THE BIZOP NEWS

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"On May 9, 2006, over two hundred franchisees, principals and guarantors of "The UPS Store" filed this action against various Mail Boxes Etc., Inc. ("MBE") and United Parcel Service, Inc. entities ("UPS").

Plaintiffs allege they were duped into investing in The UPS Store franchises, which are (allegedly) economically unviable.", see Summary Judgment Against MBE Franchisees.pdf the Court intones in the latest round between the Mail Boxes Etc franchisees, UPS Store franchisees, and the franchisor United Parcel Service, UPS.

The franchisees had alleged that UPS had confidential studies conducted by the Boston Consulting Group about the new UPS Store business model which showed that the franchisees could not succeed, withheld this information from new buyers, and did not disclose the existence of these studies in the Uniform Franchise Disclosure Offering.

At discovery, the defendant UPS tendered a number of studies which it deemed to be confidential, see Affidavit in Support of Further Discovery.pdf

The plaintiff group of franchisees asked for further discovery and alleged "Mr. Keuhn is the top level person involved in Project Miramar, a comprehensive analysis of the UPS Store franchise model. Mr. Gershen oversees the UPS marketing department that, among other activities, presides over UPS's competitive efforts to obtain the franchisees customers via and turn them into UPS house accounts. Mr. Mounts is a former UPS executive that apparently studied in great detail the impact of the proposed changes on the franchisees."

In brief, the plaintiffs allege that either this information should have been part of the UFOC or that if it was not required under the relevant state Franchise statue, it was material to the purchasers decision and its omission constituted either fraud, deceit or negligent misrepresentation.

On the eve of trial, the Defendants moved for summary judgment and "argued there are no genuine disputes of material fact and that they are entitled to judgment as a matter of law on Plaintiffs' (1) Second Claim for breach of contract; (2) Fourth Claim for fraud by omission; (3) Sixth Claim for fraud, deceit, and negligent misrepresentation; (4) Eighth Claim for violation of the California Franchise Investment Law ("CFIL"); (5) Tenth Claim for violation of California Business & Professions Code Section 17200, et seq. and 17500, et seq; (6) Eleventh Claim for violation of non-California franchise and consumer protection statutes; (7) Thirteenth Claim for declaratory relief;and (8) Fourteenth Claim for rescission."

Surprisingly, in my view, Judge Otis Wright II granted summary judgment, on December 22nd 2008.

We do not know if the factual allegations would be accepted by a jury, and if there is no appeal of this decision, we may never know. We don't know whether a jury would treat these studies as mere projections, and therefore not actionable as representations.

We don't know whether a jury would think that this information should have been disclosed under the franchise statue. We don't know whether a jury would have thought it was material under common law for the franchisor to disclose the existence of these studies.

And, again, if there is no successful appeal of this decision, we may never know.

This is a very troubling decision, which if it stands probably means the end of any meaningful protection offered by disclosure legislation. Initially, franchisors might welcome this as lowering their own litigation costs, but ultimately the franchisor community will not be well served by any decision which guts the purpose behind franchise disclosure.

The franchisor community essentially pushed for disclosure legislation as a compromise; they could have faced relationship legislation which may have set the ground work for recognizing Independent Franchisee Associations as bargaining agents.

If the franchisor community can conduct studies showing that their business model is a failure, withhold this information from the prospective franchisee, and do so with legal impunity, it will be increasingly difficult for the good franchisor to distinguish itself from the straight fraud.

In a political world in which employee's collective bargaining rights are going to be strengthened, the franchisor community ought to be concerned that meaningful disclosure is being eroded. The alternative might be to face a much more empowered independent franchise association who has gained the legislative right to conduct a royalty strike to enforce its collective bargaining demands.