Franchise 101: Court Holds Joint Liability is Fashionable; and Lack of Personal Training and Personal Jurisdiction

Franchisor 101: Court Holds Joint Liability is Fashionable

A California federal district court held that judgment entered against individual owners of a franchisor entity, KEP Fortune, LLC, finding them jointly and severally liable with the franchisor entity, was not erroneous or a violation of due process rights.

The franchise agreement was for a Klein Epstein & Parker clothing store in Las Vegas. After the parties’ relationship soured, the franchisee sent a notice that it was rescinding the franchise agreement. The franchisee then filed suit against KEP and its principals, Jeroen and Miray Bik, seeking confirmation of the rescission notice, damages, and other relief. After discovery, the parties cross-moved for summary judgment.

The court granted partial summary judgment in favor of the former franchisee on claims for violations of the California Franchise Investment Law (CFIL) and held the Biks jointly and severally liable with KEP. The former franchisee moved for entry of default judgment on its remaining claims against KEP.

At the proof hearing, the former franchisee dismissed the unjust enrichment claim against the Biks and elected to pursue rescission only against KEP, contingent on the Biks remaining jointly and severally liable with KEP. With no unresolved claims remaining against the Biks, the court excused the Biks and the court completed the proof hearing without them. At conclusion of the hearing, the court entered default judgment against KEP for over $1 million in rescission damages and $49,000 in punitive damages. The Biks were held jointly and severally liable with KEP.

The Biks moved to amend the judgment arguing that the court erroneously entered default judgment against them in violation of their due process rights after “barring” them from the proof hearing.

The court found the Biks misconstrued the court’s order granting default judgment as well as the court’s final judgment. The court clarified that it granted partial summary judgment against KEP for CFIL violations, and by extension, the court held the Biks were statutorily jointly and severally liable with KEP for KEP’s CFIL violations. The Biks did not challenge that outcome at the time.

The court stated that rescission was a CFIL remedy, not an independent cause of action. Because the Biks were jointly and severally liable to the same extent as KEP, the Biks were also jointly and severally liable for damages flowing from rescission of the franchise agreement, including punitive damages. Consequently, the judgment against them was not erroneous. 

The court also held the judgment did not violate the Biks’ due process rights. The court did not bar them from the proof hearing. Rather, the court had announced that the former franchisee abandoned its remaining claims against them and only excused the Biks, who left at their discretion.

The court concluded the Biks’ assertion that they were unaware of the personal consequences of KEP’s default, as owners and controllers of KEP, was not credible.

The individual owners of a franchisor may be jointly and severally liable along with the franchisor for CFIL violations. Franchise counsel is essential for strategizing possible ways to mitigate a franchisor’s liability, including potential individual liability for a franchisor’s officers and directors named in a dispute.

Full Tilt Boogie, LLC v. KEP Fortune, LLC, 2:19-cv-09090-ODW (KESx) (C.D. Cal. Oct. 3, 2023)  

Franchisee 101: Lack of Personal Training and Personal Jurisdiction

A Michigan federal district court dismissed a franchisee’s claims against its franchisor’s CEO and several individuals responsible for negotiating its franchise agreements, for lack of personal jurisdiction.

F45 Training Inc., the franchisor of fitness studios, entered into franchise agreements with a franchisee for the operation of three F45 training studios in Michigan. After signing the agreements, the franchisee disputed selected provisions of the franchise agreements and brought suit against F45, its CEO and four other individuals involved in the franchise sales process.

The franchisee alleged F45 and the individual defendants fraudulently induced the franchisee to enter into franchise agreements for the training studios. Specifically, the franchisee’s complaint alleged breach of contract, breach of the implied covenant of good faith and fair dealing, and fraud and misrepresentation, among others. The franchisor and the individual defendants moved to dismiss all claims, and four of the five individual defendants brought a motion to dismiss the complaint for lack of personal jurisdiction.

Four of the individual defendants were not Michigan residents; instead, they were each Australian citizens. One defendant lived in Australia, two lived in Texas, and one lived in California. The court found that being officers of the franchisor was insufficient to create personal jurisdiction. Rather, the franchisee needed to present evidence that the individual defendants were actively and personally involved in the conduct giving rise to the claims at issue for the court to potentially exercise personal jurisdiction. The court found the franchisee failed to provide sufficient evidence of specific actions giving rise claims.

Franchisees should consult with counsel prior to bringing suit to ensure they are filing in a jurisdiction that can support personal jurisdiction over each principal of the franchisor.

Functional HIIT Fitness, LLC v. F45 Training Inc., No. 22-10168 (E.D. Mich. Sep. 28, 2023)




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