The Franchise Memorandum

In responding to a motion to dismiss, the United States District Court for the Western District of Virginia recently permitted a “negligence per se” claim based on a franchisor’s FTC disclosure violation to proceed under Georgia law. Bans Pasta, LLC v. Mirko Franchising, LLC, 2014 U.S. Dist. LEXIS 19953 (W.D. Va. Feb. 12, 2014). Mirko, an Italian restaurant franchisee, alleged that the franchisor, Bans Pasta, violated the FTC Rule’s disclosure requirements by providing financial performance representations outside the context of Item 19 of the FDD. Bans Pasta filed a motion to dismiss arguing that because neither the FTC Act nor the FTC Franchise Rule gives rise to a private cause of action, as numerous courts have held, the court should not create a private right of action under a tort theory. Bans Pasta implored the court not to “open the door to such claims since it would be tantamount to allowing private rights of action that have been universally barred since the inception of the FTC Act.”

Mirko countered that it was not bringing a direct claim for a violation of the FTC Rule, but instead pled the violation as the basis for its negligence per se claim. In analyzing whether to grant the franchisor’s motion to dismiss the claim, the court first acknowledged that no cases could be found directly addressing the viability of a negligence per se claim based upon a violation of the FTC Act. Next, the court reviewed state law and determined that both Georgia and Virginia law expressly allow negligence per se claims to be premised on statutes and regulations that do not give rise to a private cause of action. Georgia case law indicated that its statute must dictate a “standard of care” and not “merely impose an administrative requirement,” and the plaintiff must still prove the additional elements of duty, proximate causation, and injury to establish liability. Examining whether a standard of care existed, the court concluded that the FTC Franchise Rule supplies a clear legal duty requiring specific actions and thus supplies the standard of care necessary to support a negligence claim.