Court Rules Summarily Against Hotel Franchisee Refusing to Consider Franchisor's Alleged Breach and Fraud

This case arose out of the premature termination of a licensing agreement ("the Agreement") between Plaintiff Days Inn Wordwide, Inc. ("Days Inn") and Defendant Khan Group, LLC ("the Khan Group").

Days Inn sued the franchisee on six grounds, asserting claims against the Khan Group for an accounting (Count One), liquidated damages under the Agreement (Count Two), or, in the alternative, actual damages (Count Three), Recurring Fees under the Agreement (Count Four), unjust enrichment (Count Five), and against Sharif and Shibly Khan for liquidated or actual damages under the Agreement, Recurring Fees under the Agreement, interest, costs, and attorneys' fees (Count Six). The franchisor's claim amounted to about $200,000.

Although the facts showed clearly that the franchisee had itself sent a letter to the franchisor terminating the agreement, the franchisee argued that the franchisor was not entitled to summary judgment because the franchisor had not in its legal papers 'disproved' the franchisee's fraud and breach of contract allegations. Specifically, the defendants argued that the Court could not permissibly grant summary judgment on liability because Days Inn failed to address their affirmative defenses that Days Inn: (1) materially breached the Agreement; (2) fraudulently induced Defendants into entering into the Agreement and Guaranty; and (3) breached the implied covenant of good faith and fair dealing. According to the Defendants, a showing of any of the above would have relieved Defendants of their obligations under the Agreement, Addendum and Guaranty.

The franchisee cited in support of its argument Florida and California law. The Court rejected these arguments stating that:

Unfortunately for Defendants, neither the Florida nor California summary judgment standards carry any authority in this Court. Under the federal summary judgment standard, it is not the burden of the moving party to specifically negate any and all affirmative defenses that the non-moving party might have set forth in an Answer. Rather, it is the non-moving party's burden to set forth specific facts, through competent evidence, suggesting that a dispute of material fact exists with respect to a claim or defense.

In so doing, the Court, in granting summary judgment for the franchisor, failed to consider the merits of the franchisee's argument that Days Inn failed to provide proper marketing support; failed to respond to defendants' repeated inquiries and requests; failed to perform the services for which it was to be paid fees; failed to properly provide advertising and promotional services; failed to provide business leads and take proper steps to assist in generating business; failed to provide proper training; and otherwise completely abdicated its role as franchisor and failed to fulfill its obligations under the License Agreement." The Court also pointed out that "Under the federal summary judgment standard, mere recitations of allegations from the pleadings do not create a dispute of material fact. Indeed, Defendants' interrogatory response provides no basis from which a reasonable jury could infer that Days Inn breached one or more provisions of the Agreement."

The court also rejected promptly the franchisee's argument regarding fraud.

Similarly, the evidence set forth in support of Defendants' affirmative defense that they were fraudulently induced into entering into the Agreement and Guaranty fails to defeat summary judgment in favor of Days Inn ... This evidence fails for several reasons, two of which the Court will note here. First, it fails to indicate "a material misrepresentation of a presently existing or past fact," which is the first element of a fraud claim under New Jersey law. Second, it makes clear that Defendants' fraudulent inducement defense is wholly duplicative of their aforementioned defense for breach of the Agreement. Indeed, the basis of their fraudulent inducement defense is rooted solely in Days Inn's promise to perform under the Agreement.

After rejecting both the breach of contract and fraud affirmative defenses of the franchisee, in part because of a pleading defect, the Court stated that "Even if that claim or defense had been properly set forth in Defendants' pleading, Defendants provide absolutely no evidence to support it. They merely recite the allegations set forth in their interrogatory responses in support of their affirmative defense that Days Inn materially breached the Agreement."