Friday, June 15, 2007





Medical Spa Franchisor Negligently Misrepresented Efficacy of Hair Removal Process

This posting was written by Pete Reap, editor of CCH Business Franchise Guide.

A franchisor of medical spa and hair removal services, the franchisor’s founder and original principal, a doctor employed as a trainer by the franchisor, and a group of investors that purchased the franchisor made negligent misrepresentations to a franchise area developer and franchisee concerning the efficacy of the franchisor’s laser hair removal process, according to an arbitration award.

The arbitrator found that (1) all of the franchisor defendants failed to exercise reasonable care in obtaining reliable evidence about the validity of information they provided and allowed to be provided to the franchisee and (2) the franchisee justifiably relied on the provided information.

Therefore, the franchisee was awarded $391,400 for the cost of additional hair removal treatments provided to customers as a result of the ineffectiveness of previous treatments.

The franchisee also claimed that the franchisor defendants committed fraud and civil conspiracy, breached the parties’ contract and its implied covenant of good faith and fair dealing, and violated the Connecticut Franchise Act, the Virginia Franchise Act, and the “little FTC Acts” of Connecticut, Tennessee, Massachusetts, and North Carolina. All of those claims were rejected by the arbitrator.

Negligent Misrepresentation

The franchisee testified that the franchisor stated—both before and after the execution of the agreements—that its laser technology was faster and better than that of competing businesses and that the franchisor’s process would permanently remove 93%-97% of unwanted hair on the human body in five treatments. This efficacy information, along with the business concept and associated written materials, alleged caused the franchisee to enter into the area development and franchise agreements.

According to an expert witness for the franchisee, a claim of permanent removal of 93%-97% of a person’s unwanted hair in an average of five treatments was both incorrect and misleading. That level of removal would require more than five treatments. In view of individual variations in hair growth, a general guarantee of 93%-97% would be impossible. The expert also testified that the franchisor’s claim that hair removal would be permanent was not supported by medical science. Lasers have not been shown to remove hair permanently, the expert said.

Testimony about the franchisor’s statements, written material, and instructions regarding the efficacy of the hair removal method led to a conclusion that the information constituted negligent misrepresentation, the arbitrator ruled. Because the faulty information was central to the franchisor’s business concept, the franchisee justifiably relied upon it and it was the proximate cause of the franchisee’s damages.

The weight of the evidence led to a conclusion that the controlling owners and officers of the franchisor were guilty of negligent misrepresentation by failing to exercise reasonable care in obtaining reliable evidence about the validity of the efficacy information.

After concerns were raised regarding the accuracy of the efficacy information, the defendants committed negligent misrepresentation by failing to exercise reasonable care in clearly communicating to the franchisee that the claim was faulty and should no longer be used in sales efforts.

Damages

The franchisee was entitled to an award of damages in the amount of $368,600 for the cost of additional hair removal treatments it provided to customers as a result of the ineffectiveness of previous treatments, according to the arbitrator. The addition of 10 percent interest brought the award to $391,400.

The franchisee might have been entitled to recover all or part of its claimed business loss of $929,800 if it could have proven that its franchise was worth little or nothing. However, the franchisee’s expert witness was not persuasive in his analysis that the franchise had little or no worth when the franchisee de-identified its business with the franchisor and began operating under a new name, the arbitrator commented.

The arbitration award is In the Matter of the Arbitration between Kempton Joseph Coady, et al and Sona Int'l Corp., et al; American Arbitration Association, Case Number 30 114 Y 01399 05; April 9, 2007; Arbitrator John T. Marshall; Atlanta, Georgia.

1 comment:

Katie said...

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