Friday, January 21, 2011

Choice of Florida Law Barred Minnesota Franchise Act Claims

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

Minnesota Franchise Act claims asserted by a Florida franchisee of two hockey-training businesses and its principal against a Minnesota franchisor and several of its officers were barred by the valid and enforceable choice of Florida law provision in the parties’ agreements, the federal district court in St. Paul, Minnesota, has decided.

After hearing about the franchise opportunity, the corporate franchisee’s principal traveled to Minnesota and met with three officers of the franchisor there. Provided with a Uniform Franchise Offering Circular, the franchisee and principal entered into two franchises for territories in Florida. The franchisee opened only one of the franchises, closing it after one year due to financial losses.

The franchisee and principal filed suit, alleging that the franchisor violated the Minnesota Franchise Act by failing to register the franchise and making several false representations that induced them to purchase the franchises. As a result of these violations, the franchisee and principal lost more than $800,000.

Specifically, the plaintiffs alleged that, contrary to the franchisor’s representations:

(1) The franchises did not generate anywhere near the gross total sales that the franchisor claimed they could;

(2) It was imperative that a franchise be located in or near a hockey rink;

(3) It was highly unlikely that all of the hockey facilities of the franchisor were financially successful;

(4) The owner of the franchise needed to have significant hockey experience to operate profitably; and

(5) The franchisor did not experience the growth that had been represented or have an established business plan for running hockey facilities.
Waiver of Rights

The franchisee and principal argued that, despite the choice of law provision, the franchisor was liable for violations under the Minnesota Franchise Act (MFA) because Minnesota law did not permit the waiver of any rights secured by the Act.

However, the statute’s anti-waiver provision prohibited the waiver of rights secured by the MFA through a choice of law provisions only if the waiver purported to bind (1) a person who was a Minnesota resident (or Minnesota corporation) at the time the that person or organization acquired a franchise or (2) a person (regardless of residence) who was acquiring a franchise that would operate in Minnesota.

In this case, the principal was not a resident of Minnesota, the franchisee was not was not organized or incorporated in Minnesota, and the franchises at issue were to be operated in Florida, not Minnesota, the court found. Accordingly, the Minnesota Franchise Act’s anti-waiver provision did not void the parties’ choice of law provision.

Although the statutory anti-waiver provision was to be construed broadly, it was also to be construed in favor of protecting Minnesota franchisees, the court observed.

Fraud, negligent misrepresentation, and Florida Franchise Act claims brought by the franchisee and its principal withstood a motion for dismissal. The court held that the issues could not be decided at such an early stage of litigation.

The January 10 decision is Hockey Enterprises, Inc. v. Total Hockey Worldwide, LLC, CCH Business Franchise Guide ¶14,531.

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