The Franchise Memorandum

A federal court in New York denied in part a motion to dismiss a franchisee’s fraud and negligent representation claims. Gould v. ILKB, LLC, 2022 WL 2079652 (E.D.N.Y. June 9, 2022). Franchisee Roger Gould alleged that kickboxing studio franchisor ILKB induced him to purchase two franchises by misrepresenting and omitting material information in the franchise disclosure document and in meetings with Gould. ILKB moved to dismiss the complaint, arguing that (1) previous lawsuits against ILKB alleging fraud and a bankruptcy filing involving one of its officers are matters of public record; (2) representations concerning expected future profits, memberships and trial memberships are predictions; and (3) representations that a studio could be run by an absentee owner were mere opinion. The district court granted ILKB’s motion in part and denied it in part.

The court held that the failure to disclose prior litigation involving ILKB was not fraud or negligent misrepresentation because it “could have been discovered by the exercise of ordinary diligence.” This conclusion did not extend, however, to lawsuits involving ILKB’s predecessor entity, which Gould could not uncover without knowing the predecessor’s relationship to ILKB. The court also held that representations concerning existing franchisee profits, start-up costs, memberships, and trial memberships could be the basis of a misrepresentation claim, as references to “the average ILKB franchise” showed them to be factual assertions rather than predictions. ILKB’s representations about its intended future actions, on the other hand, were predictions. Finally, the court held that representations about the suitability of the franchise system for absentee ownership were not statements of opinion, because ILKB used the past tense to assert that franchisees had successfully functioned as absentee owners in the past.