Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2014

And the saga continues . . .

In Chicago Male Medical Clinic, LLC v. Ultimate Management, Inc., No. EDCV 13-00199 SJO, 2014 WL 7180549, at *1 (C.D. Cal. Dec. 16, 2014), plaintiff filed suit against defendants arguing that defendants violated Section 5 of the Illinois Franchise Disclosure Act (“IFDA”).

Section 5 of the IFDA provides a franchisee with the right to rescind an agreement when a franchisor fails to either register its franchise with the State of Illinois, or fails to deliver a disclosure statement.

There, plaintiff entered into a “Continuing Consultation and Compensation Agreement” (“Consulting Agreement”) with defendants. Under the terms of the Consulting Agreement, plaintiff was required to pay a $300,000 initial investment fee, royalties, and call center fees. In exchange, plaintiff was given the right to engage in the National Male Medical Clinic business. Although required under the IFDA, however, defendants did not provide plaintiff with a disclosure document prior to the execution of the Consulting Agreement.

The court stated that in order for the Consulting Agreement to be considered a franchise agreement, plaintiff must have been required to pay defendants a fee of $500 or more for the right to engage in the business. Since the parties had stipulated that plaintiff was required to pay an initial cash payment of $300,000, in addition to fees in excess of $500, this franchise fee requirement was easily met. Therefore, the court rendered the parties’ Consulting Agreement a franchise agreement. Because of this, plaintiff was entitled to rescission.

Takeaway: This case shows the consequences of a franchisor’s failure to comply with all the applicable sections of the state franchise act.

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.