Sunday, April 1, 2007

Montrose Educational Services, Inc. v. Sylvan Learning Systems, Inc. (U.S.D.C. Maryland)(Not approved for publication)

Decided March 30, 2007—Opinion by Judge Richard D. Bennett

Montrose Educational Services, Inc. (“Montrose”) alleged that Sylvan Learning Systems, Inc. (“Sylvan”) had made fraudulent representations to induce Montrose to enter into a franchise agreement and then breached their contractual duties by failing to provide proper assistance. Montrose argued that Sylvan had presented certain demographic information from 1998 to Montrose regarding the territory in the franchise agreement and Montrose had relied on this information in its decision to buy that particular territory. Under the terms of the license agreement, Montrose had promised to pay certain fees and to operate in compliance with Sylvan’s standards of operation. In return, Montrose was to receive supervision and assistance, most notably through a Quality Assurance Review, which was to be conducted “approximately one hundred twenty (120) days after Licensee first opens its Center.” The Defendants allegedly did not offer much support to Montrose’s center and did not conduct a Quality Assurance Review until approximately two years after the opening of the center.

From early 2002 to 2003, Montrose negotiated with the owners of two other Sylvan Learning Center franchises in Reno, Nevada, and Mobile, Alabama, in an attempt to purchase those franchises. During these negotiations, but before any sales were finalized, Defendants allegedly spoke to the Reno and Mobile franchise owners and told them that they would get a higher purchase price if they allowed Defendants to broker the sale to outside buyers rather than selling to Montrose. Montrose was not able to purchase either franchise.

The Complaint filed by Montrose sought damages in connection with five causes of action: breach of contract; breach of a covenant of good faith and fair dealing; fraud; negligent misrepresentation; and tortious interference with business relationships. Sylvan moved to dismiss or for summary judgment to the extent appropriate. Because the parties attached extrinsic documents to their briefs, the Court determined that the motion could be converted to a motion for summary judgment.

The Defendants argued that all of the causes of action were subject to Maryland's three-year statute of limitations and were time-barred. Montrose argued that, under the discovery rule, the claims were timely. Rejecting any continuing breach of contract theory and holding that by any measure, Montrose must have been aware of facts prior to February 6, 2003, with respect to the demographics and value of the territory, the Court granted summary judgment based on a statute of limitations bar as to all but the claim of tortious interference with business relationships. The Court determined that resolution of the tortuous interference count required more discovery and further briefing by the parties.

The opinion is available in PDF.

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