Sona MedSpa Guilty of Negligent Misrepresentation

FRANKLIN, Tenn. (Blue MauMau) - An arbitrator has issued a guilty verdict of "negligent misrepresentation" against franchisor Sona MedSpa, and its high-profile executives James H. Amos, daughter Heather Rose, and investment firm Carousel Capital Partner II, L.P. Sona's outside counsel Kiran Mehta responded, "the arbitrator ruled unequivocally that no fraud or intentional misrepresentation of any kind occurred."

Amos, a former chairman of the International Franchise Association has moved on to become the current CEO of Tasti D-Lite, a franchise business opportunity company, and Rose continues as the CEO/president of Sona MedSpa, a position she has held since October 2005. She is currently a member of IFA's board of directors.

At the center of the decision is Carousel Capital, an equity firm that purchased a majority interest in Sona MedSpa International, Inc. with Amos and Rose in May 2004. Amos became the chief executive officer and Rose the chief operating officer of Sona.

According to franchisee attorney W. Michael Garner, Dady & Garner, this is not just about his clients winning in an arbitration case. "This is a landmark decision that will have a huge effect on franchising because of all the merger and acquisition activity going on," explained Garner. "It is about the due diligence that has to be performed by anyone who is buying a franchise company. He said, "They can't simply buy a franchisor and ignore any possible misrepresentations that might have been made to existing franchisees." He feels that up until now equity firms did not have to worry about what had gone on before them. But now this decision says they have a duty to investigate.

Attorney Craig Tractenberg of Nixon Peabody, who has no ties to the case, said he's not sure he would call it a landmark case. There have been similar cases that have not been publicized. But it is a very instructive decision. He said, "Equity firms that buy franchisors also buy the skeletons in the closet. But if they are smart they will not ignore this decision. There is clearly a lesson to be learned here."

Tractenberg explained that if equity firms are just investors they have limited risk. But they must conduct due diligence because it is possible that they may later become involved in management and then will have obligations.

Tractenberg said in this case management was found not only to know about negligent non-disclosures but also had a duty to act to prevent further harm. "It was their failure to act in their capacity of management, not just as mere investors."

Franchisee Awarded $400,000

Kempton and Rosita Coady had entered into a Boston-area Development Agreement and a Burlington Franchise Agreement in September 2003, to operate franchise laser hair removal centers. The Coadys had conducted an independent investigation of the business and had consulted with their financial and legal advisors before signing agreements. Kemp Coady testified that they had made their decision based on the information Sona representatives had given them regarding their hair removal technology. But approximately eighteen months into the system, the Coadys felt the "efficacy information" procedure, a much touted Sona method of hair removal, was flawed and constituted negligent misrepresentation under Tennessee law.

The Coadys were seeking damages worth approximately $9 million on eleven counts, namely for common law fraud and negligent misrepresentation (Counts 1 and 2). Although the arbitrator did not find the respondents liable for fraud, he did rule guilty on the charge of negligent misrepresentation. But he severely adjusted down the award to approximately $400,000, which only addressed the damages the Coady's claimed through October 2006. The arbitrator's decision of a lower compensation seemed to be influenced by the plaintiff's high education level, their income producing capabilities and an already existing new store that the husband and wife team started, Viva Skin Care Center. Compensation for loss of livelihood was minimized. The Coadys will be required to pay arbitration and legal fees.

Franchisee States, "We Were Very Much Deceived."

At the time of arbitration, Kemp Coady said Sona had a total of 45 franchises in the system, but by November 2006 sixteen franchisees had gone bankrupt or had been transferred to other people. He said, "Most franchisees got in trouble after one to two years of running their centers. Basically they come unwound. The business just stops working."

Coady and his wife are past executives with MBAs from Cornell University. He said that when they invested heavily in the Sona system and the Sona promise they felt they had been deceived, both in terms of its medical premise and, although it was not found in their favor in the decision, in terms of its business model as well. He said, "We were very much deceived."

Coady said, "They negligently misrepresented the medical facts because they did not hire the proper experts to prove what they were telling franchisees was true."

He feels the arbitrator made a good decision in vacating all of the Sona MedSpa and Carousel counter-claims against them. He said, "Now we are independent of Sona, but we still have to try to make our Viva Skin Care Center succeed. That's a tall order with all the baggage we were left with because of Sona.

Sona Replies, "Award Is Small Fraction of Originally Claimed Damages"

Although Heather Rose did not respond to a phone call personally, Sona's outside counsel Kiran Mehta of Kennedy Covington stated the following:

Sona does indeed view the outcome as favorable, for a number of reasons -- first and foremost, while the claimants in the Coady case as well as all the others have predicated their claims upon fraud (the Coady claimants in fact went so far as to liken Sona and its founder to "snake oil salesmen") the arbitrator ruled unequivocally that no fraud or intentional misrepresentation of any kind occurred, and also ruled that none of the franchise or other state regulatory or consumer protection statutes the claimants relied upon were violated. I assume that even the "redacted" version of the award reflects these findings. In addition, the award itself was a small fraction of the originally claimed damages. Finally, the defense that Sona was able to mount, in conjunction with very favorable preliminary rulings in proceedings other than the Coady matter, went a long way toward persuading other claimants that resolution of their claims was the better course of action, and even prior to the entry of the Coady award most of them were resolved.

He also stated: Sona disagrees with some parts of the award, and agrees with other parts of the award -- which is a fairly typical reaction to any arbitration award. I suspect that the claimants disagree with some parts of the award and agree with other parts as well. But Sona has no quarrel with the overall arbitration process, which is predicated upon swift and efficient resolution of contested matters, with virtually no possibility of appeal Sona now has 18 franchisees with 28 franchise locations. Mehta said, "By putting this litigation behind it certainly gives Sona the opportunity to move forward and focus on business instead of lawyers, lawsuits, and arbitration proceedings."

Clarification from Attorney Michael Garner

As a clarification to the Sona MedSpa Guilty of Negligent Misrepresentation article, W. Michael Garner, attorney for franchisee-claimants Kemp and Rosita Coady, explained the total damages actually sought at trial were $1.3 million. The original Complaint sought $4.5 million total damages.

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Related readings:

• Local Paper Interviews Jim Amos, CEO of Tasti D-Lite