Kaufmann Gildin & Robbins LLP Announces Key Decision of New York Federal Court: Franchisee Contractual Disclaimers of Reliance Do Not Violate New York Franchise Act and Defeat Statutory Claims of Fraud

NEW YORK, Sept. 10, 2014 /PRNewswire/ -- Reversing both a months old decision of the very same court and an earlier decision of the Appellate Division of the Supreme Court of the State of New York, Chief Judge Loretta A. Preska of the United States District Court for the Southern District of New York has held that franchisee disclaimers of non-reliance on purported financial performance representations allegedly furnished outside of a franchisor's Franchise Disclosure Document does not violate the "anti-waiver" provision of the New York Franchise Act and, instead, bars that franchisee from advancing a claim for fraud under the New York Franchise Act.

Says attorney David J. Kaufmann of New York City's Kaufmann Gildin & Robbins LLP, whose firm procured this important ruling for defendant 7-Eleven, Inc.: "This decision of the United States District Court for the Southern District of New York reverses earlier decisions and makes clear a very simple precept: a franchisee cannot claim in its franchise agreement that it didn't receive any financial performance representations outside of a franchisor's Franchise Disclosure Document and later come to court claiming that it did, under the misguided notion that its franchise agreement disclaimer somehow violated the tenets of the New York Franchise Act."

The case in question is Governara et al. v. 7-Eleven, Inc. In Governara, plaintiffs contended that convenience store franchisor 7-Eleven provided projections of future earnings that were unwritten and untrue in violation of the anti-fraud provisions of the New York Franchise Act and that disclaimers in their 7-Eleven Franchise Agreement that they did not receive or rely on any such projections violated the "anti-waiver" provision of the New York Franchise Act (which makes it illegal for a franchisor to require a franchisee to consent to any waiver which would relieve a person from any duty or liability under the Act).

In turn, 7-Eleven moved to dismiss this branch of plaintiffs' Second Amended Complaint.

In her decision, Chief Judge Preska of the U.S. District Court for the Southern District of New York attacked head on the notion that franchisee disclaimers contained in franchise agreements somehow violate the "anti-waiver" provisions of the New York Franchise Act: "Because the NYFA (New York Franchise Act) does not give franchisees the statutory right to purchase a franchise while relying on verbal representations outside of a written contract, the Agreement's non-reliance disclaimer is not proscribed per se by the NYFA…  Moreover,… Plaintiffs do not allege that they were compelled or "require(d)… to assent to a release, assignment, novation, waiver or estoppel…" (quoting the applicable "anti-waiver" provision of the New York Franchise Act) (emphasis in original).

Pointedly, Chief Judge Preska held that, "Plaintiffs' arguments also contravene the basic principles of contract law, which are to "protect the expectations of the parties and provide certainty where the future would otherwise be uncertain" (citation omitted).  Refusing to enforce non-reliance disclaimers would violate the sanctity of contracts and discourage their use." 

Chief Judge Preska then observed the critical importance of franchise agreement disclaimers to a franchisor's ability to ensure that "clean" franchise sales transpire by noting that, if such disclaimers were deemed violative of the New York Franchise Act, "Ironically, this would undermine the goals of the NYFA, since non-reliance disclaimers help franchisors "root out dishonest sales personnel and avoid sales secured by fraud… by requesting franchisees to disclose whether a franchisor's representatives made statements concerning the financial prospects for the franchise during the sales process (citation omitted)".

"Accordingly," held the Court, "the (7-Eleven Franchise Agreement) disclaimer must be given effect, and Plaintiffs cannot successfully allege the element of reasonable reliance…  Therefore, Plaintiffs failed to state a claim for relief under (the anti-fraud provision of the New York Franchise Act)."

Further driving home the point that franchise agreement disclaimer provisions do not violate the New York Franchise Act, Chief Judge Preska observed: "Here, Plaintiffs did not relinquish any rights by signing the Agreement's non-reliance disclaimer.  Instead, Plaintiffs merely affirmed in the Agreement that they did not rely on any financial performance representations other than those provided in the FDD."

Accordingly, 7-Eleven's motion to dismiss the New York Franchise Act fraud causes of action against it was granted, though a few remaining claims were permitted to proceed.

Chief Judge Preska's decision reversed a months old earlier ruling of her U.S. District Court for the Southern District of New York involving the same franchisor, the same franchisee counsel, the same 7-Eleven Franchise Agreement and the same claim, (Solanki v. 7-Eleven, Inc.) as well as an earlier decision of the Appellate Division of the Supreme Court of the State of New York (Emfore Corp. v. Blimpie Associates, Ltd.), both of which held that franchisee disclaimers of reliance violated the anti-waiver provision of the New York Franchise Act.

When Jerry Marks of Marks & Klein, LLP, who served as franchisee counsel in the earlier Solanki case against 7-Eleven which resulted in a contrary decision and now represented plaintiff-franchisee Governara, asked Judge Preska at oral argument why it was that 7-Eleven did not appeal that earlier ruling if it thought it was so correct on the issue, Chief Judge Preska, after reviewing the submissions and papers in that earlier case, observed: "I don't think Mr. Kaufmann was counsel in that case."  To which Mr. Klein responded: "This gentleman is a mentor of mine.  I love him."  Chief Judge Preska's final observation: "I'd hide if I were you, Mr. Kaufmann.  Run and hide."

For further information, copies of the U.S. District Court's decision or copies of the transcript of oral argument of 7-Eleven's motion to dismiss, contact David Kaufmann of New York City's Kaufmann Gildin & Robbins LLP, who can be reached at (212) 755-3100 or by email at [email protected].

SOURCE Kaufmann Gildin & Robbins LLP