The Franchise Memorandum

The United States District Court for the District of New Jersey recently granted a hotel franchisor summary judgment on its Lanham Act and breach of contract claims, and dismissed the franchisee’s claims that the franchise agreement was unconscionable and the product of negligent misrepresentation. Wyndham Hotels and Resorts, LLC v. Northstar Mt. Olive, LLC, et al., 2013 U.S. Dist. LEXIS 44468 (D.N.J. Mar. 28, 2013). Wyndham, after terminating its franchise agreement with Northstar for Northstar’s failure to pay royalties, sued Northstar to enforce the post-termination provisions of the franchise agreement, including Northstar’s obligation to cease using Wyndham’s trademarks and pay past-due royalty fees. Northstar counterclaimed, alleging, among other things, that the franchise agreement was unconscionable, and therefore void, and that Wyndham negligently misrepresented the agreement.

The district court found for Wyndham on its Lanham Act and breach of contract claims, finding Northstar’s continued use of the trademark while failing to pay its royalty fees dispositive, noting that even if Wyndham had failed to perform some of its obligations under the franchise agreement (as Northstar claimed), Northstar could not continue to take advantage of the terms of the franchise agreement while using Wyndham’s trademark without paying fees. On the issue of unconscionability the district court noted that New Jersey law requires the analysis of two factors: (1) whether there was unfairness in the formation of the contract (“procedural” unconsionability), and (2) whether the contract contained excessively disproportionate terms (“substantive” unconscionability). The district court found that the parties’ inclusion of “special stipulations” in the franchise agreement was “exactly the sort of [negotiation] that preclude[s] a finding of procedural unconscionability.” Additionally, the fact that the owners of Northstar could not identify a single provision as “unconscionable” during their depositions further supported a finding of no substantive unconscionability. Finally, in dismissing Northstar’s negligent misrepresentation claims, the district court found that Northstar failed to show that Wyndham made any specific statements, and did not demonstrate that it justifiably relied on any statements. Further, Northstar failed to identify any duty of disclosure owed by Wyndham that might give rise to negligent misrepresentation by omission.