Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION NEWS: Franchisor of Doc Popcorn stores hit with fraudulent inducement claims, (Feb 9, 2015)

By Peter Reap, J.D., LL.M.

Disgruntled Doc Popcorn popcorn store franchisees Mehb Khoja and Rodolfo Guizar Reyes (collectively, the “plaintiffs”) have filed suit in the federal district court in Denver, accusing DPD Sub, Inc., and DPI Sub, Inc. (together, the “franchisor”) of making material misrepresentations in order to induce the plaintiffs to purchase their Doc Popcorn franchises. The lawsuit was brought as a putative class action on behalf of more than 50 individuals or entities who purchased Doc Popcorn franchises.

According to the complaint, the franchisor’s Franchise Disclosure Documents (“FDDs”) represented that the franchisor provided site selection, site evaluation, lease review, and construction and project management to its franchisees. Moreover, the franchisor assured prospective franchisees that it had close relationships with large mall owners and told them that certain retail locations in malls owned by the mall owners with whom the franchisor had close relationships were available when, in fact, they were not. The franchisor concealed its misrepresentations by telling franchisees that the franchisor, rather than the franchisee, would be solely responsible for communicating and negotiating with the property managers for these locations. In reality, the franchisor did not have close relationships with large mall owners, did not have any retail real estate expertise, and did not provide any real estate assistance to franchisees, the plaintiffs allege.

Furthermore, in its franchise agreement, the franchisor requires franchisees to mediate any dispute with the franchisor, and in the event mediation is not successful, franchisees are required to arbitrate the dispute. However, the franchisor also reserves the right to unilaterally institute an alternative dispute resolution program, to make it mandatory, and to require franchisees to resolve any dispute they have with the franchisor pursuant to its unilaterally-instituted dispute resolution program rather than through mediation/arbitration.

The complaint includes claims for fraudulent inducement and negligent misrepresentation, as well as a claim for declaratory relief seeking a declaration that the dispute resolution provision in the parties’ franchise agreements is illusory and unenforceable. The plaintiffs charge that the franchisor’s FDDs made material misrepresentations or omissions regarding: the number of Doc Popcorn franchisees, the franchisor’s growth rate, the financial viability of a Doc Popcorn franchise, the franchisor’s real estate expertise and assistance, the availability of certain locations, and the right to operate mobile units as opposed to kiosks or permanent sites. The plaintiffs seek consequential, as well as exemplary damages.

The complaint, Khoja v. DPD Sub, Inc., was filed February 6, 2015.

The case is No. 1:15-cv-00258-WYD

Attorneys: Paul M. Grant (Goodreid Grant & Kuhn LLC) for Mehb Khoja.

Companies: DPD Sub, Inc.; DPI Sub, Inc.

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