The Franchise Memorandum

A federal district court in California determined that a franchisor could be held liable for violation of the California Unfair Competition Law (UCL) based upon the content of form membership agreements it had originated and distributed to its franchisees for sale to the public. In Hahn v. Massage Envy Franchising, LLC, 2014 U.S. Dist. LEXIS 147899 (S.D. Cal. Sept. 25, 2014), the plaintiffs represented a class of customers who had signed membership agreements at one of Massage Envy's franchised clinics. They argued that a provision in the agreements that required customers to forfeit unused prepaid massage services when they cancelled their memberships or failed to make timely payments violated the UCL. In moving for summary judgment, Massage Envy argued that it could not be held liable because it was not a party to the membership agreements and that the plaintiffs' claims could be asserted only against its franchisees.

The court held that Massage Envy failed to raise a genuine issue of material fact as to its potential liability for the business practices it had originated and denied summary judgment on that issue. The evidence demonstrated Massage Envy required its clinics to use the form membership agreements and exercised "wide-reaching control" over its franchisees' day-to-day operations beyond what was necessary to protect its brand and goodwill. The court distinguished this case from Patterson v. Domino's Pizza, LLC, 60 Cal. 4th 474 (2014), in which the California Supreme Court recently ruled a franchisor could not be held liable for sexual harassment committed by a franchisee's employee against a co-worker. The court reasoned that the franchisor in Patterson did not have control over the franchisee's employment practices, whereas Massage Envy prepared the content of the membership agreements that formed the basis of the plaintiffs' claims. The court also rejected Massage Envy's argument that its franchisees made modifications to the agreements during performance, reasoning that post-formation conduct was irrelevant to liability.