s draft franchise disclosure document (AJS Weightloss, LLC v. Rosenthal, filed October 7, 2013).

According to the complaint, in June 2010 AJS Weightloss, LLC retained Michael Rosenthal, an attorney and shareholder with Wagner, Johnston & Rosenthal, P.C., to review its franchise disclosure document (FDD) for compliance with FTC regulations. Non-attorney business management company Third Eye Management had referred AJS to Rosenthal, and AJS paid Rosenthal approximately $4,000 for his services.

AJS alleges that Rosenthal failed to perform a competent and reasonable review of the franchise documents. Specifically, the franchisor claims that the FDD reviewed by Rosenthal violated the FTC’s rules by (1) failing to disclose the cost of the initial inventory to be purchased by the franchisor; (2) failing to disclose the local advertising requirement, fees for location and management assistance, fees for an advertising co-op, fees to approve a new vendor; (3) failing to disclose the experience of the franchisor in compiling the estimated initial investment; (4) failing to adequately distinguish purchases from the franchisor, its designees, approved suppliers, or those pursuant to the franchisor’s specifications; (5) failing to list the costs of required purchases or leases and the proportion of required purchases or leases to all purchases and leases by the franchisee of goods and services; (6) failing to disclose payment from designated suppliers; (7) failing to disclose purchasing or distribution cooperatives or negotiation of purchase arrangements; (8) failing to disclose material benefits received by the franchisor based on franchisees’ purchases; (9) inadequately disclosing the training and experience of the instructors; (10) failing to disclose grand opening advertising, local advertising and the National Marketing Fund; (11) failing to disclose the Table of Contents of the Manual; (12) failing to describe the type of hardware and software for computer systems; (13) failing to disclose the minimum territory and any relocation rights; (14) failing to disclose whether the franchisor operates a similar business under a different mark; (15) failing to contain negative disclosure of state trademark registrations; (16) failing to cross-reference the state addenda and related requisite language; (17) failing to include Financial Performance Representations made as required by the Amended Franchise Rule FAQ 33; and (18) failing to make a disclosure regarding a Franchise Advisory Board or an Independent Franchisee Association.

AJS also alleges that Rosenthal failed to ever communicate with AJS, his true client, but instead communicated with Third Eye Management.

The complaint asserts claims for breach of contract and professional negligence. It seeks an award of actual and compensatory money damages, as well as special damages related to a settlement with a franchisee and to expenses from hiring alternate counsel to correct the franchise disclosure document’s deficiencies.

The case is No. 2:13-cv-00711-SPC-DNF.

Attorneys: C.C. Traina and Joseph Garrity (Garrity-Weiss, P.A.) for AJS Weightloss, LLC.

Companies: AJS Weightloss, LLC

News: FranchisingDistribution FloridaNews