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February 2018

Chicago Team Obtains Complete Victory for Franchisor in Million Dollar Action

Gordon Rees Scully Mansukhani Chicago managing partner Hayes Ryan, and associates Jonathan Blakley and Brian Myers, successfully defended an international property services franchisor against claims asserted by a former franchisee for breach of contract, fraud, consumer fraud, civil conspiracy, and intentional infliction of emotional distress. In addition to obtaining a complete victory against all of plaintiffs’ claims, in which plaintiffs sought recovery of more than $1 million plus attorneys’ fees, Gordon & Rees also secured an award in favor of the franchisor on its counterclaim for outstanding promissory note payments and fees due to the franchisor under the franchise agreement. 

The plaintiffs, a husband and wife, started a plumbing and sewer services franchise with Gordon & Rees’s client in 2007, but were ultimately unsuccessful and filed for bankruptcy in 2009.  The plaintiffs’ franchise agreement provided that they had the exclusive right to operate their franchise in one of the suburban counties surrounding Chicago (DuPage County).  At the time the plaintiffs opened their franchise, Gordon & Rees’s client already had a similar franchise operating in another suburban Chicago county (Will County, immediately south of plaintiffs’ territory), and subsequently expanded with yet another franchise in a separate area of suburban Chicago (northwest Cook County, immediately north of plaintiffs’ territory).

The plaintiffs, who had operated a family-owned sewer services business for decades prior to expanding with their plumbing franchise, alleged that Gordon & Rees’s client fraudulently induced the plaintiffs into opening a plumbing franchise, by making numerous misrepresentations. Principally, the plaintiffs alleged that Gordon & Rees’s client fraudulently assured the plaintiffs: (1) that they did not need to have a plumbing license to operate a plumbing franchise; (2) that the franchisor would protect the plaintiffs’ territory from encroachment by the other franchisees in the Chicago area; and (3) that the franchisor guaranteed that their franchise would be successful.  Similarly, the plaintiffs alleged that Gordon & Rees’s client breached its contract with the plaintiffs by failing to support the plaintiffs’ franchise and protect them from encroachment, and that Gordon & Rees’s client conspired with the other Chicago area franchisees to infringe on the plaintiffs’ territory. The plaintiffs claimed that the same alleged conduct also caused them extreme emotional distress in connection with their bankruptcy filings.

Gordon & Rees successfully defended against all of the plaintiffs’ claims by introducing evidence of its client's contemporaneous business records documenting its dealings with the plaintiffs, which corroborated the client's testimony at the arbitration.  Gordon & Rees established that its client’s records showed that the client provided constant support to the plaintiffs’ franchise, from multiple levels of its leadership, including in-person business coaching sessions from the president of the company herself. Gordon & Rees showed that its client had extensively coached the plaintiffs on its proven-successful business systems, and that the plaintiffs simply refused to follow the company’s advice. Most importantly, Gordon & Rees forced the plaintiffs to admit on cross-examination that they used a poor-quality telephone answering service to handle their customers’ calls, in direct violation of their franchise agreement that required personalized customer call handling, which caused their business to fail. Gordon & Rees also introduced evidence that the plaintiffs insisted on employing family members and friends with no regard for their qualifications, such as a field technician with no driver’s license. Moreover, Gordon & Rees showed that its client made repeated efforts to protect the plaintiffs’ franchise from encroachment, by coaching the other franchisees to respect the plaintiffs’ territory, auditing the other franchisees’ records for encroachment, and ultimately establishing financial penalties for any future encroachment.

Regarding the plaintiffs’ fraud claims, Gordon & Rees emphasized the language in its client's franchise documents, which directly contradicted all of the plaintiffs’ claimed misrepresentations, and the corroborating testimony of its client's witnesses. Gordon & Rees further forced the plaintiffs to admit that they had a personal attorney review the franchise documents and negotiate with the franchisor on their behalf, thereby defeating the plaintiffs’ fraudulent inducement claims.  Indeed, in his award, the Arbitrator commented, “How claimants can allege fraud of any kind against [franchisor] under these telling circumstances is impossible to fathom.”

Not only did Gordon & Rees defeat all of the plaintiffs’ claims, the firm's attorneys further obtained an award in favor of the franchisor on its counterclaim for payments due to the franchisor under the franchise agreement. The Arbitrator found that Gordon & Rees established that the plaintiffs violated their franchise agreement in numerous ways, principally by failing to follow the franchisor’s business systems, despite the repeated coaching from multiple levels of franchisor’s leadership.

Gordon & Rees took over the defense of the case from a prior defense counsel just four months prior to the previously-scheduled arbitration, midway through the discovery process.

Jonathan B. Blakley
J. Hayes Ryan