Court Watch

Because the plaintiff had failed to present evidence of who had pressured him to take the loans and to open an additional office, the court granted judgment on the pleadings to the extent that the plaintiff's fraud claim was based upon allegations that the plaintiff was fraudulently induced to do so. However, the court refused to grant judgment on the fraud claims to the extent that the claims were related to the representations made in the pro forma statement, because the court could not determine whether the representations in the pro forma were related to future promises, which may have not been fraudulent, or were representations made about existing, verifiable facts.

In addition to the common law fraud claims, Bucciarelli asserted that Nationwide's actions constituted deceptive practices under the MFIL. Nationwide argued that as a matter of law, the MFIL never covers insurance agency agreements ' and that even if it did, it would not cover the agreement in this case. Nationwide noted that decisions in Florida, Illinois, Missouri, New Jersey, New York, and Virginia have held that franchise laws in those states are inapplicable to the insurance industry.

Because no Michigan cases directly addressed the question and the MFIL did not provide a categorical exception for insurance contracts, the court refused to conclude as a matter of law that the MFIL did not apply to insurance contracts. Instead, the court went through each of the three elements of the definition of a “franchise” under the MFIL to determine whether the statute applied to the insurance agreement at issue.

The first element of a franchise under the MFIL is that the 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 in substantial part by a franchisor” (MCL 445.1502). Adopting an argument that had been successful in Illinois cases, Nationwide argued that the plaintiff could not meet this element of the definition because previous Michigan cases had established that insurance agents are mere order takers, while the insurer actually owns and sells the policies. Because the legal definition of the word “offer” would require a contract to be consummated if the offer was accepted, Nationwide argued that insurance agents could not be considered as offering insurance policies, because a contract would not be formed if an offer was accepted.

The court rejected this argument and criticized the Illinois decisions for ignoring part of the language of Illinois' own statute. The court noted that if the legal interpretation of the word “offering” was used, the word “selling” would then be duplicative. The court concluded that the words were not intended to be redundant, and it chose a broader and less technical interpretation of the word “offer”: to “refer to making goods or services available in a practical rather than a legal sense.” As a result, the court concluded that insurance agents soliciting orders for insurance coverage were offering goods and services, satisfying the first element of the definition of franchise.

The second element of a franchise under the MFIL is that the “franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services substantially associated with the franchisor's trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchisor or its affiliate.” Nationwide did not argue that the plaintiff failed to meet this element of the definition.

The final element of a franchise under the MFIL is that the franchisee “is required to pay, directly, or indirectly, a franchise fee.” Under the statute, a franchise fee is defined to include a fee or charge that a franchisee must pay “for the right to enter into a business under a franchise agreement, including but not limited to payments for goods or services” (MCL 445.1503(1)). Payments for goods, equipment, or fixtures at a bona fide wholesale price are excluded from the definition. The court noted that the Independent Contractor's Agreement did not require the plaintiff to pay money or interest for the right to enter the business. The plaintiff, however, claimed that before entering into the agreement, he was required to pay a franchise fee of $12,900 for four-year-old office furniture and $3,000 for four-year-old computer equipment as a condition of having policies assigned to his agency. Though the court doubted that the plaintiff would be able to offer evidence to support this claim, the court refused to grant judgment on the pleadings on the issue, preferring to see whether the facts supported that he had been required to purchase excessively priced furniture and equipment. Accordingly, the court denied Nationwide's motion to dismiss the MIFL claim.

The decision by the court to conclude that an insurance agent's offer of insurance policies could qualify as a franchise under MFIL is a significant departure from the conclusions reached by other courts facing similar facts. Though it is not clear whether a franchise fee was actually assessed, the decision suggests that it is possible that insurance agencies, under certain conditions, could fall within the purview of Michigan's franchise laws.

Employee Statements Viewed As Franchisor Representations

In Kiddie Academy Domestic Franchising LLC v. Faith Enterprises DC, LLC, et al., 2 Bus. Franch. Guide (CCH) '14, 185 (N.D. Md. 2009), a federal district court considered whether the comments by a franchisor's employee concerning a pro forma created by a former franchisee fraudulently induced a franchisee to purchase a franchise. Kiddie Academy, the plaintiff, sued a franchisee and its affiliates for breach of contract after the defendants had failed to pay royalties on two franchises that they had purchased from an existing Kiddie Academy franchisee. The defendants counterclaimed that Kiddie Academy fraudulently induced them to enter into franchise agreements and made negligent misrepresentations.

When the defendants were investigating whether to purchase two existing franchises, they were provided a pro forma statement from the transferring franchisee, which they believed represented the current financial condition of the franchise. The defendants forwarded the pro formas to Kiddie Academy's chief development officer and asked whether the figures were accurate. The Kiddie Academy employee responded that “they look okay to me”; and in a later conversation, the employee informed the purchasers that the profitability of the centers was “in the mid to high teens.” The defendants asserted in their counterclaim that these representations fraudulently induced them to purchase the franchise.

To succeed on a fraudulent inducement claim, the defendants were required to show that Kiddie Academy made a representation, which it knew was false or made with reckless indifference to the truth, and which it made with the intent to defraud the defendants. In addition, the defendants needed to prove that they justifiably relied on the misrepresentation and had suffered compensable injury as a result.

Considering the first elements, the court held that a reasonable jury could conclude that Kiddie Academy had made a false representation, because Kiddie Academy adopted the documents when its employee reviewed them and represented that they looked acceptable. Kiddie Academy claimed that because its employee had no knowledge of the financial health of the two franchises and was not responsible for reviewing their financial statements, he could not have knowingly made false statements regarding the pro forma statements. The court rejected this position because the chief development officer had knowledge of Kiddie Academy franchises, Kiddie Academy had financial statements from the former franchisees that contradicted the information in the pro formas, and there had been time for the employee to check the accuracy of the pro formas. As a result, the court held that a reasonable jury could find that the employee had knowingly or recklessly and indifferently made a false statement, and such statement was attributed to Kiddie Academy.

Turning to the defendants' reliance on Kiddie Academy's statements, the court focused on the fact that the defendants had been given by the transferring franchisee other profit-and-loss statements and income tax returns that contradicted the pro formas. The court concluded that despite Kiddie Academy's statements approving the pro formas, the conflicting documents put the defendants on notice of possible deception. Consequently, the defendants could not have justifiably relied on Kiddie Academy's statements, and their fraudulent inducement claim could not succeed.

Similarly, the conflicting tax returns undermined the defendants' negligent misrepresentation counterclaim, which also required the defendants to have justifiably acted in reliance on the plaintiff's misrepresentations. The result was a summary judgment in favor of Kiddie Academy for its breach of contract claim.

Though ultimately, the defendants' counterclaim was unsuccessful, the case is a significant example of how an employee's statements can be construed as a representation by the franchisor. Had the defendants not been provided with contradictory information in their investigation, their reliance on the pro formas that had been tacitly approved by Kiddie Academy could have resulted in a successful counterclaim and a successful affirmative defense against the breach of contract claim.

Alexander Tuneski is an associate in the Washington, DC, office of Kilpatrick Stockton LLP. He can be contacted at 202-508-5814 or [email protected].

Insurance Agencies Closer to Qualifying As Franchises in Michigan

In Bucciarelli v. Nationwide Mutual Ins. Co., 2 Bus. Franch. Guide (CCH) '14, 200 (E.D. Mich. 2009), the Eastern District of Michigan declined to rule as a matter of law that the Michigan Franchise Investment Law (the “MFIL”) did not apply to insurance agency contracts, deviating from precedents set by courts in other jurisdictions and setting the framework for future decisions that could have a lasting impact on the insurance industry in the state. The plaintiff, Rick Bucciarelli, was the sole owner of an insurance agency, Rick Bucciarelli and Associates. Bucciarelli signed an Independent Contractor's Agent Agreement with Nationwide Insurance in which he was entitled to sell insurance and financial products offered by Nationwide and its affiliates.

Several years after entering the agreement, Nationwide offered loans to its insurance agents through one of its banking affiliates in an effort to encourage them to open additional offices and expand their businesses. Bucciarelli alleged that he was pressured to take advantage of these loans, which Nationwide represented would be waived if his agency reached certain performance targets set forth in a pro forma. After failing to meet the targets, Bucciarelli claimed that Nationwide had committed fraud by misrepresenting that the performance goals were reasonable and achievable, as the company had never performed near those rates. Moreover, he alleged that Nationwide hindered the efforts of agencies to achieve the goals by requiring agents to follow unreasonable and unwise marketing programs and by constantly changing the performance targets. In addition, without informing the agencies, Nationwide began selling policies directly to consumers, without using agents, which further reduced the agencies' sales and inhibited their ability to make educated business decisions. As a result, he alleged that his agency had been unable to reach the targets necessary to activate the waiver and had been unable to pay off its loans, resulting in him making interest payments to Nationwide's affiliated bank.

Because the plaintiff had failed to present evidence of who had pressured him to take the loans and to open an additional office, the court granted judgment on the pleadings to the extent that the plaintiff's fraud claim was based upon allegations that the plaintiff was fraudulently induced to do so. However, the court refused to grant judgment on the fraud claims to the extent that the claims were related to the representations made in the pro forma statement, because the court could not determine whether the representations in the pro forma were related to future promises, which may have not been fraudulent, or were representations made about existing, verifiable facts.

In addition to the common law fraud claims, Bucciarelli asserted that Nationwide's actions constituted deceptive practices under the MFIL. Nationwide argued that as a matter of law, the MFIL never covers insurance agency agreements ' and that even if it did, it would not cover the agreement in this case. Nationwide noted that decisions in Florida, Illinois, Missouri, New Jersey, New York, and Virginia have held that franchise laws in those states are inapplicable to the insurance industry.

Because no Michigan cases directly addressed the question and the MFIL did not provide a categorical exception for insurance contracts, the court refused to conclude as a matter of law that the MFIL did not apply to insurance contracts. Instead, the court went through each of the three elements of the definition of a “franchise” under the MFIL to determine whether the statute applied to the insurance agreement at issue.

The first element of a franchise under the MFIL is that the 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 in substantial part by a franchisor” (MCL 445.1502). Adopting an argument that had been successful in Illinois cases, Nationwide argued that the plaintiff could not meet this element of the definition because previous Michigan cases had established that insurance agents are mere order takers, while the insurer actually owns and sells the policies. Because the legal definition of the word “offer” would require a contract to be consummated if the offer was accepted, Nationwide argued that insurance agents could not be considered as offering insurance policies, because a contract would not be formed if an offer was accepted.

The court rejected this argument and criticized the Illinois decisions for ignoring part of the language of Illinois' own statute. The court noted that if the legal interpretation of the word “offering” was used, the word “selling” would then be duplicative. The court concluded that the words were not intended to be redundant, and it chose a broader and less technical interpretation of the word “offer”: to “refer to making goods or services available in a practical rather than a legal sense.” As a result, the court concluded that insurance agents soliciting orders for insurance coverage were offering goods and services, satisfying the first element of the definition of franchise.

The second element of a franchise under the MFIL is that the “franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services substantially associated with the franchisor's trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchisor or its affiliate.” Nationwide did not argue that the plaintiff failed to meet this element of the definition.

The final element of a franchise under the MFIL is that the franchisee “is required to pay, directly, or indirectly, a franchise fee.” Under the statute, a franchise fee is defined to include a fee or charge that a franchisee must pay “for the right to enter into a business under a franchise agreement, including but not limited to payments for goods or services” (MCL 445.1503(1)). Payments for goods, equipment, or fixtures at a bona fide wholesale price are excluded from the definition. The court noted that the Independent Contractor's Agreement did not require the plaintiff to pay money or interest for the right to enter the business. The plaintiff, however, claimed that before entering into the agreement, he was required to pay a franchise fee of $12,900 for four-year-old office furniture and $3,000 for four-year-old computer equipment as a condition of having policies assigned to his agency. Though the court doubted that the plaintiff would be able to offer evidence to support this claim, the court refused to grant judgment on the pleadings on the issue, preferring to see whether the facts supported that he had been required to purchase excessively priced furniture and equipment. Accordingly, the court denied Nationwide's motion to dismiss the MIFL claim.

The decision by the court to conclude that an insurance agent's offer of insurance policies could qualify as a franchise under MFIL is a significant departure from the conclusions reached by other courts facing similar facts. Though it is not clear whether a franchise fee was actually assessed, the decision suggests that it is possible that insurance agencies, under certain conditions, could fall within the purview of Michigan's franchise laws.

Employee Statements Viewed As Franchisor Representations

In Kiddie Academy Domestic Franchising LLC v. Faith Enterprises DC, LLC, et al., 2 Bus. Franch. Guide (CCH) '14, 185 (N.D. Md. 2009), a federal district court considered whether the comments by a franchisor's employee concerning a pro forma created by a former franchisee fraudulently induced a franchisee to purchase a franchise. Kiddie Academy, the plaintiff, sued a franchisee and its affiliates for breach of contract after the defendants had failed to pay royalties on two franchises that they had purchased from an existing Kiddie Academy franchisee. The defendants counterclaimed that Kiddie Academy fraudulently induced them to enter into franchise agreements and made negligent misrepresentations.

When the defendants were investigating whether to purchase two existing franchises, they were provided a pro forma statement from the transferring franchisee, which they believed represented the current financial condition of the franchise. The defendants forwarded the pro formas to Kiddie Academy's chief development officer and asked whether the figures were accurate. The Kiddie Academy employee responded that “they look okay to me”; and in a later conversation, the employee informed the purchasers that the profitability of the centers was “in the mid to high teens.” The defendants asserted in their counterclaim that these representations fraudulently induced them to purchase the franchise.

To succeed on a fraudulent inducement claim, the defendants were required to show that Kiddie Academy made a representation, which it knew was false or made with reckless indifference to the truth, and which it made with the intent to defraud the defendants. In addition, the defendants needed to prove that they justifiably relied on the misrepresentation and had suffered compensable injury as a result.

Considering the first elements, the court held that a reasonable jury could conclude that Kiddie Academy had made a false representation, because Kiddie Academy adopted the documents when its employee reviewed them and represented that they looked acceptable. Kiddie Academy claimed that because its employee had no knowledge of the financial health of the two franchises and was not responsible for reviewing their financial statements, he could not have knowingly made false statements regarding the pro forma statements. The court rejected this position because the chief development officer had knowledge of Kiddie Academy franchises, Kiddie Academy had financial statements from the former franchisees that contradicted the information in the pro formas, and there had been time for the employee to check the accuracy of the pro formas. As a result, the court held that a reasonable jury could find that the employee had knowingly or recklessly and indifferently made a false statement, and such statement was attributed to Kiddie Academy.

Turning to the defendants' reliance on Kiddie Academy's statements, the court focused on the fact that the defendants had been given by the transferring franchisee other profit-and-loss statements and income tax returns that contradicted the pro formas. The court concluded that despite Kiddie Academy's statements approving the pro formas, the conflicting documents put the defendants on notice of possible deception. Consequently, the defendants could not have justifiably relied on Kiddie Academy's statements, and their fraudulent inducement claim could not succeed.

Similarly, the conflicting tax returns undermined the defendants' negligent misrepresentation counterclaim, which also required the defendants to have justifiably acted in reliance on the plaintiff's misrepresentations. The result was a summary judgment in favor of Kiddie Academy for its breach of contract claim.

Though ultimately, the defendants' counterclaim was unsuccessful, the case is a significant example of how an employee's statements can be construed as a representation by the franchisor. Had the defendants not been provided with contradictory information in their investigation, their reliance on the pro formas that had been tacitly approved by Kiddie Academy could have resulted in a successful counterclaim and a successful affirmative defense against the breach of contract claim.

Alexander Tuneski is an associate in the Washington, DC, office of Kilpatrick Stockton LLP. He can be contacted at 202-508-5814 or [email protected].