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Third Circuit Affirms Dismissal of Franchisee's Claims That Franchisor Misrepresented Startup Costs and Constructively Terminated Franchise
Posted in Terminations

The Third Circuit recently affirmed a federal district court's dismissal of a lawsuit against the franchisor of the Doctors Express franchise system. In Fabbro v. DRX Urgent Care, LLC, 2015 WL 1453537 (3d Cir. Apr. 1, 2015), the franchisee alleged that Doctors Express breached its contract, breached the duty of good faith, and fraudulently misrepresented the actual startup costs the franchisee would expend after entering into the franchise agreement. It claimed that its actual costs exceeded the estimates by a substantial margin, and it argued that overly restrictive requirements and changes in the Doctors Express business model had effectively rendered the franchise inoperable, constituting constructive termination in violation of New Jersey's franchise act.

The court first rejected the franchisee's argument that the startup estimates in the Doctors Express disclosure documents had somehow constituted a breach of contract or of the duty of good faith and fair dealing. The court noted that the complaint had not identified a single provision of the franchise agreement that had been breached by these disclosures, since they were expressly identified as estimates that did not account for local economic and market conditions. The good faith and fair dealing claim was not permitted where there was no evidence or allegation of bad motive or intent to create an economic disadvantage. Next, the court rejected the franchisee’s fraud claim because the estimates were nothing more than a prediction as to the future course of events, and there was no showing that the initial estimates were inaccurate at the time they were made or known to be false by the franchisor. Finally, the court concluded that there could be no constructive termination because the franchisee had failed to identify any facts that would demonstrate Doctors Express wanted to cease doing business with it or otherwise undermine its business. To the contrary, the court observed that Doctors Express would continue to profit from the continued business of the franchisee, which was otherwise still in “good standing” with Doctors Express.

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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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