Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. Ohio: Franchisee’s counterclaims rejected for failure to contest franchisor’s evidence, (Jan 30, 2015)

By Dan Selcke, J.D.

The federal district court in Cincinnati granted summary judgment to a franchisor on several breach of contract and tort counterclaims filed by a terminated franchisee, since the uncontested evidence presented by the franchisor indicated that it had not breached any franchise agreements and had fully disclosed the nature of its business (H.H. Franchising Systems, Inc. v. Aronson, January 28, 2015, Barrett, M).

Health care franchises. H.H. Franchising Systems, Inc. (HHFS) franchises businesses under the Home Helpers franchise—for businesses that offer senior care and home health care—and the Direct Link franchise—for businesses that offer personal emergency response services, medication management, and vital signs monitoring services. Dori Aronson became a franchisee of both Home Helpers and Direct Link after receiving a copy of HHFS’s Uniform Franchise Offering Circular, which disclosed the nature and risks of the franchises offered by HHFS. She operated the franchises through Redi to Help, her own company.

Franchise termination. HHFS provided Aronson with initial training and assisted both her and Redi to Help by giving them regular field support, an office landing page on the Home Helpers website, and multiple educational sessions, among other things. Later, HHFS terminated the franchise agreements after the defendants failed to pay a variety of required fees. However, the parties rescinded the termination after the defendants agreed to release any and all claims they may have had against HHFS up to that point in time. Still, the defendants’ nonpayment of required fees continued, even after the rescission, and HHFS terminated the franchise agreements again.

Counterclaims. HHFS filed suit against Aronson and Ready to Help. In response, the defendants filed counterclaims for breach of franchise agreement, breach of franchise agreement through failure to provide electronic access to franchisor services, breach of franchise agreement through establishment of a competing franchise business, fraud and misrepresentation, negligent misrepresentation, and breach of good faith and fair dealing. HHFS filed a motion for summary judgment on all of the counterclaims.

Breach of franchise agreement. First, the court dealt with the counterclaims based on a breach of contract theory. In the first counterclaim, the defendants argued that HHFS breached the franchise agreement by “providing inadequate training, inadequate manual of business operation and inadequate services and marketing of the franchise business.” Because all of these alleged breaches occurred at or around the time the defendants first signed the franchise agreements, the defendants gave up their right to bring claims as part of the deal that rescinded the initial termination of those agreements. This, by itself, was enough reason to grant summary judgment to HHFS.

Even if that were not the case, summary judgment still would have been appropriate because the defendants could not show that HHFS actually committed a breach. In fact, HHFS presented evidence that it provided the defendant with extensive training and more than enough marketing information for them to successfully operate the franchises in accordance with the agreements.

Intranet access. Next, the court looked at the second counterclaim, in which the franchisees argued that HHFS breached the franchise agreements by failing to provide them with access to online training and other services “purportedly made available by the Franchisor through secure connection to its intranet database.” Again, the defendants gave up their right to bring claims based on these alleged breaches of the agreements as part of the deal to rescind the initial termination of those agreements. Also, they could not identify any breach. While it was true that the defendants could not access the HHFS intranet after a certain point, neither of the franchise agreements obligated HHFS to provide intranet access to them. In any case, HHFS presented evidence that the defendants did not have access because of their own refusal to install necessary software applications.

“Competing” franchises. In the third counterclaim, the defendants accused HHFS of violating section 1.3 of the franchise agreement, which prohibited the company from establishing any “substantially similar” franchises within the franchisee’s territory, by developing a competing franchise called TruBlue. This argument failed, first because the evidence showed that no TruBlue franchises had been established in an area where they could compete with the defendants. Even if they had been were, TruBlue franchises were not substantially similar to Home Helpers or Direct Link franchises. TruBlue provided maid, lawn care, and home repair services, while the defendants’ franchises offered senior care, home health care, personal emergency response, medication management, and vital signs monitoring services.

Bad faith. The last breach of contract counterclaim accused HHFS of breaching its duty of good faith and fair dealing “by inducing Aronson to purchase its model by representing the exclusivity of the business system and misleading and misstating the nature of competing business operations using similar techniques.” Once again, the defendants had already given up their right to bring these claims. Additionally, HHFS presented uncontested evidence that it made complete disclosures to Aronson as required by law that described the nature of the business and its risks, so it could not have acted unfairly or in bad faith.

Fraud and misrepresentation. The court then moved on to the tort counterclaims, starting with the defendants’ contention that HHFS engaged in fraud and misrepresentation when, during the initial sales presentation, it emphasized that Aronson could gain market share for her franchises by using HHFS’s “exclusive business system.” Aronson relied on these representations in deciding to enter into a franchise agreement, but the purportedly “exclusive” business systems were actually commonplace in the industry and did not help her run a successful franchise. Here, summary judgment for HHFS was appropriate because the four-year statute of limitations for fraud and misrepresentation, which started to toll when the defendants first signed the agreements, had run.

Even if that were not true, the claim would still be dismissed because HHFS presented evidence that its business system was exclusive and innovative in multiple respects, meaning that it was not false or misleading.

Negligent misrepresentation. Finally, the court granted summary judgment to HHFS on the defendants’ counterclaim that the company engaged in negligent misrepresentation by not disclosing all of the risks involved with its exclusive business system, including the risks involving the utilization of independent contractors. Again, the statute of limitations—two years for this counterclaim—had run. Also, HHFS presented evidence that it had fully disclosed the risks to Aronson at the time of sale. As was true with all of the claims, the defendants presented no evidence to counter HHFS’s arguments. With that, the court had granted summary judgment on all of the defendants’ counterclaims.

The case number is: 1:12-cv-708

Attorneys: William Michael Gustavson (GustavsonLaw) for H.H. Franchising Systems, Inc.

Companies: H.H. Franchising Systems, Inc. and Redi to Help, LLC

Cases: FranchisingDistribution OhioNews