In JM Vidal Inc. v. Texdis USA, Inc., 2010 U.S. Dist. LEXIS 93564 (S.D.N.Y. Sept. 3, 2010), a franchisee sued under the Washington Franchise Investment Protection Act (WFIPA) after its “Mango” clothing store franchise did not meet performance expectations. It was undisputed that the franchisee had flown to Barcelona to meet with the franchisor regarding the possibility of purchasing a franchise before the franchisor had become registered in Washington or prepared an offering circular. In addition, the franchisee had prepared financial projections for the store, which it claimed the franchisor had “approved.” The franchisee alleged that the franchisor violated the WFIPA by: (1) engaging in sales activity without registration, (2) making an unregistered earnings claim, (3) making fraudulent misrepresentations, and (4) violating the covenant of good faith and fair dealing.
On summary judgment, the court held that the registration claim was time barred, noting that Washington’s two-year “catch-all” limitations period applies to the WFIPA and that more than two years had elapsed from the execution of the franchise agreement to the time of suit. The counts relating to fraud and unlawful earnings claims each required the franchisee to show that it justifiably relied on claims by the franchisor. In dismissing these claims, the court quoted heavily from the franchise agreement, which contained an extensive disclaimer of earnings representations and an integration clause. In addition, the record showed that the franchisee was an experienced retailer that aggressively pursued the franchisor (a European company) for a U.S. franchise. The franchisee had written to the franchisor that a Mango franchise in Seattle would be “very successful” and that obtaining a franchise quickly was an “emergency.” Reliance by the franchisee on alleged earnings claims outside of the franchise agreement under these circumstances was not justified.
However, the franchisee’s claim for breach of the good faith requirement of the WFIPA (as well as claims for breach of contract and breach of the implied covenant of good faith and fair dealing under New York law) survived summary judgment. The court found that the record included evidence from which a jury could determine that the franchisor made only “half-hearted” efforts to meet its advertising obligations under the franchise agreement.
The information contained in this post is provided to alert you to legal developments and should not be considered legal advice. It is not intended to and does not create an attorney-client relationship. Specific questions about how this information affects your particular situation should be addressed to one of the individuals listed. No representations or warranties are made with respect to this information, including, without limitation, as to its completeness, timeliness, or accuracy, and Lathrop GPM shall not be liable for any decision made in connection with the information. The choice of a lawyer is an important decision and should not be based solely on advertisements.
About this Publication
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.
To subscribe to monthly emails for The Franchise Memorandum, please click here.