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Judge Denies BrightStar, Shelly Sun's Attempt to Dismiss Franchisee Lawsuit

PHOENIX – Arizona district court has denied BrightStar Franchising and owner Shelly Sun’s motion to dismiss a lawsuit filed by franchisees. The lawsuit arises out of the parties’ relationship as franchisor and franchisee in providing home healthcare services.

Shelly Sun has been named individually in the lawsuit. Since franchising her home healthcare business with her husband in 2005, she has become a pillar in the franchise community.  The renowned executive has played an important role in representing franchisors and the International Franchise Association in their efforts to quash state and federal legislation in favor of franchisees.

Starcatcher Healthcare, LLC alleges that Sun and her company made several misrepresentations about their system before the parties entered into a franchise agreement. The franchisee entity claims the information it received through BrightStar’s marketing materials, 2010 franchise disclosure document, and during a personal meeting with CEO Shelly Sun and other company officials was not factual.

After the franchisees signed their franchise agreements for two BrightStar businesses on April 30, 2010 and October 31, 2011, respectively, they realized the franchisor did not have the “skilled-care” expertise it promoted, and would not be able to provide the guidance and support Starcatcher needed in running its franchises. The franchisees also discovered that BrightStar’s proprietary software system, called “ABS”, could not handle all the logistics of operating a skilled-care business for home healthcare. That included billing and medical record keeping, clinical management, and financial reporting and co-pay management.

Franchisees Steve Evans and Candice Brainard claim that company officials, including then-president Chuck Bailey and chief operating officer/chief legal counsel Brian Schnell, failed to provide workable solutions to Starcatcher’s technical problems, including a revamped version of its software program. Instead, company officers allegedly advised the franchisees to focus on providing “non-skilled” care, which was also addressed in a June 22, 2012 email sent to Phoenix area franchisees by Brian Schnell, at that time BrightStar’s president, the court ruling states.

The franchisees also maintain that the franchisor failed to prevent another franchisee in the Phoenix area from encroaching on its exclusive territory on multiple occasions. And they allege they received no benefit from the monies their company paid into BrightStar’s marketing fund to advertise and promote franchisee services.

Starcatcher Healthcare filed the lawsuit (pdf) against the franchisor on October 8, 2013, asking the court to resolve the issues, and allow rescission of the agreements between the parties. It also asks for attorney fees and costs and unspecified damages. BrightStar filed its motion to dismiss the franchisees’ complaint on November 26, 2013.

U.S. District Judge Susan R. Bolton issued her decision on April 17, 2014, stating all of Starcatcher’s causes of action against BrightStar survive violation of Illinois Franchise Disclosure Act; violation of Arizona Consumer Fraud Act; and three counts under Common Law Claims. Those three counts, common law fraud, negligent misrepresentation, and breach of contract and breach of the implied covenant of good faith and fair dealing “are not governed by the agreements’ one-year contractual limitations period.” And like the franchisee’s cause of action under Arizona Consumer Fraud Act, the judge said it is not clear when the claims for fraud and negligent misrepresentation accrued under Arizona law.

While BrightStar argued that the franchisees failed to state a claim under ACFA, contending that ACFA does not apply to the sale of a franchise, and that the cause of action is time-barred, the court rejected its argument. It said Arizona follows the common law “discovery rule,” which states that “a cause of action does not accrue until the plaintiff knows or should know the facts underlying the cause. And while the franchisor argued that Judge Bolton asserted that Starcatcher identifies “the who, what, when, where, and how” of the misconduct as the allegations center on representations made by BrightStar concerning its expertise in skilled-care businesses and providing the proprietary ABS software system for handling the logistics of a skilled-care business. The judge explains, “Starcatcher has satisfied the pleading requirements . . .  for the fraud and negligent misrepresentation claims.”

Attorneys respond

Michael Dady of Dady & Gardner, attorneys for the plaintiff franchisees, said his clients, and their lawyers, are particularly pleased that the court has recognized that franchisees located outside of Illinois are entitled to the anti-fraud protections afforded by the Illinois Franchise Act. And they add, they are pleased that the franchisee plaintiffs, located in Arizona, are also entitled to the pre-sale anti-fraud protections afforded by the Arizona Consumer Fraud Act.  

William Killion of Faegre Baker Daniels, who represents BrightStar and Shelly Sun as the lead trial lawyer in the case, explained that a motion to dismiss says that even if all of the facts alleged by the plaintiff are true, the plaintiff may not recover. “We said that the Illinois Franchise Act and the Arizona Little FTC Act do not apply and that the statutory and contract time limitations for filing the lawsuit barred all of the claims. The Court said that assuming the facts alleged in the complaint are true, the plaintiff’s claims are not barred,” Killion stated. He further explained, “This was not a decision on the merits, and we believe the facts are different than alleged by plaintiffs. Also, as we read the decision, the court threw out the claim that Brightstar breached the franchise agreement because the software was allegedly dysfunctional.”  The Minneapolis attorney said the case will now proceed to the discovery stage.

Brian Schnell, once again a partner in the Faegre law firm, also represents BrightStar as its transactional attorney. He did not respond to Blue MauMau’s request for comments.

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Starcatcher Motion to Dismiss Order.pdf8.18 MB
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