Antitrust Law Daily Franchisee entitled to rescission, damages due to missing disclosure statement
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Monday, January 30, 2017

Franchisee entitled to rescission, damages due to missing disclosure statement

By Robert B. Barnett Jr., J.D.

A vehicle deodorizing business franchisor’s failure to provide a franchisee with a disclosure statement permitted the franchisee under Michigan law to rescind the franchise agreement and obtain restitution, the U.S. Court of Appeals in Cincinnati has ruled. Michigan law allows rescission and restitution for the failure to provide the disclosure statement without any proof that the failure to supply it caused the losses necessitating restitution (Lofgren v. AirTrona Canada, January 27, 2017, Merritt, G.).

Background. Brian Lofgren bought a franchise in 2009 from AirTrona Green Technologies for (Can.) $25,000 to deodorize used cars at car dealerships. AirTrona’s sales rep was Sam Barberio. In 2011, Barberio, now representing AirTrona Canada, apparently a successor or alter ego to AirTrona Green Technologies, approached Lofgren with a new business plan involving new technologies. Whereas AirTrona Green Technologies reduced car odors by pumping ozone into the car cabin, AirTrona Canada had a process for cleaning the inside and eliminating the smells. During discussions with Lofgren, Barberio purportedly promised three dealerships that would agree to use his services. Lofgren agreed to the new plan and made additional payments to AirTrona Canada.

By 2013, Lofgren’s business was struggling, which he blamed in part on Barberio’s failed promise to deliver the three dealerships. In August, Lofgren sued AirTrona Canada and Barberio, alleging that he was entitled to rescission and restitution because their failure to supply him with the disclosure statement violated the Michigan Franchise Investment Law. The trial court held AirTrona Canada and Barberio jointly liable and awarded damages of just under $83,000, which consisted of just under $37,000 in restitution and just under $46,000 in attorney’s fees. Barberio (AirTrona Canada never made an appearance and defaulted judgment) appealed and made three arguments: (1) no disclosure statement was required because the agreement for new equipment between AirTrona Canada and Lofgren was not a new franchise agreement, (2) Barberio was not liable because was an independent contractor rather than a AirTrona Canada employee, and (3) rescission was an improper remedy because the absence of disclosure statement did not cause the damages.

New franchise. The Sixth Circuit agreed with the district court that a new franchise agreement was created. First, when the negotiations took place, no business relationship yet existed between Lofgren and AirTrona Canada. Second, the sanitization process offered in 2011 was materially different from the original process under which Lofgren operated. Third, an invoice that AirTrona Canada sent to Lofgren stated that the agreement was for "1 Franchise Michigan location."

The appellate court also rejected Barberio’s argument that no new franchise was created because no franchise fee was ever paid. Lofgren was charged more than the value of the equipment. Although the higher price did not automatically mean that a franchise fee was paid, in this case Barberio could not account for 6,852 Canadian dollars of the 20,000 Canadian dollars that Lofgren paid. The appellate court agreed with the lower court that the extra amount constituted a franchise fee, particularly when the invoice said "1 Franchise Michigan location."

Employee. The Sixth Circuit also agreed with the lower court that Barberio was an employee. Numerous facts pointed to him being an employee rather than an independent contractor, including the facts that he held himself out to Lofgren as an employee and that AirTrona Canada appointed him as CEO/COO.

Rescission. Michigan law clearly states that "A person who offers or sells a franchise in violation of section 5 or 8 is liable to the person purchasing the franchise for damages or rescission" (Mich. Comp. Laws §445.153(1)). Section 8 requires that the franchisee receive a disclosure statement. While the court agreed that the absence of a disclosure statement was not a direct cause of the franchisee’s financial struggles, the statute contains no such causal requirement; it merely says that rescission in permitted if the franchisor fails to provide the disclosure statement. If the equities are in the franchisor’s favor, such as where the franchisee has unclean hands, the courts may choose not to permit rescission. In this case, however, the franchisee met his requirements and took no improper actions. As a result, the Sixth Circuit agreed with the trial court that Lofgren had the right to rescind the franchise agreement.

Restitution. The appellate court also confirmed the amounts awarded as reasonable. The district court had entered a judgment holding Barberio and AirTrona Canada jointly and severally liable to the plaintiff in the amount of $82,757.85, which included $36,935.72 in restitution and $45,822.13 in attorney fees.

The case is No. 16-1804.

Attorneys: Mark Roy Bendure (Bendure & Thomas) for Brian Lofgren. Jonathan B. Frank (Maddin, Hauser, Roth & Heller, PC) for Sam Barberio.

Companies: Airtrona Canada

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