A franchisee sued its franchisor OsteoStrong Franchising, LLC in federal court in Texas after OsteoStrong terminated its franchise and development agreements. The termination took place after the franchisee had failed to develop and open additional locations in accordance with two development contracts. The court has issued a partially summary judgment in favor of OsteoStrong. The court ruled that releases signed by the individual owners of the franchisee are binding on the individual owners of the franchisee and their entities, and that the releases exclude most claims.
The franchise relationship began in June 2013. In November 2015, the franchisee signed a development agreement to open additional locations in New Mexico. In December 2017, the franchisee signed a regional development agreement to open locations in Colorado. The franchisee has failed to meet the schedules of the development agreements. OsteoStrong terminated all contracts in April 2018.
The franchisee alleged fraud and breach of contract, alleging that OsteoStrong had omitted essential information from its FDDs, including the bankruptcy and criminal conviction of an executive. The franchisee claimed to have been induced to enter into the franchise agreement and later the development agreements on the basis of false training promises made by OsteoStrong.
The development agreements of 2015 and 2017 each had a release, whereby the franchisee released and waived all claims against OsteoStrong. The court found the releases valid and clear and rejected the franchisee’s argument that they were limited to the individual owners of the franchisee and were not applicable to legal entities [Simpson, et al. v. OsteoStrong Franchising, LLC, Case No. 19-H-2334 (S.D. Tex. Nov. 18, 2021)]. The court found that the individual franchisee acted as the agent for each corporation and therefore bound the companies.
The franchisee argued that fraudulent incentives and misrepresentation compromised the agreements and releases, claiming that this invalidated the releases and contracts. The court dismissed the franchisee’s complaint that he was induced to buy franchises and to conclude development contracts on the basis of false promises of training. The court found that (a) the franchisee failed to provide documentary evidence of an express commitment to provide training, and (b) proven evidence that OsteoStrong was provided to the franchisee himself.
The court upheld the negligent misrepresentation complaint as it was not ripe for a summary judgment. The court found evidence that OsteoStrong did not intentionally omit essential information from the FDDs in order to fraudulently mislead the franchisee. However, the court found contentious facts as to whether the franchisee relied on the FDDs, as one owner of the franchisee unit testified, had he not entered into a franchise agreement if he had known the missing information.
Franchisees are often asked to sign waivers with the franchisor during the franchise, renewal, transfer, or other circumstances. Franchisees should consult a franchise advisor to understand what rights and entitlements they may give up in signing a release so that this can be considered when weighing the benefits of each opportunity considered.
