Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. Fla.: Disclaimer in franchise agreement blocked claims based on oral representations, (May 13, 2015)

By Edward L. Puzzo, J.D.

A childcare business franchisee could not maintain misrepresentation claims against the franchisor based on oral and other representations, after signing a franchise agreement specifically disclaiming potential misrepresentation claims based on statements made outside the agreement, the federal district court in Fort Pierce, Florida has ruled (Creative American Education, LLC v. The Learning Experience Systems, LLC, May 11, 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).

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 breaches of the franchise and other agreements. Previously, on May 7, 2015, this court denied TLE’s motion for summary judgment as to its counterclaims against CAE. At this juncture, the court ruled on TLE’s motion for summary judgment as to CAE’s claims against it, including misrepresentation, rescission, and FDUTPA claims.

Misrepresentation. Plaintiff CAE alleged that TLE fraudulently and negligently induced CAE to enter into various agreements associated with their purchase and management of the childcare business franchises, including a franchise agreement, management agreement, lease agreement, power of attorney agreement, and certain personal guarantees. Specifically, they alleged that TLE misled them as to the EB-5 visa requirements, the amount of investment they were required to make to purchase the franchises, and the extent they would be required to grant extraordinary powers to TLE to run their franchises through execution of a management agreement and a power of attorney.

There was support for these allegations in the evidence, the court stated. However, the court also noted that the franchise agreement contained a Disclaimer of Representations provision, which stated in capital letters that CAE acknowledged that the agreement constituted the entire agreement between the parties, that there were no oral or written understandings between the parties not contained in the written agreement, and that CAE was not relying on any other representations outside the agreement as a condition for entering the agreement.

The court found the inclusion of the Disclaimer of Representations in the franchise agreement to be dispositive, noting that CAE’s agreement to limit the universe of potential misrepresentation claims to that set forth in the agreement itself had induced TLE to enter into the agreement. Citing case law such as Garcia v. Santa Maria Resort, Inc., 528 F. Supp. 2d 1283 (S.D. Fla. 2007), the court ruled that the specificity of the disclaimer required a finding that any reliance upon the alleged misrepresentations was unreasonable as a matter of law. Thus, TLE was entitled to summary judgment on the misrepresentation claims.

FDUTPA. On CAE’s claim brought under the Florida Deceptive and Unfair Trade Practices Act (FDUTPA), the same arguments against the misrepresentation claims applied, but only as to misrepresentations made prior to the formation of the contracts in this case. Accordingly, the court granted summary judgment to TLE on the FDUTPA claims with respect to all extra-agreement representations, but denied summary judgment as to TLE’s performance under the relevant agreements.

Rescission. The court declined to grant TLE summary judgment on CAE’s claim seeking rescission of the various agreements. Given TLE’s unilateral seizure of managerial control, CAE’s subsequent withdrawal from its role as a franchisee, and the passage of one year’s worth of time, the court found that a question of material fact remained as to whether the parties’ performance under the relevant agreements had become impossible. As such, CAE was not precluded from rescission.

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

Attorneys: Leon Francisco Hirzel, IV (Hirzel & Dreyfuss, PA), and Mackenzie Dimitri (Einbinder & Dunn, LLP) for Creative American Education, LLC, Bernard Loganathan, and Beeve Shaik Aludeen-Loganathan. 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; Beeve Shaik Aludeen-Loganathan; The Learning Experience Systems, LLC; Korda, Zitt & Associates

Cases: FranchisingDistribution StateUnfairTradePractices FloridaNews