Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2008

And the saga continues . . .

 

In Boeve v. Nationwide Mut. Ins. Co., No. 08-CV-12213, 2008 WL 3915011, at *1 (E.D. Mich. Aug. 20, 2008), plaintiff entered into an Independent Contractor Agent’s Agreement (“ICAA”) with defendant in 2003 to sell defendant’s financial products and insurance. In order to secure her bonus, plaintiff alleged she was “encouraged” to take out loans to open new offices and hire additional staff. After plaintiff’s ICAA was terminated in 2007, however, plaintiff owed defendant approximately $65,000 on the defaulted loans. Plaintiff filed suit shortly thereafter alleging violations of the Michigan Franchise Investment Law (“MFIL”), and defendant moved for dismissal or summary judgment.

 

The MFIL defines a “franchise fee” as “a fee or charge that a franchisee or subfranchisor is required to pay or agrees to pay for the right to enter a business under a franchise agreement, including but not limited to payments for goods or services.” In support of her argument that she paid a franchise fee, plaintiff contended that her payment of interest on the loans she took out under the ICAA, in addition to her payments for training, represented an indirect franchise fee.

 

First, the court stated that the repayment of a loan cannot be a franchise fee unless the loan was a “condition of entering into the business.” Similarly, interest payments “might arguably” be an indirect franchise fee “if the interest rate exceeded a fair market loan rate.”

 

Second, the court stated that the payment of ordinary business expenses cannot be an indirect franchise fee. Accordingly, plaintiff’s training costs could only be a franchise fee if they were “substantial and unrecoverable, locking the franchise[e] into the franchisor.”

 

Third, because the complaint did not specify any payment which could constitute a franchise fee, the court rendered plaintiff’s allegations insufficient to raise a right to relief under the MFIL “above a speculative level.”  As such, plaintiff failed to state a claim on which relief may be granted, and the court dismissed plaintiff’s MFIL claim. The court did, however, dismiss this claim without prejudice as there was still the possibility of uncovering facts during discovery to support a MFIL claim.

 

Takeaway: Although both of plaintiff’s franchise fee arguments fell short, the court gave helpful hints for future plaintiffs as to the type of arguments that could satisfy the franchise fee requirement under the MFIL.

 

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