The Franchise Memorandum

In Sherman v. PremierGarage Systems, LLC, 2010 U.S. Dist. LEXIS 77392 (D. Ariz. July 30, 2010), a handful of PremierGarage franchisees sued the franchisor for, among other things, intentional and negligent misrepresentation and fraud, breach of contract and of the implied covenant of good faith and fair dealing, and violations of Florida’s Franchise Misrepresentation Act. The franchisees claimed the franchisor, PremierGarage, made affirmative earnings claims before the execution of the franchise agreement and misrepresented the quality of the floor-coating materials used to operate a PremierGarage franchise. PremierGarage filed a motion to dismiss most of the claims except for breach of the implied covenant. As an initial matter, the court dismissed the claims brought by several Canadian franchisees, as their forum-selection clauses required them to litigate their claims in Canadian courts.

As for the remaining claims, the court granted the motion to dismiss, in part. It dismissed the fraud and intentional and negligent misrepresentation claims because they were barred under Arizona’s economic loss doctrine. The court cited the recent Flagstaff v. Design Alliance decision stating that, in the context of construction-related contracts, “allowing tort claims poses a greater danger of undermining the policy concerns of contract law.” It also dismissed the claim concerning violations of Florida’s franchise law, finding that it was inapplicable under the choice of law provision in the parties’ agreement, which provided for the interpretation of the agreement under Arizona law. PremierGarage’s motion as to the breach of contract claim, however, was denied, as the court found that the franchisees had sufficiently pleaded provisions of the agreement that the franchisor had breached.