If your brand standards require franchisees to upgrade and improve their locations, a recent federal case demonstrates how thoughtful disclaimers and disclosures can shut down a franchisee lawsuit in its early stages.
In Devayatan, LLC v. Travelodge Hotels, Inc., a franchisor terminated a franchise agreement due to the franchisee’s alleged failure to improve and maintain a hotel in accordance with brand standards. No. 6:14-cv-561-Orl-41TBS (June 24, 2016 M.D. Fla.). The franchisee filed suit, alleging the franchisor negligently misrepresented the amount of required repairs and violated Florida’s Deceptive and Unfair Trade Practices Act (“FDUTPA”). Citing the franchisor’s multi-pronged disclosure of the franchisee’s improvement and maintenance obligations, the Court granted the franchisor’s motion for summary judgment, stopping the franchisee’s claims short of trial.
In Devayatan, a franchisee signed a franchise agreement with hotel franchisor Travelodge Hotels, Inc. (“THI”). A prior franchisee had been operating the hotel under a franchise agreement with THI, but the hotel was in a state of disrepair and the prior franchisee was in default of its maintenance obligations.
THI put the new franchisee on notice that it would be responsible for bringing the hotel up to brand standards. The franchise disclosure document estimated the initial investment ranged from $177K to $1.4M, depending on the condition of the property. The franchise agreement also provided a “punch list” of items that were not in compliance with brand standards.
When the real list of repairs far exceeded the punch list (including curing multiple legal violations), the franchisee cried foul. The franchisee claimed that the franchisor negligently misrepresented that the punch list was a complete list of required improvements. However, the negligent misrepresentation claim required “justifiable reliance” on an incorrect statement and the FDUTPA claim required statements that were “likely to mislead.” Thanks to thoughtful drafting, both claims missed the mark.
Several features of the FDD and franchise agreement proved valuable in defeating the franchisee’s legal claims:
- First, the FDD disclosed a broad range of possible initial investments, and indicted that the range was based on the condition of the property.
- Second, the franchise agreement clearly indicated that the punch list was based on a “random sample inspection” and did not purport to be a complete list based on a full inspection.
- Third, the punch list explained that the franchisee was “responsible for ensuring that the hotel was in compliance with all applicable federal, state and local laws, codes, ordinances and regulations.” The punch list explicitly stated that such renovations were not included.
Thus, the court found the franchisee unreasonably assumed that the punch list was a complete list of repairs and that the franchisor’s statements were not likely to mislead.
Franchisors often require franchised locations to be improved and maintained according to continually evolving brand standards. Franchisors may find it beneficial to provide a punch list of repairs or other assistance the help franchisees to meet their obligations. However, franchisors should take care that their good deed is not punished. Devayatan provides a few lessons:
- FDDs and franchise agreements should clearly state and disclose franchisee’s obligations to improve and maintain their locations and, where appropriate, disclose the amount or range of amounts for such expenses.
- Punch lists or similar documents should not attempt to list every single repair and improvement. Doing so may require a franchisor to bear the burden of inspection and assume the risk of any issues not included. Any such list should clearly state that it is not a complete list.
- Franchisees often assume the responsibility of complying with federal, state and local laws and ordinances. If this is the case, a list of improvements and maintenance should explicitly state that it does not include renovations required for such compliance.
Unfortunately, proper disclaimers and disclosures can only make a lawsuit less likely, not prevent it altogether. But they may help achieve dismissal in the early stages of a lawsuit, saving the money and time that would otherwise be spent at trial or in settlement.