Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION NEWS: Luxury car rental franchisor allegedly misrepresented information to prospective franchisees, (May 17, 2016)

By Linda O’Brien, J.D., LL.M.

Sixt Franchise USA, LLC, a franchisor of luxury rental car businesses allegedly failed to disclose financial and other key information to prospective franchisees in order to induce them to enter into franchise agreements, according to a complaint filed in the federal district court in Greenville, South Carolina (Welch v. Sixt Franchise USA, LLC, May 13, 2016).

Ken Welch owns East Coast Car Rental, LLC. William Burch is the owner of Merit Rental Services, Inc., Merit Rental Services Myr., Inc., and Merit Rental Services CHS.

The complaint states that, in December 2012, Welch and Burch began investigating franchise opportunities with Sixt Franchise USA, LLC, to own a rental car franchise that rented premium cars such as BMWs and Mercedes-Benz. Welch and Burch met with Sixt executives and, at Sixt’s urging, prepared business plans that reflected the future profitable performance of their franchises. The business plans were approved by Sixt.

During the meetings and communications with Sixt executives prior to opening their respective franchises, Sixt executives made the following representations: (1) Sixt had a "state of the art" software system; (2) Sixt was the largest and most profitable international rental car company; (3) Sixt franchisees would generate more reservations than any other brand; (4) Sixt would provide extensive sales and marketing support to franchisees; (5) Sixt had long standing relationships with international car manufacturers; and (6) franchisees could purchase up to four locations at one time and Sixt would help them purchase more locations if they were in good standing. Welch and Burch were also presented with financial data showing the revenue and profits of various Florida locations, the complaint alleges.

After Welch and Burch opened their Sixt franchise locations, they allegedly learned that the software system was outdated and flawed. The software was not able to provide reliable market data for pricing, which was a key factor in properly pricing rental rates, the complaint states. The plaintiffs’ repeated requests to use a modern pricing system used by their competitors was purportedly denied by Sixt. The plaintiffs also claim that they repeatedly complained to Sixt about excessive chargebacks and fuel prices, inadequate training, and extra fees to return vehicles transported from other locations.

The complaint claims that Sixt made numerous misrepresentations of material facts in order to induce them to execute the franchise agreements. Specifically, the defendants misrepresented their alleged affiliation with BMW and Mercedes-Benz to provide luxury vehicles at cheaper costs; the number of reservations franchisees could expect as compared to other brands; and that their software was industry leading and state-of-the-art.

The defendants also failed to disclose or misrepresented the known required total investment for the franchises, the amount of profits that franchisees could expect, the training and management assistance available, the availability of advertising and marketing, the quantity of the vehicles to be used by the franchise, the availability of financing to purchase a rental fleet, and the assistance available to find suitable franchise locations, the complaint claims. As a result of the defendants’ misrepresentations and inaction, the plaintiffs were purportedly unable to continue operating their franchises and were forced to close their locations.

The plaintiffs assert claims for breach of contract, breach of fiduciary duty, fraud and negligent misrepresentation, constructive fraud, conversion, defamation, civil conspiracy, and violations of the Federal Trade Commission Franchise Rule, Lanham Act, South Carolina Business Opportunity Sales Act, North Carolina Business Opportunity Sales Act, Florida Sale of Business Opportunities Act, South Carolina Unfair Trade Practices Act, North Carolina Unfair and Deceptive Trade Practices Act, and Florida Deceptive and Unfair Trade Practices Act.

The action seeks actual, incidental, punitive, and treble damages; costs of suit; and any other just and proper relief.

The case is No. 6:16-cv-01553-MGL.

Attorneys: Adam C. Bach, Eric R. Tonnsen, and Weston J. White (Eller Tonnsen Bach, LLC) for Ken Welch, East Coast Car Rental, LLC, William Burch, Merit Rental Services, Inc., Merit Rental Services Myr., Inc., and Merit Rental Services CHS, LLC.

Companies: East Coast Car Rental, LLC; Merit Rental Services, Inc.; Merit Rental Services Myr., Inc.; Merit Rental Services CHS, LLC; Sixt Franchise USA, LLC; Sixt Rent A Car, LLC; Sixt Financial Services, LLC

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