Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2010

And the saga continues . . .

 

In Bye v. Nationwide Mutual Insurance Co., 733 F. Supp. 2d 805 (E.D. Mich. 2010), an insurance agent (“plaintiff”) brought suit against the insurer (“defendant”) alleging it violated the Michigan Franchise Investment law (MFIL). There, plaintiff had been in defendant’s employ as an insurance agent for nine years. During such time, plaintiff had worked in various capacities, ranging from a Financed Community Agent to an Independent Contractor Agent.

 

Plaintiff expanded his business by acquiring existing agencies or opening new satellite offices, primarily in Michigan. Plaintiff took out considerable loans in order to fund such acquisitions. By 2006, however, plaintiff was continually operating at a loss. In an effort to “help with [their] future,” plaintiff’s wife opened an insurance business because it “would [have been] inappropriate based on [her] husband’s employment with [defendant] to start another company on his own.” After defendant learned of the business, defendant believed that plaintiff was referring its existing and potential customers to his wife’s insurance business. Defendant subsequently terminated plaintiff’s agency for breach of the exclusive representation agreement, and plaintiff filed suit.

 

On motion for summary judgment, plaintiff alleged defendant violated the MFIL by “employing devices, schemes and artifices to defraud in its sale or offer of a franchise.” Controlling on this issue was whether plaintiff paid a franchise fee. 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 into a business under a franchise agreement, including but not limited to payments for goods and services.” Mich. Comp. Laws § 445.1503(1).

 

In support of its argument that it paid a franchise fee, plaintiff alleged “[d]efendant churns agents. When the agent fails . . . [defendant] takes the enhanced book of business, sells it for more than it credits the defaulted former agent and then makes more money off the same book with the new agent. The fee is the profit from the book obtained by [defendant].”

 

The court found this argument unpersuasive. Because the “profit” would occur after the agent had been churned, the alleged profit could not be for the right to enter into a business. This, by definition, needed to be paid at the outset of the agreement. The court then reiterated that it is the circumstances existing at the time of the offer or sale which determines whether an agreement is a franchise under the MFIL. Accordingly, because plaintiff did not provide sufficient evidence that it paid a franchise fee, the court rendered the MFIL inapplicable and awarded defendant summary judgment.

 

Takeaway: A franchise fee needs to exist at the outset in order for it to be for the “right to enter into a business” under the MFIL.

 

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