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The Franchise Memorandum

Delaware Federal Court Denies Franchisor’s Motion to Dismiss Fraud Claim

A former franchisee’s fraud action against Little Nest Portraits may proceed, a federal court recently held, exposing the photography studio franchisor and its owner to potential punitive damages under Washington’s Franchise Investment Protection Act (“FIPA”). Wagenbrenner v. Little Nest Group, LLC, 2019 WL 2491913 (D. Del. June 14, 2019). This dispute arose after Wagenbrenner - a Washington resident - quit a lucrative career in order to start a Little Nest franchised studio. Wagenbrenner alleged that, prior to entering into the franchise agreement, Little Nest owner Laura Novak Meyer made numerous misrepresentations regarding the financial performance of the franchise, including the assurance that Wagenbrenner could expect earnings comparable to her current $300,000 annual income. When the expected profits did not materialize, Wagenbrenner brought suit against both Little Nest and Meyer, seeking nearly $2 million in actual and punitive damages for the alleged fraudulent statements. Little Nest and Meyer moved to dismiss, arguing that: (1) Wagenbrenner could not hold Meyer personally liable; and (2) the franchise agreement precluded punitive damages and limited recovery to the amounts Wagenbrenner paid to Little Nest.

The court denied the motion in its entirety, allowing Wagenbrenner to proceed with discovery on her claims. The court first determined that Wagenbrenner adequately stated a claim against Meyer, rejecting Little Nest’s argument that Wagenbrenner could not hold Meyer personally liable without first piercing the corporate veil. Instead, the court found that Wagenbrenner satisfied the heightened pleading requirements for fraud actions, in part, by specifically identifying the alleged fraudulent misrepresentations. The court also rejected Little Nest’s argument that the franchise agreement precluded Wagenbrenner from seeking punitive or exemplary damages under FIPA. Although the franchise agreement contained a limited damages provision, it also had an addendum that stated the provisions of FIPA would prevail over the contractual language in the event of a conflict. Wagenbrenner argued that this addendum thus incorporated FIPA - which specifically allows for recovery of punitive damages. Construing the facts in the light most favorable to Wagenbrenner, the court found that she adequately stated a claim for damages.

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