MINNEAPOLIS--(BUSINESS WIRE)--The law firm of Dady & Garner, P.A. announced today that an arbitrator in Atlanta, Georgia has awarded nearly $400,000 to a franchisee who was duped into buying a Sona MedSpa franchise on the basis of “faulty” information about Sona’s hair-removal services. The arbitrator not only held liable the Nashville-based franchisor, Sona MedSpas, and its founder, Dennis Jones, but also a group of prominent investors that acquired the franchisor, but then failed to correct the misleading information. The investors included Carousel Capital of Charlotte, N.C., its Chairman, Nelson Schwab II, Jim Amos, former President of Mail Boxes, Etc., and his daughter, Heather Rose. As a result of the investors’ failure to act on the information, the franchisee not only proceeded with his investment, but also repeated the faulty information to its own clients.
“The case is the first of its kind to hold that investors in a franchise company are liable to a franchisee for failing to perform adequate due diligence and to take corrective measures once they discover the fraud,” said W. Michael Garner, attorney for the former franchisee of Sona MedSpa, Kempton J. Coady.
At arbitration, Coady testified that Jones told him that Sona’s laser hair removal system gave its franchisees a “compelling competitive advantage” because it was based upon a unique “patent pending” “Sona Concept” that removed 93-97 percent of a person’s unwanted hair in five treatments; that the hair removal was permanent; and that with Meladine, a proprietary chemical, the lasers could remove all types of hair, whereas competitors could not remove blonde, gray or white hair. After Coady purchased, but before he opened his center, Sona was acquired by Carousel Capital, together with Amos and Rose.
The arbitrator found that Carousel, certain of its partners, Amos and Rose knew, through due diligence and information from more experienced franchisees, that the representations that had been made to Coady were false. At the arbitration, Dr. David Goldberg, a leading authority on laser hair removal, testified that the Sona Concept and its claims of superiority were unsupported by medical science and a “fraud.” Even though Carousel, Amos, Rose and the Carousel partners knew the information was faulty, they failed to tell franchisees for months, including the Coadys. As a result, the Coadys went into training and were instructed to repeat the very same statements to their customers that Jones had told them. It was not until a year later, as the five-treatment cycle came to an end, and Coady’s clients still had unwanted hair, that Coady discovered that what he had been told had been false.
The arbitrator specifically found:
“I find that Respondents Sona MedSpa International, Inc., Amos, Rose, Carousel Capital Partners II, L.P., Jason Schmidly, Joseph Pitt and Nelson Schwab II were guilty of negligent misrepresentation by:
(1) failing to exercise reasonable care in obtaining reliable evidence about the validity of the Efficacy Information which they allowed . . . Sona MedSpa International, Inc., to teach the Claimants; and
(2) failing to exercise reasonable care in clearly communicating to Claimants (who were formally trained after the Carousel, Amos and Rose investment) that the Efficacy Information conveyed to Claimants before and after they signed the ADA and Franchise Agreement was faulty and should not continue to be used in sales efforts to attract customers.”
As a result, Coady was awarded nearly $400,000 for the costs of making good on the promises made to customers.
“This case sends a clear signal to investors in franchise companies that they cannot treat franchisees as mere pieces of paper or income streams.” Garner said, “They have a duty to exercise reasonable care in discovering and correcting falsehoods told to existing franchisees.”
The decision capped a long series of disputes between Sona and its franchisees. In February 2006, a federal judge in Virginia turned down Sona’s request to enjoin a franchisee who had left the system from continuing in the hair removal business. The Judge commented that in light of the likely fraud Sona had committed, it was not entitled to relief.
In the past two years, 17 of 45 Sona franchisees have gone out of business, changed hands or left the system. At one point, a total of nine (9) litigations or arbitrations were or are pending against Sona for medical or business fraud.
The full redacted Coady Arbitration decision is currently on the Web as the only pdf attachment to the following Blue Mau Mau Sona article: http://www.bluemaumau.org/service/blog_entry/sona_medspa_guilty_of_ negligent_misrepresentation#attachments (Due to its length, this URL may need to be copied/pasted into your Internet browser's address field. Remove the extra space if one exists.)
Dady & Garner, P.A. is based in Minneapolis, Minnesota with offices in New York City. It focuses its practice on representation of dealers, franchisees and distributors in their disputes with their franchisors and suppliers. Its website can be found at www.dadygarner.com.