Judgment in Favor of Franchise Cancellation Due to Fraud by the Franchisor

The Franchisee sought a Dunkin’ Donuts/ Baskin-Robbins franchise with a location in a mall. During negotiations, the Franchisor learned that the Franchisee was also negotiating with a competing franchise, Red Mango Frozen Yogurt and Smoothies. When confronted by the Franchisor and instructed that he would not be approve for a franchise if he owned or had an interest in a Red Mango franchise, Franchisee responded in writing that he had no such interest. Subsequently, the parties entered a Franchise Agreement, which contained specific language concerning material misrepresentations.

The Franchisee’s wife entered into a separate Franchise Agreement with Red Mango, and closed on a lease for space contiguous to the Dunkin’ Donuts/ Baskin-Robbins store. Discovery produced an email [its always an email, folks] from the Franchisee to a mall leasing agent, in which he wrote, “[d]o not talk about [R]ed [M]ango with [a Dunkin’ employee].” Franchisee secured a commercial loan of $250,000 for the first franchise and loaned $150,000 to the Red Mango franchise for its construction next door.

A year later, the Franchisor served the Franchisee with a default notice, specifying that the Franchisee had intentionally misrepresented its involvement in a competing business for the purpose of inducing the Franchisor to enter into the agreement, and concealed his interest in the competing business.

The District Court granted the Franchisor summary judgment in part finding, upon application of Massachusetts law, that the Franchisee had committed fraud and that the Franchisor had reasonably relied upon several of these misrepresentations to its detriment. The Franchise was declared terminated and the Franchisee ordered to comply with the post-termination obligations.

The Court of Appeals affirmed and added that the Franchisor had fully complied with the New Jersey Franchise Practices Act (NJFPA) by serving written notice, and rejected the Franchisee’s argument that his fraud did not amount to a failure to “substantially comply” with the agreement. There was very good cause to terminate.

Citation: 2017 U.S. App. LEXIS 2033

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