Court Watch

The court rejected the New York franchise law claims as time barred because Rich Plan had a duty as franchisor to make disclosures at the beginning of the franchise relationship, which was in 1992. The parties signed a later agreement in 1996, but this, the court ruled, was a renewal agreement, and no disclosure is required under New York law if an agreement is renewed or extended. While the 1996 agreement did not explicitly say whether it was a new agreement or a renewal or extension of the existing agreement, the court ruled that the undisputed facts indicated that it was a renewal or extension for purposes of the franchise disclosure laws.

The complaint also alleged that Rich Plan breached the express terms of the franchise agreements and the implied covenant of good faith and fair dealing. The franchisees argued that Rich Plan breached its agreement by failing to provide them with a “unique” and “distinctive merchandising system,” as promised in the franchise agreements. The court ruled, however, that the statements in the agreements about the “unique” and “distinctive” nature of Rich Plan's products were simply too vague to be promises that those products could be offered in North Carolina without complying with North Carolina insurance law.

Moreover, both the 1992 and 1996 agreements expressly placed the burden on the franchisee to “faithfully comply with all applicable laws or regulations,” regardless of anything in the agreements to the contrary. The court noted that all the evidence indicated that the service agreements were legal in North Carolina as long as the franchisee complied with the applicable insurance laws. By the terms of the agreements, it was the franchisee's duty to comply with North Carolina law and the agreements imposed no duty on Rich Plan to advise the plaintiffs on compliance or to take any other action to assist the franchisee with its legal troubles. Thus, the court concluded, there was no breach.

The claim based on the implied covenant of good faith and fair dealing fared no better. The franchisee argued that New York or North Carolina would imply a duty on the franchisor to provide the franchisee with legal advice or assistance in these circumstances. The court held, however, that there could be no such implied covenant because it would conflict with the express contractual terms, which placed the burden on the franchisee to comply with all applicable law.

In addition, the complaint alleged fraud, intentional misrepresentation, and negligent misrepresentation. The franchisee again relied on the representation in the agreements that the Rich Plan merchandising system was “unique” and “distinctive” to support its claims of fraud and misrepresentation. Just as these statements were too vague to be contractual promises, the court held that they also were too vague to be misrepresentations.

Further, the complaint alleged fraudulent concealment of the prospect that the service agreements would violate North Carolina law. However, the court found that the undisputed evidence was that Rich Plan had no knowledge that the service agreements were insurance under North Carolina law until the North Carolina attorney general's investigation of the franchisee. There was no authority to support the franchisee's contention that the failure of a franchisor to tell franchisees of every legal issue that might be confronted by franchisees under the varying laws of other states is fraudulent concealment under New York or North Carolina law.

Real Estate Franchisor Not Vicariously Liable for Discrimination

A Georgia appellate court has ruled that real estate brokerage franchisor Coldwell Banker could not be vicariously liable for racial discrimination in violation of the Georgia Fair Housing Act by its franchisee or the franchisee's real estate agent. Coldwell Banker Real Estate Corporation v. DeGraft-Hanson et al., __ S.E.2d __, 2004 WL 385605 (Ga.App. 2004).

An African-American couple, the DeGraft-Hansons, claimed that Hayes, a real estate agent of the franchisee, informed them that Hall, the homeowner, made derogatory racist remarks when Hayes brought the DeGraft-Hansons to see the house. Hayes later denied that Hall made the remarks and that she had said that he did. In addition, Hall allegedly called another real estate agent of the franchisee and told her that his house “was not supposed to be shown to blacks.” The agent told Hall that he could not restrict the sale of his property in that way, and Hall then asked her to extend an invitation to the DeGraft-Hansons to return to the house. However, the DeGraft-Hansons never visited the property again, and instead sent the brokerage a letter demanding an apology. The managing broker of the agency and Mitchell, the listing agent, obtained a signed apology from Hall, which was mailed to the DeGraft-Hansons. The DeGraft-Hansons nevertheless brought suit against them and against Hall, Mitchell, the brokerage, and Coldwell Banker for violation of the Georgia Fair Housing Act.

The trial court denied motions by Coldwell Banker, the brokerage and Mitchell for summary judgment, but gave them leave to appeal immediately. The appellate court reversed, ruling that Coldwell Banker could not be held vicariously liable, and that the franchisee did not violate the Georgia Fair Housing Act.

The DeGraft-Hansons made no claim of actual agency, conceding that Coldwell Banker did not participate in the day-to-day operations of the brokerage, but contended that Coldwell Banker was vicariously liable under an apparent agency theory. The court ruled that contention without merit on the grounds that Coldwell Banker never held out the brokerage as its agent.

According to the court, to recover under a theory of apparent agency, a plaintiff must establish: 1) that the alleged principal held out another as its agent; 2) that the plaintiff justifiably relied on the alleged agent's skill or care based on the alleged principal's representation; and 3) that this justifiable reliance led to the injury. Here, the court ruled, the DeGraft-Hansons could not meet the first required showing. They attempted to support their apparent agency theory by citing brokerage documents ' the listing agreement between the brokerage and Hall, and the flier advertising Hall's house ' which failed to clearly state the brokerage's independent status. The court held that even if such failures could have been deemed to be representations by the brokerage that it was Coldwell Banker's agent, those representations were insufficient to meet the first prong of an apparent agency claim because they were made by the alleged agent, not by the alleged principal. It was not sufficient that the agent represent its status as an agent; the court held, it must be established that the principal held out the agent as its agent.

The undisputed evidence was that the DeGraft-Hansons had no contact with Coldwell Banker, which was not involved in the listing of Hall's house. Because Coldwell Banker never held out the brokerage as its agent, the court ruled that Coldwell Banker could not be held vicariously liable under an apparent agency theory for the acts of its franchisee and was entitled to summary judgment.

The court also granted summary judgment in favor of the brokerage and Mitchell, the listing agent. It found that while the evidence showed that Hall told the listing agent that he did not want his house shown to African-Americans, this evidence did not support the further inference that Mitchell and the brokerage shared Hall's bias, let alone that they actually reached an agreement with him to discriminate based on race. Even before the DeGraft-Hansons were taken to the Hall house, an agent of the brokerage showed the house to another African-American client, who had been referred by Mitchell. Furthermore, the DeGraft-Hansons were in fact taken by an agent of the brokerage to view Hall's house; it was Hall who then turned both the agent and the DeGraft-Hansons away. Finally, after Hall refused to let the agent show the house to the DeGraft-Hansons, the brokerage informed him that he could not restrict the sale of his house in that way, it did not show the house to any other buyers, and it then voided the Hall listing.

The evidence, the court ruled, actually supported the opposite inference to that which the plaintiff made. The evidence indicated that Mitchell and the brokerage were actively seeking to sell the house to the DeGraft-Hansons or any other interested African-American buyer. Since there was no evidence of a racially discriminatory housing practice by Mitchell and the brokerage, only evidence of discrimination by homeowner Hall, the court ruled that the trial court erred in denying summary judgment to Mitchell and the brokerage on the claim that they violated the Fair Housing Act.

Expert Testimony Required to Establish Damage Claim for Lost Future Royalties

A Connecticut court has held, after a bench trial, that a transmission repair franchisor could not collect lost future royalty payments as damages from its franchisee's landlord because the evidence presented at trial relating to the total amount of those damages was too speculative absent expert testimony. Cottman Transmission Systems, Inc. v. HOCAP, Corp., 2004 WL 503801 (Conn. Super. 2004).

This case involved a dispute between Cottman Transmission Systems, Inc. (Cottman) and HOCAP, Corp. (HOCAP), which was the landlord of one of Cottman's franchisees. Pursuant to a lease agreement between HOCAP and Cottman's franchisee, if the franchisee defaulted under the lease, Cottman had the right to assume all of the franchisee's obligations. In November 1996, HOCAP notified Cottman that its franchisee had breached the lease agreement and, according to the terms of the lease, HOCAP gave Cottman approximately 20 days within which to cure the defaults and assume the lease. Upon learning of the default, Cottman sought permission for one of its representatives to inspect the premises to determine if it was suitable for a transmission repair business. HOCAP delayed before finally allowing the Cottman representative the opportunity to inspect the premises. When the premises were finally inspected, Cottman noticed that HOCAP had already removed all of the franchisee's equipment and furniture; torn down walls; eliminated offices and bathrooms; parked a small bulldozer inside the building; and, destroyed the capacity of the property to house a transmission repair business without significant renovations and repairs.

At trial, according to the court, Cottman proved that it intended to occupy the premises and continue to provide transmission repair services. HOCAP, on the other hand, failed to offer any evidence that it was entitled to control and alter the premises before the expiration of Cottman's contractual right to cure the franchisee's default and assume all obligations under the lease. As a result, the court found that Cottman had proven by a preponderance of the evidence that HOCAP's actions within the 20-day option period made the premises uninhabitable for the purpose of conducting a transmission business, and that the unlawful acts caused Cottman to suffer damages. The court awarded Cottman damages for advertising expenses that it paid to Yellow Pages for the center and for warranty repair orders that would have been covered under warranty had the location not been uninhabitable.

While the court found in Cottman's favor, it refused to award damages for future royalties. Cottman argued that it was entitled to lost future royalties in the amount of 7.5% of the gross income that the franchise would have produced had it remained in business at the location. According to the court, the evidence offered at trial regarding lost future profits was too speculative. The court noted that Cottman produced no expert testimony. There was no opinion offered in evidence as to whether the proper calculation of damages was the national sales average, the local sales average, or the results from the actual shop that was the subject of the litigation. Thus, without expert testimony, the trial court concluded that it could not calculate lost profit damages without engaging in rank speculation, which the law does not permit. Therefore, the court refused to award Cottman damages for lost future profits.

Franchisor Had No Disclosure Obligation to Renewing Franchisee

The U.S. Court of Appeals for the Fourth Circuit has affirmed a grant of summary judgment to a franchisor sued by its franchisee for failure to make disclosures required by New York law, breach of contract and fraud. Rich Food Services, Incorporated et al. v. Rich Plan Corporation et al., unpublished opinion, 2004 WL 937260, CCH Bus. Fran. Guide Par. 12,798 (4th Cir. 2004).

The franchisee, which was located in North Carolina, sold Rich Plan's food systems, which included frozen food, freezers, cooking equipment, and comprehensive service agreements. The North Carolina attorney general commenced an investigation of the franchisee's business to determine whether the service agreements the franchisee was selling constituted insurance. Subsequently, a North Carolina court determined that the agreements were in fact contracts of insurance under North Carolina law, and the franchisees entered into a consent judgment approved by the North Carolina attorney general. They then brought suit against Rich Plan, alleging that under the franchise law of New York, where Rich Plan was headquartered, and principles of common law fraud, Rich Plan should have disclosed to them that the service agreements might be insurance under North Carolina law.

The court rejected the New York franchise law claims as time barred because Rich Plan had a duty as franchisor to make disclosures at the beginning of the franchise relationship, which was in 1992. The parties signed a later agreement in 1996, but this, the court ruled, was a renewal agreement, and no disclosure is required under New York law if an agreement is renewed or extended. While the 1996 agreement did not explicitly say whether it was a new agreement or a renewal or extension of the existing agreement, the court ruled that the undisputed facts indicated that it was a renewal or extension for purposes of the franchise disclosure laws.

The complaint also alleged that Rich Plan breached the express terms of the franchise agreements and the implied covenant of good faith and fair dealing. The franchisees argued that Rich Plan breached its agreement by failing to provide them with a “unique” and “distinctive merchandising system,” as promised in the franchise agreements. The court ruled, however, that the statements in the agreements about the “unique” and “distinctive” nature of Rich Plan's products were simply too vague to be promises that those products could be offered in North Carolina without complying with North Carolina insurance law.

Moreover, both the 1992 and 1996 agreements expressly placed the burden on the franchisee to “faithfully comply with all applicable laws or regulations,” regardless of anything in the agreements to the contrary. The court noted that all the evidence indicated that the service agreements were legal in North Carolina as long as the franchisee complied with the applicable insurance laws. By the terms of the agreements, it was the franchisee's duty to comply with North Carolina law and the agreements imposed no duty on Rich Plan to advise the plaintiffs on compliance or to take any other action to assist the franchisee with its legal troubles. Thus, the court concluded, there was no breach.

The claim based on the implied covenant of good faith and fair dealing fared no better. The franchisee argued that New York or North Carolina would imply a duty on the franchisor to provide the franchisee with legal advice or assistance in these circumstances. The court held, however, that there could be no such implied covenant because it would conflict with the express contractual terms, which placed the burden on the franchisee to comply with all applicable law.

In addition, the complaint alleged fraud, intentional misrepresentation, and negligent misrepresentation. The franchisee again relied on the representation in the agreements that the Rich Plan merchandising system was “unique” and “distinctive” to support its claims of fraud and misrepresentation. Just as these statements were too vague to be contractual promises, the court held that they also were too vague to be misrepresentations.

Further, the complaint alleged fraudulent concealment of the prospect that the service agreements would violate North Carolina law. However, the court found that the undisputed evidence was that Rich Plan had no knowledge that the service agreements were insurance under North Carolina law until the North Carolina attorney general's investigation of the franchisee. There was no authority to support the franchisee's contention that the failure of a franchisor to tell franchisees of every legal issue that might be confronted by franchisees under the varying laws of other states is fraudulent concealment under New York or North Carolina law.

Real Estate Franchisor Not Vicariously Liable for Discrimination

A Georgia appellate court has ruled that real estate brokerage franchisor Coldwell Banker could not be vicariously liable for racial discrimination in violation of the Georgia Fair Housing Act by its franchisee or the franchisee's real estate agent. Coldwell Banker Real Estate Corporation v. DeGraft-Hanson et al., __ S.E.2d __, 2004 WL 385605 (Ga.App. 2004).

An African-American couple, the DeGraft-Hansons, claimed that Hayes, a real estate agent of the franchisee, informed them that Hall, the homeowner, made derogatory racist remarks when Hayes brought the DeGraft-Hansons to see the house. Hayes later denied that Hall made the remarks and that she had said that he did. In addition, Hall allegedly called another real estate agent of the franchisee and told her that his house “was not supposed to be shown to blacks.” The agent told Hall that he could not restrict the sale of his property in that way, and Hall then asked her to extend an invitation to the DeGraft-Hansons to return to the house. However, the DeGraft-Hansons never visited the property again, and instead sent the brokerage a letter demanding an apology. The managing broker of the agency and Mitchell, the listing agent, obtained a signed apology from Hall, which was mailed to the DeGraft-Hansons. The DeGraft-Hansons nevertheless brought suit against them and against Hall, Mitchell, the brokerage, and Coldwell Banker for violation of the Georgia Fair Housing Act.

The trial court denied motions by Coldwell Banker, the brokerage and Mitchell for summary judgment, but gave them leave to appeal immediately. The appellate court reversed, ruling that Coldwell Banker could not be held vicariously liable, and that the franchisee did not violate the Georgia Fair Housing Act.

The DeGraft-Hansons made no claim of actual agency, conceding that Coldwell Banker did not participate in the day-to-day operations of the brokerage, but contended that Coldwell Banker was vicariously liable under an apparent agency theory. The court ruled that contention without merit on the grounds that Coldwell Banker never held out the brokerage as its agent.

According to the court, to recover under a theory of apparent agency, a plaintiff must establish: 1) that the alleged principal held out another as its agent; 2) that the plaintiff justifiably relied on the alleged agent's skill or care based on the alleged principal's representation; and 3) that this justifiable reliance led to the injury. Here, the court ruled, the DeGraft-Hansons could not meet the first required showing. They attempted to support their apparent agency theory by citing brokerage documents ' the listing agreement between the brokerage and Hall, and the flier advertising Hall's house ' which failed to clearly state the brokerage's independent status. The court held that even if such failures could have been deemed to be representations by the brokerage that it was Coldwell Banker's agent, those representations were insufficient to meet the first prong of an apparent agency claim because they were made by the alleged agent, not by the alleged principal. It was not sufficient that the agent represent its status as an agent; the court held, it must be established that the principal held out the agent as its agent.

The undisputed evidence was that the DeGraft-Hansons had no contact with Coldwell Banker, which was not involved in the listing of Hall's house. Because Coldwell Banker never held out the brokerage as its agent, the court ruled that Coldwell Banker could not be held vicariously liable under an apparent agency theory for the acts of its franchisee and was entitled to summary judgment.

The court also granted summary judgment in favor of the brokerage and Mitchell, the listing agent. It found that while the evidence showed that Hall told the listing agent that he did not want his house shown to African-Americans, this evidence did not support the further inference that Mitchell and the brokerage shared Hall's bias, let alone that they actually reached an agreement with him to discriminate based on race. Even before the DeGraft-Hansons were taken to the Hall house, an agent of the brokerage showed the house to another African-American client, who had been referred by Mitchell. Furthermore, the DeGraft-Hansons were in fact taken by an agent of the brokerage to view Hall's house; it was Hall who then turned both the agent and the DeGraft-Hansons away. Finally, after Hall refused to let the agent show the house to the DeGraft-Hansons, the brokerage informed him that he could not restrict the sale of his house in that way, it did not show the house to any other buyers, and it then voided the Hall listing.

The evidence, the court ruled, actually supported the opposite inference to that which the plaintiff made. The evidence indicated that Mitchell and the brokerage were actively seeking to sell the house to the DeGraft-Hansons or any other interested African-American buyer. Since there was no evidence of a racially discriminatory housing practice by Mitchell and the brokerage, only evidence of discrimination by homeowner Hall, the court ruled that the trial court erred in denying summary judgment to Mitchell and the brokerage on the claim that they violated the Fair Housing Act.

Expert Testimony Required to Establish Damage Claim for Lost Future Royalties

A Connecticut court has held, after a bench trial, that a transmission repair franchisor could not collect lost future royalty payments as damages from its franchisee's landlord because the evidence presented at trial relating to the total amount of those damages was too speculative absent expert testimony. Cottman Transmission Systems, Inc. v. HOCAP, Corp., 2004 WL 503801 (Conn. Super. 2004).

This case involved a dispute between Cottman Transmission Systems, Inc. (Cottman) and HOCAP, Corp. (HOCAP), which was the landlord of one of Cottman's franchisees. Pursuant to a lease agreement between HOCAP and Cottman's franchisee, if the franchisee defaulted under the lease, Cottman had the right to assume all of the franchisee's obligations. In November 1996, HOCAP notified Cottman that its franchisee had breached the lease agreement and, according to the terms of the lease, HOCAP gave Cottman approximately 20 days within which to cure the defaults and assume the lease. Upon learning of the default, Cottman sought permission for one of its representatives to inspect the premises to determine if it was suitable for a transmission repair business. HOCAP delayed before finally allowing the Cottman representative the opportunity to inspect the premises. When the premises were finally inspected, Cottman noticed that HOCAP had already removed all of the franchisee's equipment and furniture; torn down walls; eliminated offices and bathrooms; parked a small bulldozer inside the building; and, destroyed the capacity of the property to house a transmission repair business without significant renovations and repairs.

At trial, according to the court, Cottman proved that it intended to occupy the premises and continue to provide transmission repair services. HOCAP, on the other hand, failed to offer any evidence that it was entitled to control and alter the premises before the expiration of Cottman's contractual right to cure the franchisee's default and assume all obligations under the lease. As a result, the court found that Cottman had proven by a preponderance of the evidence that HOCAP's actions within the 20-day option period made the premises uninhabitable for the purpose of conducting a transmission business, and that the unlawful acts caused Cottman to suffer damages. The court awarded Cottman damages for advertising expenses that it paid to Yellow Pages for the center and for warranty repair orders that would have been covered under warranty had the location not been uninhabitable.

While the court found in Cottman's favor, it refused to award damages for future royalties. Cottman argued that it was entitled to lost future royalties in the amount of 7.5% of the gross income that the franchise would have produced had it remained in business at the location. According to the court, the evidence offered at trial regarding lost future profits was too speculative. The court noted that Cottman produced no expert testimony. There was no opinion offered in evidence as to whether the proper calculation of damages was the national sales average, the local sales average, or the results from the actual shop that was the subject of the litigation. Thus, without expert testimony, the trial court concluded that it could not calculate lost profit damages without engaging in rank speculation, which the law does not permit. Therefore, the court refused to award Cottman damages for lost future profits.