The Franchise Memorandum

A federal court in California granted in part a franchisor’s motion to dismiss a franchisee’s California Unfair Competition Law (UCL) and business interference claims, while denying the motion as to other aspects of the unfair competition claims and the covenant of good faith and fair dealing claim. Ronald Cohn, Inc. v. Sprouts Farmers Market, Inc., 2021 WL 120896 (S.D. Cal. Jan. 13, 2021). Ronald Cohn entered into a Trademark License Agreement (TLA) with Boney’s Services, Inc. in 1990 and then a second TLA in 1995. Boney’s was subsequently purchased by Sprouts Farmers Market in 2011, and Sprouts amended the TLA. Ronald Cohn alleged that Sprouts prevented Ronald Cohn from accessing promotional and discounted pricing, failed to provide advanced notice of certain advertising, diverted customers to corporate-owned stores because Ronald Cohn was not listed on Sprouts’ website, and conducted online sales within Ronald Cohn’s protected area. Sprouts moved to dismiss five of the six claims, including three distinct claims under the UCL.

UCL claims may be asserted under its “unlawful” prong, its “unfair” prong, or its “fraudulent” prong, and Ronald Cohn brought claims under all three. The court denied Sprouts’ motion to dismiss under the “unlawful” and “unfair” theories and granted the motion on the “fraudulent” claim. Ronald Cohn asserted that Sprouts failed to register the franchise under the California Franchise Investment Law (CFIL), which served as a predicate for showing “unlawful” and “unfair” actions under the UCL. Sprouts contended that the claim was time-barred by the four-year statute of limitations of both the CFIL and UCL, but Ronald Cohn argued that the claims were not time-barred because Sprouts had made “material modifications to the franchisee-franchisor relationship” in 2017, which overcomes the limitations bar. The court agreed with Ronald Cohn, determining that the limitations period began in 2017 when the complaint alleged Sprouts had materially modified the franchisor-franchisee relationship, and thus the “unlawful” and “unfair” claims were not time-barred. Ronald Cohn’s “fraudulent” claim under the UCL, however, did not rely on the CFIL predicate and instead alleged that Sprouts misled consumers about the availability of certain products. The court concluded that Ronald Cohn failed to show reliance on Sprouts’ misrepresentations because Ronald Cohn did not allege its own reliance on Sprouts’ misrepresentations and was not a member of the consumer class alleged to have been deceived. As a result, the court dismissed the fraudulent prong of Ronald Cohn’s UCL claim.