SOUTH SHORE LITES LLC v. FIRST CLASS PRODUCTS GROUP LLC (2025)

Order and judgment (one paper), Supreme Court, New York County (John J. Kelley, J.), entered on or about June 10, 2024, which, after a nonjury trial, found defendants’ violation of General Business Law §§ 683 and 687 was willful and material, rescinded plaintiffs’ franchise agreements with defendant First Class Products Group, LLC, and awarded plaintiffs money damages with interest at 6% per year from the date of purchase and reasonable attorneys’ fees, unanimously modified, on the law, to dismiss the claim for common-law fraudulent inducement, and otherwise affirmed, without costs.

Supreme Court properly found that defendants’ violation of the New York Franchise Sales Act (the Franchise Act) (see General Business Law §§ 683 and 687) was willful and material within the meaning of General Business Law § 691(1), meriting recission, damages, and an award of 6% of the recovery, along with attorneys’ fees.  Plaintiffs’ testimony that had they known that the ice cream product purchased from defendants was marked up over 58% of the cost to defendant First Class, they would not have entered into the franchise agreements with defendants, established that the violations were willful and material (compare A Love of Food I, LLC v. Maoz Vegetarian USA, Inc., 70 F.Supp.3d 376, 409 [D.D.C. 2014] [finding that, while the defendant intentionally did not register its offering prospectus before making the franchise sale, its violation was not material, since neither plaintiff testified that they would not have gone forward with the sale if they knew the prospectus was not yet registered], with CFTC v. Intl. Fin. Servs., 323 F.Supp.2d 482, 501 [S.D.N.Y.2004] [“misrepresentations concerning profit and risk go to the heart of a customer's investment decision and are therefore material as a matter of law” (internal quotation marks omitted)]).

Plaintiffs also demonstrated that they reasonably relied on defendants’ misrepresentations (see Emfore Corp. v. Blimpie Assoc., Ltd. 51 A.D.3d 434, 435, 860 N.Y.S.2d 12 [1st Dept. 2008];  Coraud LLC v. Kidville Franchise Co., LLC, 121 F.Supp.3d 387, 393 [S.D.N.Y.2015]).  Plaintiffs’ level of education, the primary point of contention with respect to this issue, does not change the fact that the Franchise Act is intentionally set up to allow prospective franchisees to receive, and rely on, representations from a franchisor (see General Business Law § 683[2][u] [disclosures “will afford prospective franchisees an adequate basis upon which to found their judgment”]).  Here, there were no obvious signs of falsity and the relevant information was under the control of defendants (see Coraud LLC, 121 F.Supp.3d at 394).

Contrary to defendants’ contention, the record here shows that the Franchise Act applies to plaintiffs’ West Caldwell store, which was located in New Jersey (see General Business Law § 683[1];  Mon–Shore Mgt., Inc. v. Family Media, Inc., 584 F.Supp. 186, 191 [S.D.N.Y.1984]).  Also contrary to defendants’ contention, the boilerplate merger and no-oral modification clauses in the franchise agreement are invalid and unenforceable as a defense to the fraud claim under the Franchise Act (see General Business Law § 687[5]; Emfore Corp., 51 A.D.3d at 435, 860 N.Y.S.2d 12).

However, outside of the franchise context, plaintiffs cannot maintain a claim for common-law fraudulent inducement in the face of the aforementioned nonreliance disclaimers (see EV Scarsdale Corp. v. Engel & Voelkers N.E. LLC, 48 Misc.3d 1019, 1033–1034, 13 N.Y.S.3d 805 [Sup. Ct., N.Y. County 2015]).  For that reason, the common-law fraudulent inducement claims should be dismissed.