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The Franchise Memorandum

New Jersey Federal Court Holds Exculpatory Language in Franchise Agreement Does Not Preclude Franchisee’s Fraudulent Inducement Claims

A federal court in New Jersey recently held that a contractual disclaimer of reliance did not bar the franchisee’s claim for fraudulent inducement. TSMA Franchise Sys., Ind., v. TS of Kings Highway Inc., 2022 WL 1602137 (D.N.J. May 20, 2022). TSMA, a franchisor of martial arts studios, sued franchisee TS of Kings Highway, alleging that it had breached the franchise agreement. The franchisee counterclaimed alleging fraud and negligent misrepresentation related to TSMA’s precontractual statements regarding the value of the franchised business, anticipated revenue and profits, and buildout costs. TSMA moved to dismiss the counterclaims, arguing that disclaimers in franchise agreement, in which the franchisee acknowledged that no representations or promises were made other than those set forth in the FDD, and that the franchisee was not relying on any other representations, prohibited the claims.

The court denied the motion holding that governing New York law requires contractual disclaimers of reliance to be specific to the particular type of fact misrepresented or undisclosed. The court concluded that the disclaimer provision in the franchise agreement did not track the particular misrepresentations and omissions alleged by the franchisee and so was not an enforceable, specific, focused disclaimer.

*Sam Ferguson is a Summer Associate for Lathrop GPM who contributed to the writing of this post.

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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. 

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