FRANCHISOR 101: PRINCIPALS NOT LIABLE UNLESS THEY PARTICIPATE IN FRAUD
In Sig, Inc. v. AT&T Digital Life, Inc., a federal district court in Miami held that the principal officers of a home and business security and electronics systems manufacturer were not liable to two terminated dealers under the Florida Sales of Business Opportunities Act, the Florida Deceptive and Unfair Trade Practices Act or the Florida Franchise Act, but that the manufacturer could be held liable for these Florida statutory claims.
The dealers claimed that they were franchisees of the manufacturer, that the manufacturer and its principals were required to comply with the FTC franchise disclosure rule, but failed to do so, and that the principals had misrepresented the prospects of success of their dealership. The principals filed a motion to dismiss claiming the dealers failed to identify any intentional misrepresentations made by any of the principals.
Under applicable law, a corporate officer of a franchisor may not be held personally liable unless he personally participated in the fraud. The court found here that the dealers' complaint failed to state any facts demonstrating the principals' personal participation in an intentional misrepresentation regarding the likelihood of success of the dealerships and dismissed the Franchise Act claims against the principals.
The business opportunity and deceptive and unfair trade practices claims were based on the principals' failure to comply with the FTC franchise disclosure rule, their misrepresentations and nondisclosures about the dealership, and their alleged violations of the Florida franchise and business opportunity laws. The court again held that absent allegations that an individual was a direct participant in the improper dealings, the principals of the manufacturer could not be found liable for violating these statutes. To read the full case, click here.
FRANCHISEE 101: FAILURE OF HOTEL RESERVATION SYSTEM CLAIMS GO FORWARD
A federal district court in Kansas City has ruled that a hotel franchisor was not entitled to the dismissal of a franchisee's claim for breach of contract based on the alleged failure of the franchisor's reservation system and the franchisor's failure to effectively market the franchisee's hotel.
The franchisee believed that the franchisor would design and provide a marketing program tailored to fit and drive demand to the hotel. But, according to the franchisee in 5 detailed pages of allegations it presented to the court, the franchisee's hotel was never visible on Internet searches for Kansas City hotels and the franchisor's Central Reservation Office failed to find and recommend the hotel to potential customers.
The franchisor argued that the franchisee did not identify specific contractual provisions it breached and asserted that it had no obligation to the franchisee with respect to its reservation system because the agreement made it clear that the franchisor "enjoys absolute and total discretion with regard to its control" over the reservation system. However, the agreement obligated the franchisee to pay monthly fees tied to the franchisor's marketing association and obligated the franchisor to afford the franchisee access to its reservation service for the hotel, which was paid for in part by the franchisee's mandatory services contribution fee. Since the franchisee's complaint listed a number of obligations that the franchisor had under the agreement and alleged that the franchisor breached those obligations, the court could not conclude, as a matter of law, that the agreement imposed no marketing or reservations obligations on the franchisor on its face. To read the full case, click here.