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HT of Highlands Ranch, Inc. v. Hollywood Tanning Systems, Inc.

590 F.Supp.2d 677 (D. N.J. 2008)

FRANCHISES — Where a franchisee can plead facts that sufficiently demonstrate that its franchisor and an equipment leasing company functioned as a unit in furtherance of an alleged scheme to defraud the franchisee, it can pursue a civil RICO claim.

Four operators of tanning franchises located in three different states had entered into a contract for the purchase of one or more franchises with a New Jersey franchisor. Each of the contracts had an arbitration clause which provided that all claims arising out of the contracts had to be submitted for arbitration in New Jersey. Three of the franchisees subsequently entered into a contract with a leasing and financing company that furnished tanning salon equipment. The franchisor, in course, assigned its interest in the franchise contracts to another party. After four years, the franchisees sued in federal court for violation of the Racketeer Influenced and Corrupt Organizations Act (RICO) and for recovery under fraud and contract theories. The franchisees alleged that both entities conspired and acted to routinely and systematically submit misleading or incomplete invoices by fax and mail over a four year period for products sold as new but which were, in fact, used, and also for products never received. The franchisees further alleged that the franchisor inhibited their ability to access proper invoicing information from the leasing and financing company.

The franchisor filed a motion to dismiss the lawsuit and to compel arbitration as required under the franchise agreement. The Court dismissed this motion, finding that the franchisor had assigned its rights and obligations under the franchising agreement prior to the filing of suit. The Court held that it was unable to conclude that a valid agreement to arbitrate the dispute at this time still existed between the parties. The Court was unable to determine whether the franchisor retained the right to arbitrate after making its assignment, as the Court was not presented with evidence of the respective rights of both assignor and assignee.

The leasing and financing company filed motions to dismiss the lawsuit to obtain a more definite statement, and for sanctions for a frivolous filing of litigation. The Court denied all relief but for dismissing the franchisees’ claim for unjust enrichment, finding that such a claim could not co-exist with claims for damages arising out of a governing written agreement.

The Court examined the franchisees’ particularity and sufficiency of pleading for the RICO claim. It stated that such sufficiency requires allegations of predicate acts of racketeering activity so as to put on notice those alleged to have committed such conduct. In this case, the Court found the franchisees pled facts regarding numerous specific dates on which some of the allegedly fraudulent invoices were received and identified particular pieces of equipment for which they were charged but never received. The Court also found the allegations of repeated mailing of fraudulent invoices over a fifteen month period sufficient to establish a continuity and pattern of conduct required under RICO.

The Court likewise found that the franchisees’ pleadings properly alleged the existence of a RICO enterprise. It noted that so long as a civil RICO claimant pleads facts indicating various associates functioned as a unit, the claimant has satisfied its burden. In this matter, the Court felt the facts pled sufficiently demonstrated that the franchisor and the leasing and equipment company functioned as a unit in furtherance of an alleged scheme under which suspect invoices were transmitted and where the franchisees were deterred from acquiring full information.

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