Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—W.D. Wash.: Hotel franchisee fails to state fraud, Consumer Fraud Act claims against two franchisors, (Dec 23, 2013)

By John W. Arden, J.D., LL.M.

The owner of two unsuccessful hotel franchises, claiming that its franchisors committed presale misrepresentations, failed to state claims of violation of the FTC franchise rule, fraud in the inducement, and violation of the New Jersey Consumer Fraud Act, according to the federal district court in Newark, New Jersey (Robinson v. Wingate Inns International, Inc., December 20, 2013, Cecchi, C.). However, the franchisee was granted 30 days to file an amended complaint to cure the deficiencies of the claims.

Ronald J. Robinson entered into two separate hotel franchise agreements, one with Wingate Inns International, Inc. and one with Wyndham Hotels and Resorts, LLC. He was unable to obtain financing to build either franchised hotel, and his business failed.

Robinson complained that the Wingate Franchise Disclosure document represented that the franchisor would offer development incentives and arrange to offer project financing with a third party, but he obtained no such incentives or financing. According to Robinson, Wingate knew that he would not be able to obtain financing to meet his obligations under the franchise agreement, and refused to guarantee part of a loan so Robinson could obtain financing. Wingate’s refusal and other failures to perform obligations constituted a breach of the franchise agreement, Robinson charged.

The franchisee filed suit against Wingate, seeking recovery for breach of contract, breach of the covenant of good faith and fair dealing, fraud in the inducement, and violation of the New Jersey Consumer Fraud Act. Wingate moved to dismiss the fraud in the inducement and Consumer Fraud Act claims.

Regarding the franchise arrangement with Wyndham, Robinson alleged that other franchisees had failed in the Las Vegas area and elsewhere prior to the execution of the franchise agreement; he wasn’t provided with a Franchise Disclosure Document prior to the execution of the franchise agreement, as required by the FTC franchise rule; and Wyndham knew that he would not be able to obtain financing to build a hotel yet still sold Robinson a franchise.

Thus, the franchisee alleged that Wyndham violated the FTC franchise rule, breached the covenant of good faith and fair dealing, committed fraud in the inducement, and violated the New Jersey Consumer Fraud Act. Wyndham moved to dismiss the claims alleging violation of the FTC franchise rule and the New Jersey Consumer Fraud Act.

FTC franchise rule claim. The court dismissed the FTC franchise rule claim against Wyndham because there is no private cause of action for violation of the FTC franchise disclosure rule.

Fraud in the inducement. Robinson alleged that Wingate fraudulently induced him to enter their franchise agreement using representations in its Franchise Disclosure Document and that Wyndham fraudulently induced him to enter their franchise agreement because it knew that other Wyndham hotels failed in Las Vegas and that Robinson would be unable to obtain financing to perform the contract. Both franchisors sought dismissal on the grounds that (1) the complaint failed to meet pleading requirements under Rule 9(b) and (2) the integration clause of each franchise agreement precluded liability for fraudulent inducement. Wingate further claimed that the statute of limitations had run.

Robinson’s fraud claim against Wingate was not brought within the six-year statute of limitations, the court observed. While timeliness under a statute of limitations is typically an affirmative defense brought in the answer, the Third Circuit Ruled “permits a limitations defense to be raised by a motion under Rule 12(b)(6), but only if the time alleged in the statement of a claim shows that the cause of action has not been brought within the statute of limitations.” As far as the court could determine, the fraud claim arose out of representations made in the Franchise Disclosure Document provided to Robinson prior to March 11, 2005. Thus, on the face of the complaint, the six year statute has run.

Robinson responded that (1) he brought the action shortly after speaking with counsel and (2) Wingate’s acts and their effects have been continuing. He did not claim that the statute of limitations should be tolled or that the discovery rule prevented its accrual. The court found these arguments to be without merit. Robinson’s failure to speak to a lawyer during the limitations period did not excuse bringing an action outside of the limitations period. To the extent that Robinson complained of fraud from acts occurring before 2005, the statute of limitations has run. To the extent that Robinson alleged additional acts by Wingate constituting fraud, these were not pleaded in compliance with Rules 8 and 9(b). Thus, the fraud claims against Wingate were dismissed as untimely.

Regarding the fraud claims against Wyndham, the court found that Robinson had not alleged any material misrepresentation by the franchisor. Robinson pointed to the allegations of fraud arising out of the failure of other Wyndham Hotels in Las Vegas. However, none of these allegations claimed that the franchisor had made a material misrepresentation. Thus, the claim for fraud was dismissed

Consumer Fraud Act claims. Robinson’s claims that the franchisors violated the New Jersey Consumer Fraud Act in the sale of their franchises were dismissed on the ground that the franchises were businesses, not consumer goods or services within the coverage of the Consumer Fraud Act. The Act declares unlawful fraudulent practices “in connection with the sale or advertisement of any merchandise or real estate.” Merchandise is defined as “any objects, wares, goods, commodities, services or anything offered, directly or indirectly to the public for sale.” The Third Circuit has held franchises to be outside of the coverage of the New Jersey Consumer Fraud Act. Even in the face of contrary New Jersey appellate court decisions on this issue, the court was obligated to follow the Third Circuit’s interpretation of New Jersey law unless the New Jersey Supreme Court held to the contrary. Thus, the claims were dismissed.

To the extent that the deficiencies could be cured by way of amendment, Robinson was granted 30 days to file an amended complaint.

The case is Civil Action No. 13-cv-2468 (CCC).

Attorneys: Mitchell J. Kassoff (Mitchell J. Kassoff) for Ronald J. Robinson. David S. Sager (Lowenstein Sandler LLP) for Wingate Inns International, Inc. and Wyndham Hotels and Resorts, LLC.

Companies: Wingate Inns International, Inc.; Wyndham Hotels and Resorts, LLC

Cases: FranchisingDistribution StateUnfairTradePractices NewJerseyNews