The Franchise Memorandum

The United States District Court for the District of New Jersey recently granted summary judgment in favor of the franchisor of the Wingate Hotels system on its claim for damages (including liquidated damages) arising from the early termination of a franchise agreement by a franchisee. In Wingate Inns International, Inc. v. P.G.S, LLC, 2012 U.S. Dist. LEXIS 115745 (D.N.J. Aug. 16, 2012), the franchisee entered into a franchise agreement for a ten-year term. The agreement stated that the franchisee would pay liquidated damages capped at $250,000 if it terminated the franchise agreement prior to its expiration. Later, the franchisee signed a promissory note in favor of Wingate for $250,000, in exchange for which the franchisee received the same amount to be used toward building and later expanding the hotel. After opening its hotel, but several years before expiration of the term, the franchisee notified Wingate that it was terminating the franchise agreement. Wingate acknowledged the termination, then sought damages from the franchisee for royalties and other amounts due under the agreement, the remaining amounts due under the promissory note, and the $250,000 in agreed-upon liquidated damages.

In response, the franchisee claimed that it had been fraudulently induced to enter into the franchise agreement by statements by Wingate representatives that: (a) all damages arising from termination by the franchisee (not merely the liquidated damages) would be capped at $250,000 and (b) 30% of franchisee’s reservations would come from Wingate’s reservation system. The court rejected both of these arguments. With respect to the claim that Wingate fraudulently concealed the real meaning of the damages cap, the court found that the franchisee’s testimony was barred by the parol evidence rule and that the franchise agreement and note unambiguously provided for all three categories of damages. With respect to Wingate’s alleged representations regarding the percentage of reservations the franchisee could expect from the reservation system, the court noted that a promise regarding future events that are outside the promisor’s control may not form the basis of a fraud claim. The court also held that under Third Circuit precedent, the New Jersey Consumer Fraud Act does not apply to the sale of franchises.