Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. Fla.: Childcare franchisor not entitled to summary judgment on breach of contract claims, (May 8, 2015)

By Edward L. Puzzo, J.D.

A franchisor of a childcare business that assumed management of a franchise location at various times, both with and without the franchisee’s consent, was not entitled to summary judgment on basis of the franchisee’s alleged breach of the franchise agreement, the federal district court in Fort Pierce, Florida has ruled (Creative American Education, LLC v. The Learning Experience Systems, LLC, May 7, 2015, Rosenberg, R.).

The Loganathans were citizens of Singapore who sought to obtain EB-5 visas that would allow them to immigrate to the United States. The requirements to qualify for such visas include investment and active participation in an American business. They therefore sought to establish a childcare business in two Colorado locations by having their firm, Creative American Education (CAE), enter into a franchise agreement with The Learning Experience (TLE).

Management agreement. Because the Loganathans were unable to arrive in the United States prior to the completion of the build-outs for the franchise locations, they entered into a management agreement with TLE. Under the management agreement, franchisor TLE would manage the two locations for CAE for a period of time, followed by a period of co-management by the franchisor and franchisee, followed finally by the franchisee taking over exclusive responsibility for management of the two locations.

Subsequently, TLE and the Loganathans filed claims and counterclaims accusing each other of breach of the franchise agreement. TLE moved for summary judgment on grounds including alleged breach of the franchise agreement, but the court ruled that questions of material fact remained unresolved, meaning summary judgment was inappropriate.

Franchisor and franchisee management. TLE alleged that, during the period before franchisee CAE assumed sole managerial control, CAE breached the franchise agreement by failing to maintain proper state licensing, to comply with state childcare regulations, to keep a proper staff-to-child ratio, and to employ competent and trained workers. CAE counterclaimed that these breaches actually stemmed from the period of time when TLE unilaterally managed the franchises.

Reviewing the record, the court found support for both positions: that the alleged breaches could have occurred as a result of CAE’s actions, as TLE argued, or the breaches could have been caused by decisions TLE made during its initial management of the franchises, as CAE argued. The origination of the breaches was therefore a material fact. Construing the evidence in the light most favorable to CAE as the non-moving party, the court ruled against TLE’s motion for summary judgment.

Intent to abandon franchise. In May 2014, the Loganathans sent an e-mail to TLE, proposing to close one of their two franchise locations the following day due to staffing problems and warnings from state inspectors. In response, TLE immediately responded that such a closure would be unacceptable and would be considered a breach of the franchise agreement. TLE therefore immediately assumed operational management of both franchise locations on May 2, 2014.

Subsequently in litigation, TLE claimed that the franchisee’s statement, “I propose closing the center tomorrow,” was an expression of intent to abandon the franchise in breach of the franchise agreement, giving it the right to preemptive action. In support, TLE cited Burger King Corp. v. Barnes, Business Franchise Guide ¶10,932 (S.D. Fla. Aug. 28, 1996), which involved a finding of breach after a franchisee sent a letter notifying the franchisor of his intent to close a restaurant location and suspend performance of all obligations under the franchise agreement. While the franchisee in Burger King clearly showed an intent to abandon the franchise, the intent in the instant case was far from clear, the court stated. CAE argued that it intended only a short-term closure to remedy non-compliance with state regulations, and that it never actually closed the franchise. Only a trier of fact can determine whether CAE abandoned the franchise or otherwise ceased to operate under the terms of the franchise agreement, the court ruled.

Franchise agreement termination. A question arose as to whether TLE’s May 2, 2014 notice of assumption of “operational management” acted to terminate the franchise agreement. TLE asserted it did not, as shown by its continued requests that CAE comply with the agreement. It maintained that CAE breached the franchise agreement by refusing to fund or maintain the franchise after that date. CAE countered that the franchise agreement was terminated, as shown by TLE’s assumption of managerial control without CAE’s consent and because TLE banned the presence of the Loganathans on franchise premises.

Since issues of material fact remained as to whether the franchise agreement was terminated on May 2, 2014, and because the court may not weigh evidence on a motion for summary judgment and must construe all evidence in the light most favorable to CAE as the non-moving party, summary judgment could not be granted on this basis, and had to be denied, the court ruled.

The case is Civil Action No. 9:14-cv-80900-RLR.

Attorneys: Leon Francisco Hirzel, IV and Andre Louis Dreyfuss (Hirzel & Dreyfuss, P.A.) for Creative American Education, LLC, Bernard Loganathan and Beeve Shaik Aludeen-Loganathan. Mackenzie Dimitri and Michael Einbinder (Einbinder & Dunn, LLP) for Creative American Education, LLC. George Louis Sigalos (Simon & Sigalos, LLP) for The Learning Experience Systems, LLC. Steven Jay Wisotsky (The Reyes Law Firm, PA) for Anthony Korda and Korda, Zitt & Associates.

Companies: Creative American Education, LLC; The Learning Experience Systems, LLC; Korda, Zitt & Associates.

Cases: FranchisingDistribution FloridaNews