Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION NEWS: Yogurt franchisees seek rescission of franchise agreement for false and misleading earnings claims, (Apr 14, 2014)

By Linda O’Brien, J.D., LL.M.

In an action for rescission and damages, investors in a yogurt franchise allege the franchisor made false and misleading representations regarding the earnings and other financial information prior to the execution of the franchise agreement. The complaint was filed in the federal district court in Brooklyn, New York (Sweet Frog Stony Brook Inc. v. Sweetfrog Enterprises, LLC, April 11, 2014).

Sweetfrog Enterprises was engaged in the business of operating SweetFrog trademarked stores and franchising the right to operate SweetFrog trademarked stores to sell SweetFrog products. SweetFrog stores feature soft serve yogurt and other products that can be created as individualized yogurt desserts.

The complaint alleged that, in 2011, the principals of Sweet Frog Stony Brook were prospective investors in a SweetFrog franchise in Virginia. Ki Cha, an executive with Sweetfrog Enterprises, provided the investors with detailed written financial information about Sweetfrog trademarked stores. The information included initial investment costs, projected annual sales, and monthly sales projections. Cha also made oral representations concerning financial information about Sweetfrog trademarked stores, according to the complaint. When the investors stated an interest in operating a SweetFrog franchise in the New York metropolitan area, Cha indicated that he was knowledgeable and would be in position to advise the investors on how Sweetfrog trademarked stores would perform in the New York metropolitan area.

According to the complaint, the investors, relying on Cha’s financial information and representations, visited locations in the New York metropolitan area. Cha visited and approved prospective locations identified by the investors. In 2012, the investors opened a location in Stony Brook. Pursuant to the franchise agreement, the investors paid an initial franchise fee and royalties equal to a percentage of gross sales to Sweetfrog Enterprises. To date, the Stony Brook store did not perform as represented, made no net income, and experienced operating losses.

In 2013, the investors opened a Sweetfrog trademarked store in Babylon. Pursuant to the franchise agreement, the investors paid and initial franchise fee to Sweetfrog Enterprises. To date, the Babylon store did not perform as represented, made no net income and experienced operating losses.

In reasonable reliance on the financial information and representations made by Cha and Sweetfrog Enterprises, the investors entered into franchise agreements and lost substantial sums in the establishment and operation of their respective Sweetfrog trademarked stores, the lawsuit charged.

Sweet Frog asserts claims for violations of the New York General Business Law of fraudulent earnings and disclosure violations. The action seeks rescission, damages, costs of suit, attorneys’ fees, and any other just and proper relief.

The case is No. 2:14-cv-02356-JS-WDW.

Attorneys: Michael Einbinder (Einbinder & Dunn, LLP) for Sweet Frog Stony Brook Inc. and Sweet Frog Babylon Inc.

Companies: Sweet Frog Stony Brook Inc.; Sweet Frog Babylon Inc.; Sweetfrog Enterprises, LLC

News: FranchisingDistribution NewYorkNews