Archives for: The Dady & Gardner Blog

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.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

 

Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2004

And the saga continues . . .

 

In Home Pest & Termite Control, Inc. v. Dow Agrosciences, LLC, No. 8:02CV406, 2004 WL 240556, at *1 (D. Neb. Feb. 6, 2004), a trained pest control operator (“plaintiff”) filed suit against the manufacturer of a termite elimination system (“defendant”) after the manufacturer terminated the agreement between the parties. After plaintiff alleged violations of the Nebraska Franchise Practices Act, defendant moved for summary judgment on the basis that the agreement between the parties was not a franchise agreement. In support of this, defendant pointed to the following section of the agreement “[t]his Agreement is not, nor is it to be construed as, a franchise agreement.”

 

Although the agreement contemplated “a community of interest in the marketing” of the pest control system, thereby seemingly satisfying part of the definition of a franchise under the statute, the court ultimately rendered the relationship not a franchise because the Agreement “nowhere required [plaintiff] to pay a franchise fee in exchange for a license to use the [defendant’s] name or mark. None of the fees mentioned in the agreement are for a surety bond or deposit or for security; rather, they are connected to the purchase of the termite system components.”

 

Takeaway: Payments primarily for the purchase of components, rather than for the license to use a name or mark, have not been found to satisfy the franchise fee element of the Nebraska Franchise Practices Act.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

 

Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2009

And the saga continues . . .

 

In Coyne’s & Co. v. Enesco, LLC, 553 F.3d 1128 (8th Cir. 2009), a distributor (“plaintiff”) entered into an agreement with a company formed under the laws of England (“company”). The agreement provided for plaintiff’s exclusive right to sell, distribute, market and advertise all of the company’s products in the United States and Mexico from 2005 through December 2007. In exchange, plaintiff agreed to pay the company a 35–50% mark-up on the products.

 

In August 2007, the company was placed into receivership and its receivers entered into an asset sale agreement with an Illinois corporation (“defendant”). A few days later, the company’s receivers sent plaintiff a termination letter pursuant to Section 5.4 of the agreement, allowing for any party to terminate if the other becomes insolvent. Plaintiff responded that the termination was without legal effect because Section 5.4 did not allow an insolvent party to use its own insolvency to justify termination.

 

One month later, defendant announced that it would be distributing the products—which plaintiff had an exclusive right to distribute in the United States and Mexico—in the United States. Plaintiff subsequently filed suit and sought a TRO and preliminary injunction to prevent defendant from moving forward with its plan to distribute the products in the United States.

 

The district court denied plaintiff’s motion and rejected plaintiff’s claim for unlawful termination in violation of the Minnesota Franchise Act. The court reasoned that plaintiff was unable to demonstrate a likelihood of success on its claims if the agreement was not still in effect. Plaintiff appealed on the basis that it paid a franchise fee. As such, the failure to comply with the termination requirements under the Minnesota Franchise Act rendered both the termination invalid and the agreement still in effect. In support, plaintiff argued that the minimum purchase requirement and 35–50% mark-up on the products constituted an indirect franchise fee.

 

Minimum Purchase

 

A minimum purchase requirement can satisfy the franchise fee element of the Minnesota Franchise Act “if the distributors were required to purchase amounts or items that they would not purchase otherwise.” To determine this, the court asks “whether the [minimum purchase] requirements were unreasonable.” Because plaintiff did not put forth the argument at the district court or before the court on appeal that the minimum purchase requirement was unreasonable, the district court’s finding that the minimum purchase requirement was not an indirect franchise fee was not clearly erroneous.

 

Price Mark-up

 

Whether a price mark-up on goods above a bona fide wholesale price constitutes an indirect franchise fee is a fact-specific inquiry. The district court found that the mark-up was not an indirect franchise fee, as the mark-up represented the profits on the products. On appeal, plaintiff argued that this was incorrect “because it is illogical to assume that all of the rights granted to [plaintiff] under the Agreement . . . are merely in consideration for [plaintiff’s] payment of a bona fide wholesale price for [the] products.” The court on appeal, without much (or any) elaboration, responded that plaintiff’s argument was insufficient to demonstrate that the district court’s finding was clearly erroneous. As a result, the court affirmed the district court’s holding.

 

Takeaway: Under the Minnesota Franchise Act, a minimum purchase requirement can be a franchise fee and a price mark-up on goods above a bona fide wholesale price can be an indirect franchise fee. However, be aware that different trial court judges may demand different standards of proof to establish a “franchise fee” and a decision of a trial court judge may not receive a great deal of scrutiny on appeal.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

 

 

 

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.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2007

And the saga continues . . .

 

In Sound of Music Co. v. Minnesota Mining and Manufacturing Co., 477 F.3d 910 (7th Cir. 2007), a music equipment dealer (“plaintiff”) brought suit against its supplier (“defendant”) alleging violation of the Illinois Franchise Disclosure Act and violation of the Minnesota Franchise Act.

 

In 1995, the parties entered into an agreement (“agreement” or “1995 agreement”) whereby plaintiff was to be defendant’s non-exclusive distributor of background music and equipment. This agreement was set to expire on December 31, 1999 “unless earlier terminated by either party as provided herein.” In the years following, the music industry began to experience a rapid change, which made defendant fear that it would no longer be financially advantageous for it to continue in the background music business.

 

Accordingly, defendant had one of its employees evaluate the company’s background music business. The evaluation report recommended that defendant expeditiously shut down its background music business. Acting on this, defendant sent plaintiff a letter in November 1997 that it would no longer be in the background music business as of December 31, 1998—just one year prior to the agreement’s initial expiration date. Plaintiff consulted its attorney shortly after receiving this letter and subsequently brought suit alleging, among other claims, violation of the Illinois Franchise Disclosure Act and violation of the Minnesota Franchise Act. The district court granted summary judgment in favor of defendant and plaintiff appealed.

 

Illinois Franchise Disclosure Act Claim

 

Actions brought under the Illinois Franchise Disclosure Act must be brought within one year “after the franchisee becomes aware of facts or circumstances reasonably indicating that he may have a claim for relief in respect to conduct governed” thereunder. When plaintiff received defendant’s termination notice in November 1997, the court determined that plaintiff had a reasonable indication that it possessed a claim under the Illinois Franchise Disclosure Act. This indication was reinforced when plaintiff consulted its attorney a mere three days after receiving the termination notice. Despite this, plaintiff did not file its complaint until February 2, 1999. Because the one-year statute of limitations had already expired prior to plaintiff’s initiation of the cause of action, the court of appeals rejected plaintiff’s Illinois Franchise Disclosure Act violation claim.

 

Minnesota Franchise Act Claim

 

Turning to plaintiff’s termination without good cause claim under the Minnesota Franchise Act, the court first looked to whether the agreement between the parties was in fact a “franchise,” and thereby rendering it under the purview of the Minnesota Franchise Act. In support of its argument that it paid a franchise fee, plaintiff argued that the $2,400 “dealer reception fee” that it paid under an earlier agreement with defendant was enough to render it a franchisee at the time defendant terminated the 1995 agreement.

 

The court did not find this argument persuasive. First, the earlier agreement, which required plaintiff to pay the dealer reception fee, was terminated two years prior to the 1995 agreement. Second, the negotiations for the 1995 agreement made it clear that the 1995 agreement was to be a stand-alone contract, and not to be considered a renewal or extension of the prior agreement. Third, the court doubted that the dealer reception fee could be considered a franchise fee under the earlier agreement, as “[n]ot all payments made by a purported franchisee over the course of a business relationship constitute franchise fees. Instead, only fees paid for the ‘right’ to enter into a business or the ‘right’ to continue a business qualify.”

 

To expand on this third point, the court found nothing to suggest that plaintiff paid a franchise fee at the time it signed its first agreement with defendant. Although there was a $2,400 fee listed, “the text of the agreement suggest[ed] that this was a fee charged to dealers for the space [defendant] leased on the satellite that transmitted music signals, not a fee for the ‘right to enter’ or continue in the background music business with [defendant].”

 

Takeaway: Although an agreement may require the payment of “fees,” those fees must be for the right to enter into or continue the business in order to satisfy the franchise fee element of the Minnesota Franchise Act.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

 

Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2006

And the saga continues . . .

In Smith v. Molly Maid, Inc., 415 F. Supp. 2d 905 (N.D. Ill. 2006), a prospective Molly Maid franchisee (“plaintiff”) brought suit against the Molly Maid, Inc. franchisor (“defendant”) alleging, among other things, violation of the Illinois Franchise Disclosure Act and breach of the Franchise Agreement. In 2001, plaintiff telephoned defendant to inquire about the franchise opportunities it offered. During the course of conversations between the parties, plaintiff made several misrepresentations in order to better her chances of becoming a franchisee. Defendant later sent plaintiff a Uniform Offering Circular, indicating plaintiff would be required to pay: “(a) a fixed Franchise Fee of $6,900; (b) a fixed Initial Package Fee of $8,000; and (c) a Territory Fee of $1.00 for every qualified household, typically from $15,000 to $60,000.”

 

After intermittent conversations over the next couple of months, defendant approved plaintiff as a Molly Maid franchisee based on the false information that plaintiff submitted to defendant. Defendant later sent plaintiff a congratulatory letter, enclosing two copies of a franchise agreement (“agreement”), and informing plaintiff that the agreement would become effective on the date that defendant signed it.

 

Plaintiff signed both copies of the agreement and returned them to defendant, along with a $6,900 check for the franchise fee. Defendant then instructed plaintiff that defendant would sign the agreement once plaintiff completed the required training. Because plaintiff never completed the required training, however, defendant never signed the agreement. Accordingly, defendant subsequently sent plaintiff a letter refunding the initial $6,900 fee.

 

The Illinois Franchise Disclosure Act provides:

 

(1) “Franchise” means a contract or agreement, either expressed or implied, whether oral or written, between two or more persons by which:

(a) a franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services, under a marketing plan or system prescribed or suggested in substantial part by a franchisor; and

(b) the operation of the franchisee’s business pursuant to such plan or system is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchisor or its affiliate; and

(c) the person granted the right to engage in such business is required to pay, directly or indirectly, a franchise fee of $500 or more.

 

815 Ill. Comp. Stat. 705/3(1). In order to establish that the parties entered into a franchise agreement, the court stated that plaintiff must prove, among other things, that plaintiff paid a “franchise fee exceeding $500 for the right to enter into the business.” Although plaintiff paid $6,900—an amount far exceeding $500—this amount was paid “towards the franchise fee, [but] the entire fee required for the right to enter into the business was $43,351.” Because plaintiff only paid part of the amount required to enter into the business, and not all of it, the court determined that the franchise fee element was not satisfied.

 

Takeaway: Payments towards the franchise fee, but equaling less than the full amount required for the right to enter into the business, have not been found to satisfy the franchise fee element of the Illinois Franchise Disclosure Act.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

 

Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2005

And the saga continues . . .

 

In Three M Enterprises, Inc. v. Texas D.A.R. Enterprises, Inc., 368 F. Supp. 2d 450 (D. Md. 2005), defendants were unable to prevail on a motion to dismiss on its argument that plaintiff was not a “franchise” under Maryland law. Specifically, defendants argued that plaintiff cannot be a franchisee under Maryland law because plaintiff did not pay a franchise fee. In support, defendants submitted two exhibits which demonstrated that plaintiff’s alleged $15,000 “franchise fee” was merely an order for goods. The court, however, found defendants argument unpersuasive.

 

First, the court noted that defendants failed to address plaintiff’s allegation that plaintiff paid “a fee in the amount of $15,000 and indirect franchise fees during the course of the relationship.” Second, the court noted that defendants’ arguments attacked the factual sufficiency of plaintiff’s complaint, which was premature at that stage in the proceeding. Because of this, defendants’ motion to dismiss for failure to state a claim was denied.

 

Takeaway: This case is good reminder that a franchisee can seek protection under a state’s franchise act by alleging not only that it paid a franchise fee, but also that it paid an “indirect” franchise fee.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2003

And the saga continues . . .

In Jon K. Morrison, Inc. v. Avis Rent-A-Car Systems, Inc., Bus. Franchise Guide (CCH) ¶ 12,701 (W.D. Wash. Nov. 20, 2003), Jon K. Morrison, Inc. (“plaintiff”) signed an

agency operator’s agreement (“Agreement”) with Avis Rent-A-Car System, Inc. (“defendant”). Five years after signing, defendant informed plaintiff that the parties were amending the Agreement to include a “fleet surcharge,” which would reduce plaintiff’s commissions by twenty cents per vehicle. Notably, the Agreement provided that it “is not granting franchise rights” and that plaintiff “waives any and all rights under franchise law should a court rule that the business is a franchise.”

 

After defendant sent plaintiff notice of its intent to terminate the Agreement, plaintiff filed suit asking, among other things, that the court render the Agreement a franchise and that termination was unjust under the Washington Franchise Investment Protection Act (“FIPA”). After referring to how the statute defines a franchise fee, the court found the definition to “suggest[] that a franchise fee includes ‘fees hidden in the franchisor’s charges for goods or services’” and made note of several cases where Washington courts have found an indirect or “hidden” franchise fee.

 

Nevertheless, the court ultimately found that neither the commission arrangement nor the fleet surcharge was a franchise fee. The commission arrangement was not a franchise fee because the money that plaintiff collected was forwarded to defendant, who received 10% of the gross amount as compensation. Plaintiff never directly paid defendant any money. To render this arrangement a franchise “would convert every commissioned sales person in a clothing store into a franchise where none of the concerns FIPA was intended to address are in play.”

 

The fleet surcharge was not a franchise fee because it was “not an amount paid to the principle in order to continue to do business.” Further, the fleet surcharge was not an amount paid by the franchisee. Instead, it was “simply one factor in the determination of the commission to be paid to the agent.” Because of this, the court did not render the relationship between the parties a franchise because plaintiff never paid a franchise fee.

 

Takeaway: Fleet surcharges and commissions have not been found to satisfy the franchise fee element of the Washington Franchise Investment Protection Act.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2002

And the saga continues . . .

In Pool Concepts, Inc. v. Watkins, Inc., Bus. Franchise Guide (CCH) ¶ 12,249 (D. Minn. Jan. 20, 2002), a Minnesota franchise dealer of Caldera products (“plaintiff”) filed suit against a California manufacturer of Caldera products (“defendant”) after defendant threatened termination.

 

The principal dispute was whether plaintiff paid a franchise fee. Under the Minnesota Franchise Act, a “franchise fee” means “any fee or charge that a franchisee or subfranchisor is required to pay or agrees to pay for the right to enter into a business . . . .” Minn. Stat. § 80C.01, subdiv. 9.

 

According to plaintiff, the following payments to defendant constituted franchise fees: “(1) the payment of funds by plaintiff to defendant that are ultimately transferred by defendant into the so-called ‘co-op’ advertising fund, (2) the sales literature that defendant required plaintiff to purchase and (3) the minimum parts inventory that defendant required plaintiff to maintain in excess of plaintiff’s desires and/or requirements.”

 

Ultimately, the court rendered the co-op advertising program to constitute a “franchise fee,” reasoning that “when plaintiff purchases spas from defendant, it is purchasing the spa and also the ability to participate in the co-op advertising fund that is created as a result of the transaction. The money that defendant collects from plaintiff for spas includes the funds defendant contributes to the co-op fund. Moreover, the payment of funds is not optional, as it is tied to the purchase of spas. Because the money for the co-op fund comes directly from plaintiff . . . this money constitutes a franchise fee.”

 

Takeaway: Mandatory contributions to an advertising fund have been found to satisfy the franchise fee element of the Minnesota Franchise Act.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.

Historical Review of Franchise Fees: Litigating the Franchise Fee Element in 2001

And the saga continues . . .

 

In Romeo Maintenance & Rental v. U-Haul Company of Minnesota, Bus. Franchise Guide (CCH) ¶ 12,259 (Minn. Dist. Ct. Feb. 13, 2001), plaintiff filed suit against defendant seeking a claim for relief under the Minnesota Franchise Act. Finding that plaintiff did not allege in the Complaint that it paid defendant a franchise fee, the court dismissed the Minnesota Franchise Act claim. Plaintiff then filed a motion for reconsideration.

 

The court noted on reconsideration that its previous order, finding no indirect franchise fee where plaintiff incurred expenses and paid defendant royalties as a “simple principle-agency relationship,” was an error. The court further stated that while ordinary business expenses are not considered a franchise fee, plaintiff’s required maintenance of dedicated phone lines and electronic databases that it would not have otherwise purchased “in the ordinary course of business as an independent truck rental business” might be sufficient to constitute an indirect franchise fee. As such, the court reversed its previous order granting defendant’s motion to dismiss the franchise act claim and reinstated it.

 

Takeaway: The court gave more breadth to the term “indirect franchise fee” for purposes of the Minnesota Franchise Act.

 

*NOTICE: This blog is intended solely for informational purposes and should not be construed as providing legal advice. Please feel free to contact us with any questions you may have regarding this blog post.