Freedman v. Meldy's, Inc.

• Decision Date: 28 February 1984
• Docket Number: Civ. A. No. 83-5992.
• Citation: 587 F. Supp. 658
• Parties: Gary FREEDMAN v. MELDY'S, INC. and Richard Meldofsky.
• Court: U.S. District Court — Eastern District of Pennsylvania

587 F. Supp. 658

Gary FREEDMAN v. MELDY'S, INC. and Richard Meldofsky.

Civ. A. No. 83-5992.

United States District Court, E.D. Pennsylvania.

February 28, 1984.

Joseph L. Higgins, Post & Schell, P.C., Philadelphia, Pa., for plaintiff.

Stephen G. Fox, Barry D. Floyd, Bernstein & Fox, P.C., Philadelphia, Pa., for defendants.

OPINION AND ORDER

VANARTSDALEN, District Judge.

The complaint in this action has its genesis in an exclusive franchise agreement entered into between plaintiff and defendant, Meldy's, Inc. Plaintiff seeks to recover losses sustained in the operation of a franchised restaurant, which enterprise he allegedly entered into as a result of certain misrepresentations made by defendants. Defendants have moved to dismiss the complaint for failure to state a cause of action and lack of subject matter jurisdiction. Defendants' motion to dismiss for failure to state a cause of action will be granted.

Background

Plaintiff's complaint avers that plaintiff is a citizen of the state of New Jersey, that defendant Richard Meldofsky (Meldofsky) is also a citizen of that state, and that defendant Meldy's, Inc. (Meldy's) is a corporation organized, existing and with its principal place of business in the Commonwealth of Pennsylvania. Plaintiff avers that prior to November 6, 1981 Meldofsky, acting individually and as president of Meldy's, actively recruited plaintiff to become a franchisee of Meldy's. Plaintiff entered into an exclusive franchise agreement with Meldy's on November 6, 1981 whereby plaintiff was granted the exclusive right to operate a restaurant known as Meldy's in the Gallery, a center-city shopping mall in Philadelphia, Pennsylvania.

Plaintiff claims that during the frequent consultations which led to the signing of the franchise agreement Meldofsky made representations "that the franchise restaurant operation would produce between $5,000 and $6,000 of gross sales per week if the volume of trade were low," and "that plaintiff would be guaranteed a salary of $300 per week from the business" (plaintiff's complaint, paragraph 8).

Plaintiff contends that he relied upon these representations (plaintiff's complaint, paragraph 9), but that at no time prior to entering into the franchise agreement was he provided with "written documentation of substantiation of the representations" (plaintiff's complaint, paragraph 10).

In Count I of the complaint plaintiff seeks recovery of the loss sustained when he was forced to invest substantial additional funds to keep the business afloat and for the loss of the allegedly guaranteed salary. In Count II plaintiff seeks recovery of the franchise fee, the additional invested funds and the guaranteed salary alleging that Meldy's, through its president, Meldofsky, made false non-financial representations to the plaintiff, including the use of the good will of "Meldy's Prime Meats" despite defendant's knowledge that, as a new business, the restaurant possessed no such intangible benefits.

Plaintiff brought suit in this court under 28 U.S.C. § 1331 alleging that defendants violated the "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures," 16 C.F.R. §§ 436.1-438.10 (1983), promulgated by the Federal Trade Commission pursuant to the Federal Trade Commission Act (FTCA or Act), 15 U.S.C. §§ 41-58.

Discussion

On September 26, 1914, Congress passed the Federal Trade Commission Act and established the Federal Trade Commission (FTC). The FTC was created as one of the prongs in a two-pronged effort to improve enforcement of the anti-trust laws.¹ As enacted in 1914 the Act declared unlawful all unfair methods of competition in commerce and it empowered the FTC to prevent the use of unfair methods of competition in commerce. The 1938 Wheeler-Lea Amendments to the Act contained provisions relating to advertising in general and food, drug and cosmetic advertising in particular. Recently, the Act was again amended by the passage of the Federal Trade Commission Improvements Act of 1980, Pub.L. No. 96-252, 94 Stat. 374 (1980).

The courts have almost uniformally rejected the argument that there is an implied right of action under the FTCA. Dreisbach v. Murphy, 658 F.2d 720 (9th Cir.1981); Naylor v. Case and McGrath, Inc., 585 F.2d 557, 561 (2d Cir.1978); Alfred Dunhill Limited v. Interstate Cigar Co., Inc., 499 F.2d 232 (2d Cir.1974); Holloway v. Bristol-Myers Corp., 485 F.2d 986 (D.C.Cir.1973); Carlson v. Coca-Cola Co., 483 F.2d 279 (9th Cir.1973); Beckenstein v. Hartford Electric Light Co., 479 F.Supp. 417 (D.Conn.1979); L'Aiglon Apparel v. Lana Lobell, Inc., 118 F.Supp. 251 (E.D.Pa.1953). But see Guernsey v. Rich Plan of Midwest, 408 F.Supp. 582 (N.D.Ind. 1976) (recognizing private right of action for consumers under FTCA). One of the most frequently cited cases supporting the denial of a private right of action and the one containing perhaps the most detailed analysis in support of such a position is Holloway v. Bristol-Myers Corp., 485 F.2d 986 (D.C.Cir.1973).

In Holloway the District of Columbia Circuit held that there was no implied right of action under the FTCA as enacted in 1914 or under the Wheeler-Lea Amendments.² The plaintiffs had brought a class action challenging certain advertising practices of one of the defendant's products as false and misleading. Because the case was decided before Cort v. Ash, 422 U.S. 66, 95 S.Ct. 2080, 45 L.Ed.2d 26 (1975), and its progeny, the court used a somewhat different, and arguably more liberal, five criteria standard to decide if there was an implied right of action. The court, however, did state that:

the core of our decision rejecting implication of a private action lies in our analysis of the ramifications of the asserted private remedy and a comparison of these with the policies and objectives sought to be advanced by Congress. This analysis is conjoined with a further discussion of ... legislative intent and ineffectiveness of the means provided by Congress for effectuating its objective.

Holloway, 485 F.2d at 989 (footnote omitted). In declining to find an implied right of action under the Act the court relied in large measure on the fact that such private enforcement would substantially interfere with the FTC's enforcement of the Act.

None of the decisions since Holloway, which in the main have rejected an implied right of action, has seen fit to reevaluate Holloway in light of Cort and its progeny. In light of the fact that the Supreme Court's position since Cort is considerably more restrictive in implying rights of action under federal statutes, none is probably necessary. See, e.g., Merrill Lynch, Pierce, Fenner & Smith v. Curran, 456 U.S. 353, 102 S.Ct. 1825, 72 L.Ed.2d 182 (1982); Transamerica Mortgage Advisors, Inc. v. Lewis, 444 U.S. 11, 100 S.Ct. 242, 62 L.Ed.2d 146 (1979); Touche Ross & Co. v. Redington, 442 U.S. 560, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979); Cannon v. University of Chicago, 441 U.S. 677, 99 S.Ct. 1946, 60 L.Ed.2d 560 (1979).

Given the above described applicable case law and that this circuit has apparently adopted the Holloway rationale, Polansky v. Trans World Airlines, Inc., 523 F.2d 332, 339 (3d Cir.1975), it would seem elementary that plaintiff's action must be dismissed. There is one problem, however, which must be addressed.

In 1979 the FTC, for the first time, promulgated rules controlling disclosure of information to prospective franchisees. 16 C.F.R. §§ 436.1-438.10 (1983). The rules basically make it an unfair or deceptive act or practice for a franchisor to fail to furnish certain required information. 16 C.F.R. § 436.1 (1983). The difficulty stems from the FTC's Statement of Basis and Purpose which accompanied the rules in the Federal Register:

The Commission believes that the courts should and will hold that any person injured by a violation of the Rule has a private right of action against the violator under the Federal Trade Commission Act, as amended, and the Rule. The existence of such a right is necessary to protect the members of the class for whose benefits the statute was enacted and the Rule as being promulgated, is consistent with the legislative intent of the Congress in enacting the Federal Trade Commission Act, as amended, and is necessary to the enforcement scheme established by the Congress in that Act and to the Commission's own enforcement efforts.

Since these rules were promulgated after Holloway the initial question to be decided is whether Holloway is still controlling. If the FTC rules can be said to reflect a change in Congressional intent, I don't think Holloway would control. That leads to the crux of the problem: what effect does the FTC's expressed view, that there is a private cause of action under the new regulations, have on prior court decisions as to congressional intent? The question is particularly interesting in light of the following: the Holloway holding relied in large part upon the rationale that private enforcement of the Act would upset the FTC's enforcement scheme. The FTC, under the new regulations, opines that enforcement of its new rules will be ineffective without private enforcement. The new rules are analogous to the Securities Exchange Commission Rules on disclosure which have been held to be enforceable by private right of action. Disclosure rules are precisely the type of rules difficult to enforce by agency action alone.

If Congress' intent has not changed I am constrained, under the law of this circuit, to dismiss plaintiff's complaint, regardless of any belief I may have that the Holloway rationale may be affected by the FTC's new disclosure rules.

Research has uncovered a case in which this precise issue was addressed. In Chelson v. Oregonian Publishing Co., 1981-1 Trade Cas. (CCH) §§ 64,031, at 76,336-37 (D.Ore. March 4, 1981), the court considered an argument that the new FTC rules with their interpretive guide required the court to defer to the FTC's construction...