The Franchise Memorandum

A federal court in New York has dismissed contract, fraud, and negligent misrepresentation claims brought by a former iLoveKickboxing franchisee. ILKB, LLC v. Singh, 2021 WL 2312951 (E.D.N.Y. June 7, 2021). ILKB operated the iLoveKickboxing franchise system of kickboxing studios and Ardamandeep Singh entered into a franchise agreement with ILKB in July 2015 to operate an iLoveKickboxing franchise. In his claims, Singh alleged that ILKB made multiple representations to induce him into entering the franchise agreement, including that he would break even in weeks or months, that franchisees of the system were able to retain other employment and participate in the franchise as absentee owners, that the system’s marketing would generate 100 trial members per month, and that the membership conversion rate was in the 70-80% range. Singh alleged that he relied on those representations, which were false, when he entered into the franchise agreement with ILKB. In 2020, ILKB Too, a Florida LLC, assumed the assets of ILKB through an asset purchase agreement.

ILKB, former CEO Michael Parrella, and ILKB Too each sought dismissal of Singh’s claims, but ILKB Too specifically argued that the court lacked personal jurisdiction over it. The court agreed, explaining that ILKB Too was a Florida limited liability company and Singh failed to allege any facts showing ILKB Too had continuous contact with New York. Instead, Singh alleged that because ILKB Too was the successor-in-interest to ILKB, the court had jurisdiction over both entities. In determining whether successor liability attached to ILKB Too, the court looked to whether ILKB Too expressly or implicitly assumed its predecessor’s liability, whether there was a merger of seller and purchaser, whether the purchaser was a continuation of the seller, and whether the transaction was entered into fraudulently to escape certain obligations. ILKB Too had expressly assumed only certain liabilities of its predecessor and none that were related to Singh’s claims. As to whether there was a merger or continuation of the seller, the key factor identified by the court was the lack of continuity of ownership. Parrella was required to resign as part of the acquisition by ILKB Too, and he retained no interest or management role whatsoever in the successor company. Lastly, the asset purchase agreement contained a provision which stated ILKB would indemnify ILKB Too, which the court understood to mean that the asset purchase agreement was not entered into under pretenses to defraud. Taken together, successor-in-interest liability did not attach to ILKB Too, and the New York court did not have jurisdiction over the successor company. The court also dismissed the claims against ILKB and Parrella on the basis that the fraud claim was not specific or detailed enough to meet the requisite pleading standard, that the franchisor-franchisee relationship was not a “special relationship” under New York law for purposes of stating a claim for negligent misrepresentation, that Parrella was not a party to the franchise agreement and therefore could not have breached the contract, and that ILKB did not fail in its marketing obligations simply because they were not as effective as Singh had hoped they would be.