Franchise Officer’s Presale Financial Claims Could Violate Florida Franchise Law

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

An officer and part-owner of a hockey training business franchisor could have violated the Florida Franchise Act’s prohibition on intentionally misrepresenting the prospects or chances for success of a proposed franchise by allegedly misrepresenting the financial condition of the franchisor to a prospective franchisee, a federal district court in St. Paul, Minnesota has ruled. However, the franchisee failed to adequately allege that the officer committed common law fraud.

Florida Franchise Act

The owner argued that the Florida Franchise Act did not apply to him because he was not a party to the franchise agreement and was not personally selling a franchise to the franchisee. However, the Act defined a "person" as "an individual, partnership, corporation, association, or other entity doing business in Florida," the court noted.

The owner was doing business in Florida because he personally travelled to Florida to assist with the establishment of the franchisee’s franchise, and he received money for doing so. As such, the owner was a "person" under the Act.

The showing required to recover damages for a defendant’s intentional misrepresentation of the prospects or chances of success of a proposed franchise was not the same under the Florida Franchise Act as required for an action for common law fraud, according to the court.

The statute did not require proof of a deliberate and intentional false statement of material existing fact. Rather, recovery under the franchise statute required only proof of intentional words or conduct by the franchisor, concerning the prospects or chances of success of the enterprise, which were relied upon by the franchisee to his detriment and which were not in accord with the facts.

The owner argued that he had little to no knowledge of the financial circumstances of the franchisor’s existing facilities. However, a reasonable jury could find that, to a prospective franchisee, the owner, an engineer who worked with the franchisor’s facilities and as part-owner of the franchisor, was in a position to represent the financial conditions of the franchisor, the court held.

Common Law Fraud

The franchisee failed to present sufficient evidence that the officer knew that his representations were false or that he intended his representations to induce the franchisee’s reliance to support a common law fraud claim, the court determined. Thus, the owner was entitled to summary judgment on that claim.

The franchisee’s allegation that the officer made false statements concerning the financial success of its existing facilities, if true, would qualify as false statements regarding a material fact. The franchisee submitted evidence that the financial success of existing facilities, a financial projection worksheet, and the statements the officer made to the principal of the franchisee were pivotal factors in the principal’s decision to open a franchise.

However, the franchisee introduced no evidence beyond a bare assumption showing that the franchisor was in financial trouble when the negotiations leading up to the purchase of a franchise took place, or that the officer knew of this financial trouble, the court decided.

The decision is Hockey Enterprises, Inc. v. Talafous, CCH Business Franchise Guide ¶14,773.

iPad Data Plan Fraud Claims Proceed Against Apple and AT&T

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

Purchasers of 3G-enabled iPads can pursue claims of common law fraud against Apple and AT&T Mobility, but the purchasers failed to state claims under California consumer protection statutes, the federal district court in San Jose has ruled.

Apple’s and AT&T’s advertising, including statements by Apple CEO Steve Jobs, allegedly led the purchasers to believe that they would have the flexibility of switching in and out of an unlimited data plan based upon their monthly needs.

Apple began selling 3G-enabled iPads on or around April 30, 2010, and the firms’ allegedly promoted the flexible and unlimited data plan options up to June 2, 2010, when they announced that as of June 7, 2010, they would no longer provide an unlimited data plan.

Consequently, purchasers who initially opted for the limited data plan no longer have the option to switch in and out of an unlimited plan. Purchasers who had signed up for the unlimited plan were allowed to maintain it, but if they discontinued it they would not be allowed to switch back.

Bait and Switch

The purchasers asserted a classic “bait and switch” fraud scheme and claimed that they would not have purchased 3G-enabled iPads had they known that the firms would pull the flexible unlimited data option.

Contrary to AT&T’s contention, the purchasers alleged the “who, what, when, where, and how” of the fraud with the particularity required by the Rule 9(b) of the Federal Rules of Civil Procedure. The court found that the complaint set forth specific information that AT&T allegedly concealed—that it would almost immediately be canceling the unlimited plan and denying customers flexible access to such a plan, and that this was its intention all along.

The purchasers pleaded the element of reliance by repeatedly alleging that both Apple's and AT&T's statements were material to them and had they known that there would be no flexible unlimited data plan, they would not have purchased their iPad 3Gs, according to the court. The purchasers claimed that AT&T was aware of Apple's alleged misrepresentations, but did nothing to counter the statements, and even endorsed them, the court added.

California Consumer Protection Laws

The purchasers failed to allege a proper basis for restitution under the California Unfair Competition Law and False Advertising Law with regard to excess data plan charges incurred after the unlimited data plan was replaced. A damages claim under the California Consumers Legal Remedies Act was rejected because a required 30-day advance notice of violation was sent to Apple but not to AT&T. In addition, non-California residents who purchased their iPads outside of California lacked standing to assert claims under the statutes.

The purchasers’ claims under the California consumer protection statutes were dismissed with leave to amend.

The July 18 opinion in In re Apple and AT&T iPad Unlimited Data Plan Litigation will be reported at CCH Advertising Law Guide ¶64,337.

Further information regarding CCH Advertising Law Guide appears here.