Date: March 18, 2022
By: Thomas O’Connell
Citation:
Shaw v. Ultimate Franchises, Inc., Not Reported in Fed. Supp., 2022 WL 2132692 (C.D. Cal. 2022)
Executive Summary:
In this unpublished decision, Judge Josephine L. Staton of the United States District Court for the Central District of California granted in part Plaintiffs’ motion for default judgment against Scott Griffiths, CEO of Ultimate Franchises, Inc., holding him personally liable for fraudulent misrepresentation and violations of the California Franchise Investment Law (CFIL). However, the court denied default judgment against co-defendant Loretta Hwong Griffiths due to insufficient evidence and also declined Plaintiffs’ request for attorney fees. The court awarded Plaintiffs $749,467.99 in damages, $196,346.57 in prejudgment interest, and eligible litigation costs.
Relevant Background:
This case stems from Plaintiffs’ 2014 purchase of three 18|8 Fine Men’s Salons franchises, based on information provided in the Franchise Disclosure Document (FDD) and during a Discovery Day presentation led by Scott Griffiths. In the first case, Plaintiffs established the foundation of their claims, arguing that the franchisor misrepresented operational costs and omitted material information, including a prior fraud judgment against its predecessor, Mana Concepts, Inc. The court denied summary judgment, allowing those claims to proceed.
The second case resulted in a default judgment against Ultimate Brands, Inc. and its affiliates, with the court finding them liable for fraudulent misrepresentation and CFIL violations.
Building on these findings, the present case focused on defendants Scott Griffiths, the franchisor’s CEO, who personally certified the accuracy of the FDD and played a direct role in marketing the franchises. Plaintiffs alleged that Griffiths knowingly misrepresented operating costs and omitted critical information about prior litigation. Plaintiffs further argued that Griffiths was the “decision-maker” responsible for creating and promoting the misleading sales pitches.
Despite initial participation, Scott Griffiths ceased defending the case, leading to a default judgment. The court considered his role as a controlling person under CFIL § 31302, which extends liability to individuals who directly or indirectly participate in franchise violations.
Decision:
The court granted Plaintiffs’ motion for default judgment in part, finding Scott Griffiths liable for fraudulent misrepresentation and violations of the California Franchise Investment Law (CFIL) but denying judgment against co-defendant Loretta Hwong Griffiths. The decision was based on the following findings:
- The court found that Scott Griffiths knowingly made false representations and omissions, satisfying the elements of fraud under California law as outlined in Lazar v. Superior Court, 12 Cal.4th 631 (1996). The court emphasized that Griffiths’ personal certification of the FDD and direct involvement in promoting the franchises misled the Plaintiffs into their investment.
- CFIL Violations: Griffiths violated CFIL §§ 31200 and 31201 by offering franchises through materially misleading statements and omissions. As a controlling person under CFIL § 31302, Griffiths was held personally liable for these violations, in addition to the franchisor’s liability established in the second case.
- Damages: The court awarded $749,467.99 in damages to Plaintiffs, representing their financial losses, including franchise fees, buildout costs, operational losses, and liabilities. This judgment extended the liability for these damages to Scott Griffiths personally, alongside the franchisor entities.
Applying the factors from Eitel v. McCool, 782 F.2d 1470 (9th Cir. 1986), the court concluded that default judgment was appropriate given the merits of Plaintiffs’ claims, Griffiths’ failure to defend himself, and the absence of excusable neglect.
- The court denied default judgment against co-defendant Loretta Hwong Griffiths, finding that Plaintiffs failed to sufficiently demonstrate her active involvement or knowledge of the misrepresentations and omissions. The court noted that the evidence provided did not establish her direct participation or role in certifying or promoting the misleading FDD.
- Plaintiffs’ request for attorney fees was denied because Scott Griffiths, in his capacity as CEO, was not a party to the Franchise Agreement in his individual capacity.
Looking Forward:
This case reaffirms key lessons for franchisors and their executives. Taken together with the previous cases, it highlights the following considerations:
- Across all three cases, the courts have underscored the need for accurate, transparent disclosures in FDDs. Misrepresentations regarding operational costs and omissions of material facts, such as prior litigation, are clear violations under CFIL. Thus, franchisors and executives must ensure their disclosures are thorough and truthful.
- Also, this case illustrates the potential risks faced by executives who personally certify disclosures or directly participate in franchise sales. Griffiths’ role as a controlling person under CFIL § 31302 made him personally liable for the misstatements and omissions in the FDD. Therefore, franchisors should establish rigorous review processes to protect executives from potential liability.
- Griffiths’ failure to defend himself contributed significantly to the adverse judgment. As established in Geddes v. United Fin. Grp., 559 F.2d 557, 560 (9th Cir. 1977), allegations are deemed admitted when a party defaults. Active participation in disputes is crucial to challenge claims and potentially mitigate liability.