Franchise Termination Upheld: Federal Court Harshly Spanks Terminated Immigrant Childcare Franchisees
By: Jeffrey M. Goldstein
Goldstein Law Firm, PLLC
(202) 293 3947
Creative American Education, LLC, v. The Learning Experience Systems, LLC, 2015 WL 4655087, United States District Court, S.D. Florida. (July 31, 2015)
Reading between the lines of this franchise termination case, it appears that the franchisees in this case were doomed from the very moment they uttered their first words at the trial. The scathing and lengthy decision was a victory for the Defendant, the franchisor, The Learning Experience (“TLE”), which had terminated the Plaintiff, the franchisee, Creative American Education (“CAE”). The individuals who had created and managed the Plaintiff business entity were Bernard Loganathan and his wife, Katijah Alaudeen–Loganathan (collectively referred to as the Loganathans).
The case pivoted off of two agreements including a Franchise Agreement and a Management Agreement. CAE expectedly contended that TLE breached these agreements through TLE’s failure to provide appropriate training, advice, and guidance and through an improper seizure of the CAE franchise. TLE argued that CAE breached the agreements through a failure to comply with TLE standards and state regulations.
The Loganathans were citizens of Singapore, and in June of 2011 the Loganathans began to explore a plan to immigrate to the United States. Because Ms. Alaudeen–Loganathan had some experience in the childcare industry in Singapore, she began to research childcare franchises in the United States. The Loganathans believed that a childcare franchise would be a good vehicle for their immigration to the United States because it would provide them with income and would serve as the basis for obtaining a visa.
The primary claims by the parties were that the other party had breached the franchise and management agreements in various and repeated ways. CAE argued, in part, that TLE breached Section 7 of the Franchise Agreement through a “failure to train” CAE. The Court quickly disposed of this traditional franchisee argument by pointing out that “Section 7 … does not obligate TLE to train franchisees to any specific level.” Although it could have ended its analysis there, the Court continued by pointing out that the training concept was included in the franchise agreement not as an obligation owed by the franchisor to the franchisee, but as a prerequisite or “condition precedent” that the franchisee was required to meet before it would be permitted to open the childcare franchise.
The Court also found support for its view in the wording of subsequent sentences in the franchise agreement that began with the phrase “you [the franchisee] will be required” meaning that “Section 7 merely imposes obligations on the franchisee and does not impose obligations on the franchisor.” Thus, said the Court, “TLE did not breach Section 7 of the Agreement (with respect to the training of the Loganathans) because there is no relevant covenant in Section 7 for TLE to breach.”
The Court also rejected the franchisee’s breach of training claim on factual grounds. As the Court reasoned, “Alternatively, even if Section 7 could be construed to place an obligation on TLE to provide the training delineated in that section, any alterations in the Loganathans’ training regime was a direct result of the Loganathans’ request to manage their franchises as soon as possible and TLE’s attempts to accommodate the Loganathans’ request.” Similarly, stated the Court, “to the extent the Loganathans’ training schedule was altered or truncated in September of 2013, this was due to the Loganathans’ unilateral decision to remove Ms. Giarratano and their decision not to pursue every possible training opportunity available to them.” As a final matter, the Court rejected CAE’s argument that TLE breached a training representation it made to CAE in its franchise disclosure documents relating to the number of hours it would train the Loganathans. “Even if some claim is cognizable based upon the types of training described in TLE’s franchise disclosure documents, all such changes in training were attributable to the Loganathans — not TLE.”
CAE’s claim that TLE breached Section 9.1 of the Franchise Agreement through “a failure to provide support services” did not fare much better than the breach of training argument. Under the franchise agreement, Section 9.1 states:
9.1 Services Offered by Your Franchisor.
9.1.1 Consultation. For no additional charge, we will make our personnel available to you tor consultation on such matters as operations, advertising and promotion, and administration throughout the term of the franchise. We will provide continuing assistance to you in the development and operation of your Center by means of periodic visits by our field representative and by the maintenance of an office staff of trained personnel exports at our headquarters.
With respect to consultation services under Section 9.1.1, the Court proclaimed that it was clear that TLE did provide consultation services to CAE, including through TLE’s website, phone calls, e-mails, and on-site visits. Even though the Court noted that on-site visits “could have been more frequent”, it blamed the dearth of visits on the franchisees’ inability to work on a professional level with the franchisor. From a legal perspective, the Court concluded that “the terms of Section 9.1.1 do not impose a specific requirement that TLE failed to satisfy.” Oddly, the Court further remarked “Alternatively, the services TLE provided to CAE were rendered in good faith and with the intention to see CAE succeed. The mere fact that TLE required CAE to show independent initiative and personal responsibility is of no import when CAE functioned as the on-site owner of the franchises.”
Turning to the Management Agreement, CAE argued that TLE committed a breach by its failure to comply with myriad and many state of Colorado regulations. More specifically, CAE argued that TLE breached Section 2(b) of the Management Agreement (“Manager will obtain childcare licenses”), Section 4(a) of the Management Agreement (“Manager will contribute invaluable effort”), Section 4(b) of the Management Agreement (TLE offers its services in “good faith”), Section 2(a) of the Management Agreement (TLE is liable for actions of willful misconduct), and Section 6(e) of the Management Agreement (“Manager shall use reasonable efforts to manage the Centers so they operate profitably as soon as commercially practical”). CAE’s case in this regard focused upon TLE’s allegedly poor management of the centers when TLE had unilateral control.
The Court vehemently rejected the basis of this argument finding that “TLE managed the CAE franchises in good faith, with an earnest desire to see that the centers succeed, and with an earnest intent to do so lawfully.” Based on these findings, “the Court cannot conclude that TLE failed to “contribute invaluable effort” or that TLE engaged in “willful misconduct.” The Court at this point, not surprisingly, found “the direct opposite.” In this regard, the Court found again that “To the extent the franchises were poorly managed, this was the fault of CAE — not TLE.”
CAE also contended that TLE breached Section 2(f) of the Management Agreement through a failure to keep CAE apprised of center operations. Section 2(f) of the Management Agreement read as follows:
(f) Manager’s authority to pay each Center’s expenses is limited to day-to-day expenses, and all standard and typical payments that are required to perform Manager’s role for operating the Centers. Franchisee further agrees to work with Manager for the success of the Centers, but will use its best efforts not to interfere with Manager’s management of the Centers. Manager shall use reasonable efforts to update Franchisee on Center matters in a reasonable time so as to keep Franchisee apprised of Center operations.
As an initial matter, the Court agreed with TLE’s argument that the provision at issue (“shall use reasonable efforts to update Franchisee on Center matters in a reasonable time so as to keep Franchisee apprised of Center operations”) was unambiguously limited to requiring TLE to apprise CAE of center operations in the context of finances. In turn, the Court found that the evidence clearly showed that TLE apprised CAE of all financial matters. Showing its apparent disdain for the franchisees again, the Court stated that “Even if the Court were to agree with CAE’s interpretation, however, and construe this covenant to broadly include a duty to report to CAE on all matters of importance, the Court would still resolve this matter in favor of TLE.”
The Court next turned to the primary factual matter in contention on the management agreement dispute: that of the probationary license that was pending for the Aurora Center at the time CAE assumed managerial control. On this issue the Court decided that “It is undisputed that CAE was unaware of the pending probationary license at the time they assumed managerial control.” The Court, however, forgave the franchisor for this situation, again blaming the franchisees for the franchisor’s arguable failure. “However, TLE did not actively seek to deceive CAE on the matter of the probationary license. Instead, TLE failed to diligently convey this information because TLE feared the Loganathans’ reaction and TLE wanted to know the precise date and contours of the probationary license before engaging the Loganathans in a discussion about the license.” Further, the Court held that TLE did attempt to notify the Loganathans on a few occasions about the license, but the Loganathans were unavailable.” In sum, the Court concluded that TLE did not fail “to use reasonable efforts” in a “reasonable time” to apprise CAE — TLE was merely awaiting more information before engaging the Loganathans in a discussion about the license.”
The Court further blamed the franchisees for the state licensing problems: “Even if the Court were to conclude, however, that TLE did breach Section 2(f) of the Management Agreement due to its failure to notify CAE of the impending probationary license, the Court still resolves this matter in favor of TLE. The issue is damages. The Aurora Center’s parents were not officially notified of the probationary license until after TLE assumed unilateral management of the Aurora Center. This means that damages did not have time to accrue to CAE. Alternatively, CAE’s claims are precluded by a waiver CAE executed in the Management Agreement.”
Next the Court turned to the allegation that the franchisor had breached the lease assignment requirements by entering into lease assignments on CAE’s behalf which resulted in high property tax bills. Rejecting this argument quickly, the Court stated: “The leases at issue in this case were executed prior to the Loganathans entering into the Franchise Agreement and, as a result, the leases and the underlying property tax obligations inherent in those leases were items that the Loganathans should have reviewed in their due diligence investigation.” The Court continued its attack on the franchisees’ alleged lack of due diligence by stating that “The Loganathans had a high net worth and had utilized legal counsel in the past. The Loganathans were fully capable, both in terms of experience and financial resources, of a due diligence investigation for the transaction in this case. Notwithstanding their ability to do so, the Loganathans, for whatever reason, chose not to seek legal counsel and their due diligence investigation was less than thorough.”
It is interesting to observe, on this point again, the Court’s apparent scorn for the Loganathans, who, understandably, were not very astute legally, as they were immigrants who came to the United States to build and operate the franchise. For example, the evidence showed that during his initial training program at TLE, Mr. Loganathan expressed confusion that he did not own his franchise buildings. The Court flat-out refused to accept this possibility, instead, castigating Mr. Loganathan, stating: “This belief, by Mr. Loganathan, is so incongruous with the structure of the transaction and the Franchise Agreements that it leads to the logical conclusion that the Loganathans did not fully read or understand the documents they executed. Moreover, the Loganathans were aware at the time they signed the Franchise Agreements that TLE’s affiliates were already under lease for the Parker and Aurora Centers.” The Court completed its disparagement of the franchisees’ position by stating that “In any event, CAE assented to the underlying property tax obligations when they executed the Franchise Agreements; the property tax obligations were items they should have investigated in their due diligence. TLE cannot be held liable as a manager for failing to act in good faith or for failing to use reasonable efforts when TLE executed lease assignments on CAE’s behalf because CAE had agreed for TLE to do so. Alternatively, CAE’s claims are precluded by a waiver CAE executed in the Management Agreement.”
The Court momentarily let up from its legal assault on the franchisees when it was confronted with the franchisees’ next argument that TLE had breached Section 3 of the management agreement by “threatening to terminate the Management Agreement.” After criticizing CAE’s argument for “lacking clarity”, the Court went on to reject it. “Although Section 3 of the Management Agreement does place restrictions on CAE’s ability to terminate the Management Agreement, these restrictions are not imposed on TLE. There is, therefore, no express provision in Section 3 that clearly prohibits TLE from terminating the Management Agreement.” Then, as with all of the franchisees’ other rejected arguments, the Court addressed, and rejected, sub- and related arguments that might later be made by the franchisees. “Alternatively, even if such a covenant or restriction [not to terminate] could be construed, the evidence provided by CAE on this point (which primarily consisted of comments by TLE that perhaps management should be vested solely in CAE at an earlier than agreed upon date), lacks the necessary specificity and force to qualify as a breach of the Management Agreement." Also, the Court was quick to rebuff the franchisees’ alternative argument that, to the extent it was premised upon TLE’s assumption of management in April of 2014, “these actions were undertaken in the context of CAE’s breaches of the Franchise Agreement which, by virtue of a cross-default clause, entitled TLE to terminate the Management Agreement.”
CAE also alleged that TLE breached the Management Agreement by failing to co-manage. According to the Court, “At trial, CAE placed great emphasis on TLE’s alleged lack of support of the Loganathans during the “co-management” period of the Management Agreement.”
According to the Court, “The co-management period appears to have resulted from a rather hastily drafted contractual provision in Section 3(d) of the Management Agreement:
(d) After Franchisee assumes full-time management of a Center, and subject to Section 3(e) below, Manager will co-manage with Franchisee for a period of six (6) months, and so long as each Center is improving and Franchisee is operating pursuant to the Franchise Agreements, the System and the Manuals, after expiration of the six (6) month period, this Agreement will no longer by applicable to that respective Center and Franchisee will assume full management and operations for that Center. After the expiration of such period for both Centers, this Agreement will be terminated. Upon termination. Franchisee will execute a General Release of Franchisor and its affiliates in the form attached hereto as Exhibit D.
After observing that the term “co-manage” was not explicitly defined in the agreement, and unable to use other parts of the Management Agreement to explain the meaning of the co-management provision, the Court found the term to be ambiguous, which legally permitted the Court to examine extrinsic evidence for the purposes of determining the intent of the parties at the time of contract. Initially, the Court looked for other instances in which TLE had used a similar co-management period; however, none existed. “Instead, this entire provision appears to have been drafted in response to the Loganathans’ request for assistance after their initial visa applications were denied, and as a result the Court has minimal extrinsic evidence to guide its decision.” In turn, the Court understandably next looked to how the Loganathans personally defined “co-management.” The Court stated that “It was their essential belief that the term meant that whenever the Loganathans encountered a problem, TLE would provide in-person assistance to help the Loganathans correct that problem, and that the Loganathans and TLE had a relationship that resembled that of a partnership.” Before finishing the sentence, the Court appeared to gruffly reject this view as “unreasonable and unpersuasive.”
Uncharacteristically, on this issue the Court also rejected TLE’s argument: “To the extent TLE makes the argument that the term did not require it to provide any additional support to CAE whatsoever, the Court finds this interpretation to be unreasonable as it would render the provision meaningless.” In turn, the Court evaluated the circumstances surrounding the parties at the time the Management Agreement was executed. First, the Court remarked that “One critical objective fact is that during the co-management period, TLE was not entitled to a management fee. The importance of this fact cannot be understated. Based upon this fact, it is unreasonable to conclude, as the Loganathans did, that TLE would provide in-person assistance (TLE’s only corporate employee in the state of Colorado was banned from the Loganathans’ presence) to the Loganathans, for any problems the Loganathans perceived, for no additional compensation.”
Second, the Court returned to its condemnation of the franchisees, stating that:
The purported importance the Loganathans placed upon the co-management term was both unreasonable and unpersuasive in support of their contract construction argument. The co-management provision did not induce the Loganathans to purchase a franchise from TLE– the evidence clearly shows that the Loganathans’ intention, from the very start, was that they would purchase and open a franchise center themselves without any co-management whatsoever. The genesis of the co-management provision was the fact that the Loganathans encountered visa troubles and, as an accommodation to the Loganathans, TLE agreed to manage the CAE centers until the Loganathans could comfortably enter the United States and train. The co-management provision is not what induced the Loganathans to enter into the Management Agreement; it was the Loganathans’ immigration delays which ultimately induced the Management Agreement. When the co-management term is viewed in this context, together with the fact that TLE was not to be compensated during the co-management period, TLE’s position that it need not provide any additional assistance (beyond what a franchisee would normally receive) is more tenable than it would otherwise facially seem.
After reviewing the evidence as described above, the Court concluded that the co-management provision required that assistance be provided during one time period but not the other. “During the co-management period prior to April 2014, TLE’s position–that it need not provide any additional assistance to CAE that it would not otherwise provide for a normal franchisee–was correct. The Court’s conclusion was also bolstered by the fact that TLE received no management fee during this period. “TLE’s co-management performance during this period of time was compatible with the terms of the Management Agreement. The Parker Center, although far from problem-free, did not appear to be in a dire situation and, from TLE’s perspective, it was reasonable to conclude that many of the Loganathans’ problems (which they now assert in perfect hindsight they needed help for) should have been resolved independently by the business owners on the ground.”
In turn, as it did with every other prior contention of the franchisees, the Court sided with the franchisor, finding that even though some assistance was required by the management agreement, the franchisor met its obligations in this regard. “However, once the Parker Center entered into a crisis situation in April of 2014, the co-management provision of the Management Agreement required something more. During that period of time, TLE was required to provide substantial assistance to CAE to help CAE deal with an unusual and very serious situation. And this is precisely what TLE did. TLE, particularly during the end of April, provided a vast amount of support to CAE in an effort to help the franchise survive. Although TLE ultimately terminated the Franchise Agreements after the April crisis, the evidence shows that TLE’s termination was attributable to the manner in which the Loganathans navigated the April crisis and TLE’s termination was pursuant to authorization in a completely separate agreement–the Franchise Agreement.”
CAE’s final arguments were the most doctrinally significant. First, the franchisees argued that TLE breached the covenant of good faith and fair dealing under both the Management Agreement and Franchise Agreements. Second, the franchisees argued that the Franchise Agreement and Management Agreement were improperly terminated by TLE’s seizure of the childcare centers on May 2, 2015. The Court wiped out both arguments in a cursory manner maintaining that where there are no explicit breaches of contract, there cannot be a breach of the implied covenant of good faith and fair dealing. “The implied covenant of good faith cannot be used to create a breach of contract on one party’s part where there was no breach of any express term of the contract.” And, “the Court has already concluded that TLE did not breach any term in the contractual agreements in this case.” Further, the Court again asserted its view of the goodness of the franchisor and how the Court believed that “TLE did execute its duties in good faith.” In this regard, “TLE did not seek “to thwart [CAE’s] reasonable expectations.”
The Court next took up TLE’s contract claims against the franchisees, whereby TLE argued that CAE breached the Franchise Agreement by virtue of the conditions of the Parker Center in the April 2014 crisis. Pursuant to Section 11.2 of the Franchise Agreements, TLE was entitled to terminate a Franchise Agreement immediately and without an opportunity to cure under certain circumstances:
11.2 Termination Without Opportunity to Cure. You acknowledge and agree that strict compliance with many of the obligations agreed to by you in this Agreement is crucial to the success of the System and the Centers, and that any breach thereof would so jeopardize the well-being of the entire Franchise System or otherwise have such an adverse affect on the relationship between us, or be of such significance that you no longer will be able to effectively function as a franchisee under this Agreement. Accordingly, you agree that if you commit any action described in Section 11.2 (a) through (n), you shall be in default hereunder, and we may, at our option, terminate this Agreement and all its rights granted hereunder and retain the Franchise Fee, SDSC and/or Site Coordination Fee, without affording you any opportunity to cure the default, effective immediately upon receipt of written notice by you. The actions are:
As pointed out by the Court, one basis on which TLE could immediately terminate CAE’s franchise was when the operations of the franchise posed a threat to public health and safety: “(j) If we make a reasonable determination that the operation of your Center poses a threat to public health or safety.” And, with regard to such a predicate, the Court found that the operations of the Parker Center, in April of 2014, did pose a threat to public health and public safety. As such, according to the Court, “a similar determination by TLE, at that time, would have been reasonable.”
Per usual, the Court proceeded to fully deconstruct any potential argument that might be available to the franchisees, pointing out that TLE had another ground upon which it could immediately terminate the Franchise Agreement–if CAE ceased to operate the center:
(h) If you cease to Operate your Center, unless: (i) operations are suspended for no more than sixty (60) days; and (ii) the suspension was caused by fire, earthquake, hurricane, condemnation, or act of God.
With regard to the position that the franchisees had unlawfully abandoned the franchise, the Court stated: “As of May 1, 2014, the day before TLE’s assumption of managerial control, Mr. Loganathan exhibited a clear intent to abandon the Parker Center by virtue of his (only) plan to close the center and merge the students there into the Aurora Center.” Again rejecting the franchisees’ explanation as insincere the Court rationalized “Although it was Mr. Loganathan’s testimony that he was only proposing such a merger and the merger would have been temporary, Mr. Loganathan’s e-mail must be reviewed in context. On the night of May 1, 2014, the closure of the Parker Center by the state of Colorado was imminent. The center director for the Parker Center had quit. There were no immediate prospects to replace the center director. The staff at the Parker Center was exhibiting an extreme reluctance to come to work under the Loganathans’ management. The earliest anticipated date upon which a new center director could be hired was approximately two weeks away.” Based on the circumstances, the Court concluded that “TLE was entitled to view this statement, based upon the totality of facts, as an indication that the Loganathans were about to cease to operate their center.” Accordingly, the Court held that TLE was permitted to terminate the Franchise Agreement for the Parker Center on the night of May 1, 2014.
As noted by the Court, however, TLE had not formally terminated the Franchise Agreements, nor, from the Court’s point of view, was TLE required to do so. “Even when, for example, center operations pose a threat to public health, TLE is not required to terminate a franchise agreement.” The Court continued by pointing out that CAE never formally terminated the Franchise Agreements either, instead arguing that “TLE’s seizure of the centers wrongfully terminated the Franchise Agreement.” Notably, stated the Court, “TLE does possess the power to seize franchise centers, but only in the context of a termination. The Management Agreement does not authorize, in any way, the seizure of a center.” Further Complicating this incongruous situation, was the position of TLE that its seizure of the Parker Center on May 2, 2014 was authorized by the Loganathans; however, it was the position of CAE that no such authorization ever occurred.
Seeming to throw its hands in the air in the face of this particular aspect of the dispute, the Court stated: “What is clear is that there was no meeting of the minds on this issue.” Finding both parties’ positions to be credible, the Court asserted that “both parties subjectively believed their actions were correct, with neither party clearly seeking to terminate the Franchise Agreement, but with both parties believing the other party had, through its actions, terminated the Franchise Agreement.” Next the Court turned to the difficult task of picking one of the arguments as correct.
The Court concludes that on May 2, 2014, when TLE seized the Parker Center, all agreements between the parties were terminated, and that TLE was entitled to take this course of action. The Court’s decision is based upon the alternatives available to TLE at that time. If TLE had known that CAE had refused (or meant to refuse) to allow it to seize the centers, TLE would have exercised its power to terminate all relevant agreements. This is because the alternatives were, to TLE, unacceptable. TLE could not allow the state of Colorado to close the Parker Center down–this would have damaged the TLE brand. TLE refused to allow the Parker Center to close under Mr. Loganathan’s merger plan–from TLE’s perspective this too would have damaged the TLE brand. No other alternatives existed. TLE was entitled to terminate. In the absence of a meeting of the minds (with respect to TLE’s seizure of the centers), the Court therefore concludes that TLE terminated the Franchise Agreements by virtue of Section 11.2 because the Parker Center represented a threat to public health and public safety and CAE’s closure of the Parker Center was imminent. Although it is true that CAE had not formally closed the center at the time of Mr. Loganathan’s controversial e-mail, the Court concludes that Mr. Loganathan’s e-mail, although styled as a proposal was, in fact, a clear intention to close. This is because Mr. Loganathan’s e-mail, when read in context, was a concession that the Loganathans were too overwhelmed to continue operations at the Parker Center, and TLE was not required to undertake a futile act; if TLE had waited until the following morning to observe a formal closure, the damage to CAE–and to the TLE brand–would have already been done. TLE could not prevent the closure of the Parker Center (had they waited for a formal closure) on a moment’s notice–logistics were involved.
In turn, the Court identified various cross-default provisions in each of the franchise agreements and the management agreement. [See Section 11.2.3 of the Franchise Agreements (cross-default clause); Section 7 of the Management Agreement (permitting repossession of a center pursuant to the Franchise Agreement); Section 8 of the lease assignments (cross-default clause); and generally the terms of the personal guarantees (attached to the Franchise Agreements).] Based on these, the Court was able to use the breach of the Parker Franchise Agreement to cross-default all of the other relevant agreements. “It necessarily follows that by essentially evicting CAE from the Parker Center and Aurora Center, by seizing the centers, by precluding the Loganathans from physically returning, and by terminating the Parker Franchise Agreement and the Aurora Franchise Agreement, that TLE’s actions, although not styled as a termination, had the effect of immediate termination of the Management Agreement and all related agreements.” Based on this long and tortuous analysis, the Court determined that “on May 2, 2014 all agreements between the parties were terminated, by TLE, and TLE was authorized to do so.”
With regard to CAE’s remaining claims, the Court rejected the rescission claim given that it required as a factual predicate a finding of fraud or intentional misrepresentation. “Here, the Court has found that with respect to the contracts in this case, TLE is without fault; TLE did not breach the agreements in this case; CAE did. Accordingly, CAE is not entitled to judgment on this count.”
The franchisees’ claim alleging a violation of the Florida Deceptive and Unfair Acts and Practices Act met the same fate; dismissal. According to the Court, it had permitted this claim to proceed to trial so long as it was limited to wrongdoing under the management contract only. The Court then quickly pointed out that it had already rejected the allegation by finding that TLE’s actions in connection with the management of the CAE franchises were undertaken in good faith. Based on this finding, the Court concluded that “TLE has not engaged in any deceptive or unfair practice.” In addition, the Court singled-out the explicit claim by CAE that came the closest to comprising a deceptive or unfair practice — the matter concerning TLE’s failure to inform CAE of the pending probationary license at the Aurora Center. On this matter, again, the Court referred to its earlier conclusion that TLE did not actively seek to deceive CAE. And, true to form, the Court did not finish its discussion of the issue without debunking every potential hypothetical argument of the franchisees: “Alternatively, even if it were assumed that TLE actively deceived CAE on this point, the Court found that such deception did not result in any damages to CAE; in addition, evidence of causation on such damages is lacking–there was simply no time for any damages to materialize. Proof of actual damages is necessary to sustain a FDUTPA claim.”
And, as expected, the Court took a final parting shot at all of the franchisees’ claims against the franchisor under the Management Agreement, stating that the Management Agreement contains express disclaimers and limitations of TLE’s duties as Manager, including the following:
• That Manager and its affiliates shall not assume or otherwise incur any liability in regard to its management of the Centers, and that Franchisee does hereby agree to release and hold harmless Manager and its affiliates from any liability arising from its management of the Centers, except for any liability resulting from the willful misconduct of Manager. See Section 2(a) of the Management Agreement;
• Franchisee agrees and represents that each understands that there are no express or implied representations by Manager with respect to the Centers’ operations, and Franchisee further agrees that the performance by Manager hereunder will not be used by Franchisee as a basis for any claim, suit or other cause of action, or otherwise as a claim against Manager or its affiliates under the Franchise Agreements or any related documents. Franchisee further acknowledges that Manager’s agreement to assume the management of the Centers does not constitute a guarantee, assurance or warranty, express or implied, of the successful operation or profitability of the Centers. See Section 6(e) of the Management Agreement;
• Franchisee specifically acknowledges, agrees and represents that no representations or promises of any kind have been made to induce them to sign this agreement. Franchisee further acknowledges, agrees, and represents that neither Manager nor any of Manager’s affiliates have guaranteed that the center will succeed or has provided any sales or income projections of any kind. Franchisee agrees that if the above is not true, they are obligated to notify the Manager in writing, of any violation of this Section. Most importantly, Franchisee acknowledges, agrees and understands that Manager has entered into this Agreement based solely on the representations made by Franchisee hereunder and is merely a good faith attempt by Manager to improve the Center in the interests of the Center’s children and the brand name. See Section 5 of the Management Agreement.
CAE’s argument that these provisions were not waivers and disclaimers in the normal sense, and that instead they were merely promises not to sue for a failure to produce a profit, was rejected by the Court. “This interpretation of the waivers in the Management Agreement is unreasonable. The terms of the waiver are unambiguous; the most appropriate reading of the waivers and disclaimers in the Management Agreement is that CAE promised not to litigate claims that were based upon TLE’s performance under the Management Agreement, unless TLE’s deficient performance arose from willful misconduct.” Again, here, the Court did not miss an opportunity to note that “TLE did not engage in any willful misconduct.” Accordingly, the Court concluded that “CAE may not bring any claim that is premised upon TLE’s performance under the Management Agreement.”
Jeffrey M. Goldstein
Goldstein Law Firm, PLLC
(202) 293 3947