The Franchise Memorandum

Following a franchisor’s motion to dismiss and motion for summary judgment, the United States District Court for the Southern District of New York has dismissed a franchisee’s fraud claims based on actions that occurred after it entered the parties’ franchise agreement. Safe Step Walk In Tub Co. v. CKH Indus., Inc., 2018 WL 4539656 (S.D.N.Y. Sept. 20, 2018). Under the franchise agreement, Safe Step permitted CKH to use Safe Step’s trademarks when marketing, selling, and installing its walk-in bathtubs in the Mid-Atlantic and New England areas. Safe Step brought suit against CKH for nonpayment of fees, and CKH brought counterclaims alleging a variety of contractual, quasi-contractual, and fraud claims.

CKH alleged that Safe Step had failed to provide franchise disclosure documents, intentionally escalated CKH’s costs to try to constructively terminate the franchise, expressed a bad-faith intention to renew the franchise, and failed to make buy-out offers for the franchise. The court rejected Safe Step’s argument that CKH had failed to plead its fraud claims with sufficient particularity. Instead, the court divided the fraud allegations into those occurring before and those occurring after the execution of the franchise agreement. The court dismissed the fraud claims based on actions occurring after the execution of the franchise agreement, holding that CKH was limited to its contractual remedies for those claims, but let stand CKH’s fraud allegations relating to the parties’ pre-agreement negotiations. The court also denied Safe Step’s motion for summary judgment on its breach of contract claim because the parties disagreed as to whether there was a meeting of the minds, creating a factual dispute regarding the contract’s validity. The court further noted that the motion for summary judgment was premature, since CKH had not yet had the opportunity to conduct discovery.