International Law

Dream Dinners' Attorneys Sued

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Janet Sparks, writing at Blue Mau Mau, has a very interesting article about a lawsuit in which the franchisor's attorneys were sued in connection with their role in preparing the franchisor's FDD.

"The lawsuit claims that Bender knew or should have known that prospective franchisees were receiving materially false, incomplete and misleading information regarding the franchise opportunity, and that he was a "person in act of control of the activities" of the franchisor.

Bender drafted or approved the franchisor's franchise agreement, UFOC and all other contracts and documents used by Dream Dinners in offering and selling the franchise to the Turners.

He also approved the procedure used by which they required the franchisees to sign a binding contract before they could receive the UFOC or other information, as well as the PowerPoint slides used to give the earnings claims.

He allegedly participated in the illegal earnings claims with Dream Dinners and its accountant, disguising them as being part of the audited financial statements.

Attorneys Collette and Kim assisted Bender in his activities for the franchise company and did nothing to prevent the relevant violations of the Washington Franchise Investment Protection Act on Dream Dinners behalf.

The complaint states that franchisees Nicole and Eric Turner suffered damages in an amount not yet fully determined but which are estimated to exceed $300,000. For judgment against Dream Dinners and its legal counsel, other attorneys and the law firms, it asks for exemplary damages up to three times actual damages as permitted by the Washington Act, and for costs and reasonable attorney fees."

In Canada, this type of case would depend upon whether there was a duty of care between the franchisor's attorney and the prospective franchise

In the case, Hercules Managements Ltd. v. Ernst & Young, [1997] 2 S.C.R. 165, the Supreme Court of Canada laid out the appropriate analysis.

The existence of a duty of care in tort is to be determined through an application of the two?part Anns/Kamloops test (Anns v. Merton London Borough Council; Kamloops (City of) v. Nielsen). That approach should be taken here. To create a "pocket" of negligent misrepresentation cases in which the existence of a duty of care is determined differently from other negligence cases would be incorrect. Whether the respondents owe the appellants a duty of care for their allegedly negligent preparation of the audit reports, therefore, depends on (a) whether a prima facie duty of care is owed, and (b) whether that duty, if it exists, is negated or limited by policy considerations.

The existence of a relationship of "neighbourhood" or "proximity" distinguishes those circumstances in which the defendant owes a prima facie duty of care to the plaintiff from those where no such duty exists.

In the context of a negligent misrepresentation action, deciding whether a prima facie duty of care exists necessitates an investigation into whether the defendant?representor and the plaintiff?representee can be said to be in a relationship of proximity or neighbourhood. The term "proximity" itself is nothing more than a label expressing a result, judgment or conclusion and does not, in and of itself, provide a principled basis on which to make a legal determination.

"Proximity" in negligent misrepresentation cases pertains to some aspect of the relationship of reliance. It inheres when (a) the defendant ought reasonably to foresee that the plaintiff will rely on his or her representation, and (b) reliance by the plaintiff would, in the particular circumstances of the case, be reasonable.

So is your franchisor's attorney the neighbour of the prospective franchisee?

Full post as published by Misleading Advertising Law on October 23, 2008 (boomark / email).