The Franchise Memorandum

A Wisconsin federal district court dismissed a terminated franchisee’s tort based claims premised on a pre-agreement misrepresentation by the franchisor, but refused to dismiss—for the time being—the franchisee’s unjust enrichment claim. ERA Franchise Sys., LLC v. Hoppens Realty, Inc., 2013 U.S. Dist. LEXIS 107078 (W.D. Wis. July 31, 2013). Prior to the execution of a franchise agreement, a representative from ERA allegedly told the franchisee that it would receive support and training from ERA during the franchise relationship. The franchisee claimed that ERA made the statement knowing that it was not true, and that it did not receive support and training. After the franchisee stopped paying royalties, ERA terminated the franchise agreement and initiated a lawsuit for breach of contract and trademark infringement. The franchisee asserted a number of counterclaims, including claims for breach of contract, unjust enrichment, intentional misrepresentation, conversion, and violation of the Wisconsin Fair Dealership Law.

Applying the economic loss doctrine, which bars tort claims for purely economic losses arising out a contractual relationship, the court granted ERA’s motion to dismiss the franchisee’s claims for intentional misrepresentation and conversion. The court held that although Wisconsin law does not recognize the economic loss doctrine in contracts for services, New Jersey law does, and the franchise agreement dictated that New Jersey law control on the issue. The court, however, refused to dismiss the franchisee’s unjust enrichment claim. It did not agree with ERA’s argument that the claim was undermined because the franchisee had continued to receive the benefit of operating as an ERA franchisee for at least two years after ERA’s alleged breach.