Apr 5, 2019 - Judge’s Distribution and Franchise Rulings from the Front Lines by |

Many esoteric legal doctrines have evolved historically to blunt the impact of fraud accusations and claims, especially in franchise cases. These include the requirements that the false representation be of a material fact that a reasonable person would reply upon, and that the defendant know that his representation is false. Further, fraud usually cannot be based on a promise or failure to meet a promise (versus a fact) unless the promisor never intended to perform. In a recent case, the court applied all of these principles to reject a franchisee’s fraud allegations reasoning that the franchisee’s allegations were merely “a business deal gone bad.” Kiddie Acad. Domestic Franchising, LLC v. Wonder World Learning, LLC, Civil Action No. ELH-17-3420, 2019 U.S. Dist. LEXIS 56126, at *44-46 (D. Md. Mar. 31, 2019). In this regard, the Court summarized some of the franchisee’s rejected fraud claims:

For example, counterclaimants contend that on May 9, 2011, during the couple’s visit to Kiddie Academy in Maryland, Commarota allegedly told the defendants that “‘his team’ would guide them through the entire construction process.” ECF 25, ¶ 24. As Kiddie Academy’s VP of Construction, Commarota held himself out as knowledgeable in construction and certainly knowledgeable in Kiddie’s construction process. The Amended Counterclaim alleges that Commarota’s statements were false because he knew that Kiddie “did not typically guide franchisees through the entire construction process” and, allegedly, Kiddie never intended to guide defendants. Id. ¶ 24.

In addition, counterclaimants assert that Helwig and Wise falsely assured “Kiddie’s support,” and assured defendants that “their lack of industry experience would not be an issue due to Kiddie’s proven curriculum, marketing, and support from all Kiddie’s departments.” Id. ¶ 28; see also id. ¶ 32. However, Kiddie did “not buil[d] a platform which would guide them to success.” Id. ¶ 28. At a training on April 20, 2015, Kiddie also promised counterclaimants that its employees “would be present for the interviews [*45]  of candidates for the franchise’s ‘Director,” but “Kiddie never provided the promised assistance with the Director selection.” Id. ¶ 56.

Defendants also complain that Kiddie withheld information on the performance of other franchisees and misled them on the length of time it would take for their franchise to become profitable. Id. ¶ 30. Further, they claim Kiddie understated their payroll taxes and property taxes. Yet, such information would seem equally available to defendants. Id. They also complain about “mistakes” in construction, id. ¶ 47, but such allegations plainly do not sound in fraud.

Further, defendants complain that between February and May of 2011, Kiddie assured them that the site selection process “takes anywhere from 3 to 9 months . . . .” Id. ¶ 21. Yet, they contend that Frick knew that it “often took far longer . . . .” Id. Defendants also assert that Kiddie did not approve a site for them in Texas until November 2013. Id. ¶ 37. Obviously, that far exceeded 3 to 9 months. Yet, defendants paid a franchise fee of $50,000 in March 2014 (id. ¶ 40), well after they would have known that the alleged representation as to the length of the site selection process (3 to 9 months) [*46]  was incorrect.

Indeed, the fraud claims are replete with allegations that do not smack of fraud: Kiddie underestimated by $32,000 the cost of a playground “splash pad,” id. ¶ 50; Kiddie did not tell defendants that the construction plans would have to be “re-permitted without the ‘splash pad,'” id. ¶ 51; defendants chose to reject Kiddie’s architect choice, reflecting that defendants were not as dependent on Kiddie as they would like to suggest. Id. ¶ 52.

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