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No Proof of Damages Knocks-Out Negligent Misrepresentation Claim

9/13/16

By: John Goselin and Kristian Smith
There is no point in prosecuting a lawsuit if you can’t prove up any damages. If you don’t think strategically at the beginning, you may find yourself with a pyrrhic victory or just simply a bad taste in your mouth. The Georgia Court of Appeals recently provided some guidance regarding the issue of provable damages in the context of a negligent misrepresentation claim.
A franchisor was held not liable for alleged negligent misrepresentation because the franchisee could not prove any direct or consequential damages. Legacy Academy, Inc. v. Doles-Smith Enterprises, Inc., 2016WL 3208751 (June 9, 2016). This particular lawsuit arose from a lawsuit by Doles-Smith Enterprises (“DSE”), the franchisee, against Legacy Academy, the franchisor, alleging negligent misrepresentation. The Plaintiff strategically chose not to pursue a claim for rescission (which may have cost them the victory here). Legacy asserted counterclaims against DSE, for lost royalties, lost advertising fees, and attorney’s fees.
DSE purchased a Legacy day-care franchise in 2006 after reviewing Legacy’s Franchise Offering Circular. DSE paid a franchise fee and agreed to pay Legacy royalty and advertising fees. DSE’s daycare opened in 2008 and after three years of net losses, DSE stopped paying Legacy monthly royalty and advertising fees. In 2012, DSE learned of problems between Legacy and other franchisees and sent a letter to Legacy terminating their franchise relationship based on alleged false and misleading information in the Offering Circular. They stopped marketing their Legacy affiliation and continued operating the daycare under a different name.
DSE sued alleging negligent misrepresentation and negligence, among other things. The jury found for DSE on these claims and awarded damages. The Georgia Court of Appeals, however, took the victory away from DSE. On appeal, the Court held that the trial court erred in denying Legacy’s motion for directed verdict and j.n.o.v. on the negligent misrepresentation claim because DSE failed to prove any actual economic damages, an essential element of the claim.
Using Georgia’s out-of-pocket standard of recovery for claims of this nature, the Court of Appeals held that DSE had not shown sufficient proof of any actual or consequential damages. Just to make things easier to figure out what constitutes “consequential damages,” the Court of Appeals adopted the Black Law Dictionary definition of consequential damages as governing Georgia law. This new standard remains vague, but helps illustrate why time spent thinking through your damages may be amongst the most important time spent thinking about the case.
First, the Court held that DSE’s franchise fee and DSE’s personal financial costs of funding the purchase of the daycare center were not consequential damages because they were expenditures “inherent in the underlying transaction rather than additional, indirect expenditures incurred as a consequence of the alleged misrepresentations.” The court found that awarding damages in the amount of these types of expenditures would essentially amount to restoring the parties to their original status, which is the goal of rescission, not an award of consequential damages. Since DSE dropped an original claim for rescission, DSE could not claim rescission damages under the guise of consequential damages to obtain a rescission remedy.
Unfortunately, DSE did not develop any specific evidence of consequential damages. The Court of Appeals held that testimony from an owner of DSE about “depletion of personal savings” without specific amounts was too vague to allow the jury to calculate damages without speculation and guesswork. Moreover, the Court found that DSE’s claims that they had to purchase an extra bus and were required to have an owner work on site were contradicted by contractual provisions in the franchise agreement, and the agreement’s “entire agreement/merger” clause barred them from relying on any other verbal or written representations outside of the four corners of the agreement.
The lesson for the day? Don’t forget about the damage component of your claim, what you intend to prove and how you intend to prove it. Otherwise, you may put yourself through a whole lot of litigation effort, but end up empty handed at the end.