Archives for: Litigation

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 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.