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September 2016

Gordon & Rees New Jersey Team Obtains Dismissal of Lawsuit Against Tax Preparation Franchisor

Gordon & Rees New Jersey partner Peter G. Siachos and associate JoAnna M. Doherty obtained complete dismissal of a multi-count complaint filed against their client, the second largest tax preparation franchisor in the nation, on a motion to dismiss in the United States District Court for the Eastern District of New York. The plaintiff commenced the lawsuit against the firm's franchisor client alleging violations of Title 18 including mail fraud, wire fraud, and the National Stolen Property Act, violations of the Civil Racketeer Influence and Corrupt Organization Act ("RICO"), and asserting state law claims for fraud, fraudulent inducement, conversion, unjust enrichment, and intentional infliction of emotional distress.  

The plaintiff claims to have incurred significant financial losses as the result of a purported scheme run by two franchisees of the client.  The plaintiff had her tax return completed at a franchise location in New York, and the franchisee asked the plaintiff about her credit score. When the plaintiff did not know her credit score, the franchisee asked for permission to run a credit report, and the plaintiff consented. The two subsequently reviewed the report together, at which time the franchisee urged the plaintiff to "think about investing.”  

When the plaintiff indicated that she lacked financial resources to “invest,” the franchisee advised the plaintiff to obtain a line of credit and invest the money with the franchisee and her sister, a Georgia franchisee of the client who “specialized in these types of investments.”  The franchisees paid to fly the plaintiff to the Atlanta area, where they were able to dupe the plaintiff into participating in a “business partnership” which included opening a bank account with the plaintiff’s knowledge.  Shortly thereafter, the franchisees took out credit cards in the name of the plaintiff without her knowledge, allegedly using the information provided for the completion of the plaintiff’s tax return to do so.  The franchisees used some of the monies for franchise location expenses, but mostly for their personal expenses and for shopping sprees. The franchisees also took out a $50,000 line of credit in the plaintiff’s name, a small amount of which was used for franchise expenses (including franchise fees paid directly to the client) and the rest of which were used for the franchisee’s personal expenses.

The plaintiff alleged that the client, as franchisor, was responsible for the acts of its franchisees on a theory of vicarious liability, claiming that the client "exercises strict control over the manner and means by which franchisees operate their businesses,” rendering the franchisees the client’s agents.  The plaintiff also brought multiple fraud-based claims against the client, alleging that it received, accepted and did not return funds from the franchisees that were stolen from the plaintiff.  In bringing RICO claims, the plaintiff alleged the client was recklessly indifferent toward the unlawful activity of its franchisees.  

Gordon & Rees, on behalf of the client, successfully argued that the allegations of the complaint, despite being nearly 30 pages long, were too generalized to show that the client exercised control over the daily operations of the franchisees and franchise locations to impose liability upon the franchisor.  Gordon & Rees also argued that there was no private right of action for many of the federal claims, and that the failure to allege that the franchisor was directly involved with the bad acts required the plaintiff to plead and prove vicarious liability.  

While a Fed.R.Civ.P. 12(b)(6) motion is typically confined to facts as alleged in the four corners of the complaint, Gordon & Rees argued that the judge could review the franchise agreement to determine the degree of control the franchisor had over the rouge franchises.  While the court reviewed this evidence, Gordon & Rees was able to successfully argue that the extensive allegations as to franchisor control were insufficient to state plausible claims against the client. The court found that the plaintiff's allegations regarding the client's "strict control" were generalized and referred to such issues as approval of the franchise location, setting of standards and operating procedures, reporting requirements, training, and software and technical support.  The court found that these allegations pertained to uniformity and standardization across franchises, not day-to-day oversight, and dismissed the entire lawsuit against the client.  

This victory was especially important in that a case based on substantially identical facts against the client’s competitor in the same jurisdiction was not dismissed by way of dispositive motions, and resulted in a large verdict against the competitor.  

JoAnna M. Doherty
Peter G. Siachos


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