In last week's blog posting we discussed the recent decision of Yogo Factory Franchising, Inc. v. Edmond Ying, et al., US District Court D. New Jersey 2014), in which the court enforced the arbitration clause contained in the franchise agreement. Also notable in this case was the court's decision reaffirming that the New Jersey Consumer Fraud Act did not apply to the sale of franchises.
In this case, the franchisee alleged that the franchisor committed fraud during the sale of the franchises. In particular, the franchisee claimed that the franchisor misrepresented the amount the franchisee would earn from the operation of the franchised locations and misrepresented the start-up costs. The franchisee asserted that the franchisor's actions were a violation under the New Jersey Consumer Fraud Act. The court held that the New Jersey Consumer Fraud Act did not apply to the sale of franchises.
In reaching its conclusion, the court noted prior Third Circuit decisions which concluded that franchises are not deemed consumer goods or services under the Consumer Fraud Act. "Franchises are not purchased for consumption but rather purchased for either present value of cash they are expected to produce in the future…and bear no resemblance to the commodities and services listed in the statutory definition of "merchandise" or the rules promulgated by the Division of Consumer Affairs."
If a franchisee was able to convince a court that a franchisor committed a violation of the Consumer Fraud Act, it could result in a court awarding a franchisee treble damages. For this reason, I would anticipate that franchisees will continue to assert claims under the New Jersey Consumer Fraud Act. However, as the Yogo Factory Franchising decision illustrates, these types of claims will likely not prevail in the Third Circuit.