How does the litigation history of Chatime's affiliate (Item 3) relate to the franchisee's potential liability, considering their obligations outlined in Item 9?
Chatime Franchise · 2025 FDDAnswer from 2025 FDD Document
[Item 3: Litigation]
In re Chatime USA, LLC, State of Washington, Department of Financial Institutions, Securities Division, Consent Order No. S-19-2701-19-0001. On or about August 4, 2016, our affiliate Chatime USA LLC entered into a five-year Master Franchise Agreement with a Canadian company based in Edmonton, Alberta (the "Alberta Master Franchisee") pursuant to which our affiliate Chatime USA LLC granted the Alberta Master Franchisee master franchise rights in Washington. In 2019, the Washington Department of Financial Institutions (the "Department") began an investigation into our affiliate Chatime USA LLC's prior franchising activities in connection with its application for franchise registration. The Department concluded that the sale to the Alberta Master Franchisee violated Washington franchise law because (i) Chatime USA LLC granted master franchise rights to the Alberta Master Franchisee in Washington without first obtaining franchise registration in Washington, and (ii) Chatime USA LLC did not provide the Alberta Master Franchisee with a U.S. disclosure document. Under the terms of a consent order dated September 16, 2019, our affiliate Chatime USA LLC agreed to cease and desist from the sale of franchises in Washington in violation of Washington franchise law and paid the Department $2,500 for the costs of its investigation.
Investigation by Letitia James, Attorney General of the State of New York, of La Kaffa International Co., Ltd., Chatime USA, LLC, and Yao-Hui Wang. In December 2018, the Attorney General of the State of New York (the "NYOAG") began to inquire into the activities of our affiliate Chatime USA LLC and La Kaffa pursuant to New York General Business Law, Article 33, §680 et seq., also known as the New York State Franchise Sales Act (the "NY Franchise Sales Act"). The inquiries were made in connection with the issues of whether our affiliate Chatime USA LLC and La Kaffa sold franchises from or in New York without satisfying the pre-requisite of registering the franchise offerings with the NYOAG or otherwise having a franchise registration
exemption. The NYOAG found that our affiliate Chatime USA LLC and La Kaffa sold franchises from or in New York without being registered or exempt from registration. On November 25, 2019, our affiliate Chatime USA LLC, La Kaffa, and Yao-Hui Wang entered into an Assurance of Discontinuance with the NYOAG (the "Assurance of Discontinuance") prohibiting our affiliate Chatime USA LLC and La Kaffa from engaging in, or attempting to engage in, conduct in violation of the NY Franchise Sales Act. Further, pursuant to the Assurance of Discontinuance, (i) our affiliate Chatime USA LLC and La Kaffa were required to offer rescission to franchisees that were sold franchises in violation of the NY Franchise Sales Act, and (ii) our affiliate Chatime USA LLC and La Kaffa were required to pay $25,000 in penalties and costs to New York.
10.1 Indemnity
- (1) Franchisee Parties indemnify Franchisor and each of its Affiliates (Chatime Group) against all:
- (a) Losses incurred by the Chatime Group;
- (b) Liabilities incurred by the Chatime Group; and
- (c) All Legal Costs and other Costs and expenses incurred by the Chatime Group in connection with a demand, action, arbitration, or other proceeding (including mediation, compromise, out of court settlement or appeal),
arising directly or indirectly as a result of or in connection with:
- (d) A breach by Franchisee Parties of this Agreement or any Collateral Agreement;
- (e) Any injury to, or loss of property of, any person in or on premises from which the business is conducted;
- (f) Franchisee's taxes, liabilities or Costs of The Franchised Business;
- (g) Any negligent or willful act or omission of Franchisee, its employees, agents, servants, or contractors; and
- (h) Any warranty, promise, or representation made by Franchisee Parties or any employee, agent, or other person acting on behalf of Franchisee Parties being incomplete, inaccurate, or misleading.
What This Means (2025 FDD)
According to Chatime's 2025 Franchise Disclosure Document, Item 3 details the litigation history of Chatime USA LLC, an affiliate of the franchisor. In one instance, Chatime USA LLC entered into a consent order with the Washington Department of Financial Institutions in 2019 for selling master franchise rights in Washington without proper registration and disclosure, resulting in a $2,500 penalty. Additionally, in 2019, the Attorney General of New York investigated Chatime USA LLC and La Kaffa for similar violations of the New York State Franchise Sales Act, leading to an Assurance of Discontinuance, a requirement to offer rescission to affected franchisees, and $25,000 in penalties and costs.
While these legal issues directly involved Chatime's affiliate and not the franchisees, Item 23 outlines indemnity provisions that could indirectly affect a franchisee's potential liability. Specifically, the franchisee is required to indemnify Chatime Group (which includes Chatime and its affiliates) against losses, liabilities, legal costs, and expenses arising from various circumstances. These circumstances include any breach of the Franchise Agreement by the franchisee, injuries or property loss on the business premises, the franchisee's taxes or liabilities, negligent acts or omissions by the franchisee or their staff, and any incomplete, inaccurate, or misleading warranties or representations made by the franchisee.
This means that if a franchisee's actions or inactions lead to legal issues that cause losses or liabilities for the Chatime Group, the franchisee could be responsible for covering those costs. The litigation history of Chatime's affiliate demonstrates the importance of adhering to franchise laws and regulations. Although the franchisee was not directly involved in these past legal issues, the broad indemnity clause in the franchise agreement means that the franchisee could bear financial responsibility for legal problems that arise due to their own operational mistakes or breaches of contract.
Prospective franchisees should carefully review the indemnity provisions in the franchise agreement and understand the scope of their potential liability. They should also ensure they fully comply with all applicable laws and regulations in operating their Chatime franchise to minimize the risk of triggering the indemnity clause and incurring significant financial burdens.