Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. Cal.: Franchisee may proceed with misrepresentation claims against Jani-King, (Jul 8, 2015)

By Edward L. Puzzo, J.D.

A franchisee could maintain claims that Jani-King, a janitorial services franchisor, committed fraud and violated the California Unfair Competition Law when it misrepresented to the franchisee the projected profits for a cleaning contract it offered, the federal district court in San Diego has ruled (Tervon, LLC v. Jani-King of California, Inc., July 6, 2015, Bashant, C.).

Tervon, LLC and its principals entered into franchise agreements with Jani-King, a franchisor of cleaning and maintenance services. Subsequently, Jani-King submitted a bid to the City of San Diego for janitorial and cleaning services at Qualcomm Stadium following professional and college football games. The bid contained free cleaning services on the third day post-games. Jani-King was awarded the Qualcomm Stadium contract. It then offered the cleaning contract to franchisee Tervon. Based upon spreadsheets presented by Jani-King, projecting the number of hours of labor required and profits expected, the franchisee accepted the cleaning contract. However, after the first four sporting events, the franchisee had suffered significant losses. Jani-King representatives then told the franchisee that the spreadsheet projections provided prior to the franchisee’s acceptance of the cleaning contract were “all wrong” and should be discarded.

Tervon then brought various claims against Jani-King, including allegations of fraud by intentional misrepresentation and concealment, negligent misrepresentation, and violations of the California Unfair Competition Law (UCL). Jani-King moved to dismiss.

Particularity of fraud allegations. The court first found that franchisee allegations of fraud were pleaded with sufficient particularity to satisfy Federal Rule of Civil Procedure 9(b). Plaintiffs had specifically alleged the dates and dollar figures given to them by Jani-King representatives prior to their acceptance of the Qualcomm cleaning contract that contained misrepresentations, and further alleged that Jani-King knew the figures to be inaccurate, based on the City of San Diego’s questioning of the bid figures and Jani-King’s concealment that fact. These allegations adequately gave Jani-King notice of the particular misconduct that was alleged to constituted fraud.

Economic Loss Doctrine. To maintain a fraud claim based on the same factual allegations as a breach of contract claim under California law, a plaintiff must show that the duty that gives rise to tort liability is either completely independent of the contract or arises from conduct that is both intentional and intended to harm. Jani-King alleged that franchisee fraud claims failed this test and thus were precluded, but the court disagreed.

The franchisor’s duty under the franchise agreement was to secure commercial cleaning contracts and offer the franchisee the opportunity to accept or decline those cleaning contracts. By offering the Qualcomm contract to franchisee, Jani-King satisfied this duty under the franchise agreement.

But the Qualcomm contract itself was separate from the franchise agreement. If, as franchisee alleged, Jani-King fraudulently induced franchisee into accepting the Qualcomm contract, this would be independent of any breach of the franchise agreement. Thus, franchisee fraud claims are not precluded by the economic loss doctrine, the court stated.

The court therefore denied Jani-King’s motion to dismiss the claims brought under Sections 1709 and 1710 of the California Civil Code.

Unfair Competition Law. The court explained that California’s Unfair Competition Law (UCL) prohibits unlawful business practices, unfair business practices, and fraudulent business practices.

Unlawful business practices are practices forbidden by law, but not including common-law violations such as breach of contract. The court stated that California case law indicates that facts supporting a violation of Civil Code Sections 1709 and 1710, discussed above, sufficiently state a cause of action under Section 17200 of the UCL.

In the Ninth Circuit, unfair business practices simply mean any practice whose harm to the victim outweighed the benefits. Franchisee allegations of harm resulting from Jani-King’s fraudulent conduct, not outweighed by any benefit, sufficiently alleged an unfair business practice under the UCL, the court found.

The term “fraudulent” as used under Section 17200 of the UCL does not refer to the common law tort of fraud, but instead refers to conduct likely to deceive the public. Here, nothing in the franchisee's allegations suggested that any of Jani-King’s misrepresentations spread to or deceived the public. Thus, the franchisee’s claim of fraudulent business practices was inadequate to support a claim under the UCL.

Consequently, the court denied Jani-King’s motion to dismiss the franchisee’s unlawful business practices claim and unfair business practices claim under the UCL, but did dismiss its fraudulent business practices UCL claim, without prejudice.

The case is Civil Action No. 14-cv-2648 BAS (JMA).

Attorneys: Kara L. Gervais (Gervais Law) for Tervon, LLC. Peter L. Loh (Gardere Wynne Sewell LLP), and Stephen L. Schreiner (Solomon, Ward, Seidenwurm & Smith, LLP) for Jani-King of California, Inc.

Companies: Tervon, LLC; Jani-King of California, Inc.

Cases: FranchisingDistribution StateUnfairTradePractices CaliforniaNews