Beverly Hills Concepts, Inc. v. Schatz And Schatz, Ribicoff And Kotkin

717A.2d 724 (1998)

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Nature of the Case

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Facts

Three parties incorporated Beverly Hills (P) in April 1987. They sold fitness equipment with a distinctive color scheme and logo as well as a plan for operating a fitness club for women. P licensed purchasers to use its concept, which was basically a turnkey and franchise operation. P also sold distributorships to investors who gained the exclusive right to sell P’s products and to sublicense its name within a regional territory. In October 1987, P encountered a legal problem with P’s trademark in California. P contacted the law firm of Schatz and Schatz (D). P told D that they had recently filed a trademark application for the name Beverly Hills Concepts. D assumed incorrectly that this meant that P had a federally registered trademark, which would have alleviated the need to register as a business opportunity under Connecticut law. D, through attorney Goldman, told P that his firm was qualified to do franchising and could handle P’s legal affairs. P’s file was turned over to a junior associate as Ira Dansky, a contract lawyer had not yet been admitted to the Connecticut bar. Neither the junior associate nor Dansky had any expertise in the law of franchising, and business opportunities and Goldman had only spent two hours on P’s account between December 1987 and June 1988. Goldman did visit P’s site and examined the operations. Despite P’s request for guidelines regarding the sale of its equipment and system prior to franchise registration, D failed to advise P that it was violating the franchise act by selling its fitness club packages without first registering with the state-banking commissioner. Goldman, in fact, told D that whether P was offering business opportunities was a gray area of the law. D then referred P to Coopers and Lybrand for obtaining financial statements for federal law but failed to inform Coopers that D must meet the requirements of the state laws. Eventually, it was determined at D that P needed to meet the requirements of the state act. That day D also discovered that the federal registration was only pending and that no federal registration had been issued. There was no doubt at this point in time that P was subject to the state law and D did not notify P of that fact. In June 1988, Dansky terminated D’s representation of P over concern that P was offering documents that overstated their financial position. P then got a new attorney and within weeks that new attorney prepared a state application to register as a business opportunity. P decided not to file that application because the federal approval was estimated to occur within the next few months. On September 15, 1988, a banking commission official notified P that its marketing franchises violated the act. P then contacted its new attorney and began to prepare a post-sale registration for previous sales. P, on the advice of counsel, stopped advertising and selling franchises. The banking commissioner issued a cease and desist order on June 28, 1989, with an intent to fine P up to $10,000 for each sale made in violation of the act. The commissioner also stopped P’s post-sale registration. A final cease and desist order was issued in May 1990. P then sued D for malpractice. P got a judgment for $15.9 million. D appealed. D did not challenge the trial court’s determination that they had breached the professional standard of care but only raised claims of causation and damages.