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Court Finds Common-Law Fraud Is Barred by Franchise Disclaimer Clause, but Statutory Fraud Is Not

The United States District Court for the Southern District of New York has held that a provision in a franchise agreement disclaiming a franchisee's reliance on statements made outside of the franchise disclosure document was sufficient to defeat a claim for common law fraud. The court, however, also found the same disclaimer provision did not bar a cause of action for statutory fraud under the New York Franchise Sales Act ("NYFSA"). Coraud LLC v. Kidville Franchise Co., 2015 U.S. Dist. LEXIS 77028 (S.D.N.Y. June 12, 2015). Prior to the sale of the franchise, the franchisor, Kidville, had made representations regarding market and demographic analysis, projected revenues, costs, and profits of a childcare franchise. When Coraud's revenues and costs significantly differed from Kidville's projections, Coraud filed suit, claiming that the representations made by Kidville and its franchise sales team during the negotiation process constituted both common law and statutory fraud. Kidville moved to dismiss both claims based on a clause in the franchise agreement that disclaimed liability for representations as to "volume, sales, income or profits of a Kidville Facility" not expressed in the disclosure document.

The court held that Coraud could not prevail on its common-law fraud claim because the disclaimer covered "the very matter" about which Coraud alleged it was defrauded. The court also found, however, that the antiwaiver clause in the NYFSA voided any franchise agreement provision that relieves an individual of a duty or liability established under the NYFSA, including provisions that may waive fraud claims like the disclaimer in Coraud's franchise agreement. The court noted that policies underlying the NYFSA supported this interpretation and that the NYFSA was enacted to protect New York residents who may be defrauded by aggressive salespeople who do not provide full and complete information. Accordingly, the court granted Kidville's motion to dismiss Coraud's common-law fraud claim but denied its motion to dismiss the claims under the NYFSA.

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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