Friday, September 25, 2009

Insurance Agent Could Be “Franchisee” Under Michigan Franchise Sales Law

This posting was written by Pete Reap, Editor of CCH Business Franchise Guide.

The Michigan Franchise Investment Law could apply to insurance agency contracts, the federal district court in Detroit has decided. Thus, an insurance company was not entitled to judgment on the pleadings on an agent’s claim that it committed deceptive practices in the sale of an agency in violation of the Franchise Investment Law.

The company argued that the Michigan insurance code comprehensively regulated the industry and that applying the franchise law would be incompatible with such comprehensive state regulation. It also pointed to decisions from other states holding that franchise laws in those states were inapplicable to the insurance industry.

There were no Michigan decisions directly addressing the question, the court observed. However, neither the Franchise Investment Law nor the laws of other states explicitly provided an exception for insurance agency agreements. Instead, the relevant statutes—including Michigan’s—simply specified generic characteristics of the contracts that they did cover.

In determining whether insurance agency agreements were governed by the franchise statutes, the courts in other states simply considered whether the agreements exhibited the required characteristics, according to the court. However, absent clearer direction from the Michigan statutes or courts, the court refused to hold as a matter of law that the Franchise Investment Law did not apply to insurance agency agreements.

“Offering, Selling” Goods or Services

The agency agreement at issue fell within the Franchise Investment Law’s requirement that a franchisee be “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, the court held.

The company argued that Michigan courts have stated that insurance agents were merely “order takers,” while insurance companies owned the insurance polices and actually sold them.

The Illinois franchise sales statute was identical in relevant part to Michigan’s, and an Illinois court had ruled that insurance agents did not fall within the protections of the Illinois law because “the right to sell consists of an unqualified authorization to transfer a product at the point and moment of the agreement to sell or authority to commit a grant to sell” and the insurance agents did not have that authority,

However, that Illinois decision ignored part of the language of the Illinois state and which was identical to Michigan’s, the court reasoned.

A person was a franchisee under the Michigan Franchise Investment Law if he was engaged in selling, offering, or distributing goods or service. The legal meaning of “offering” required that an acceptance would create a contract, and either transfer ownership or create a legal obligation to transfer ownership, the court noted.

If the agent did not own insurance policies and was not authorized to contractually bind the insurance company, he could not offer them in this sense, the court reasoned. But if the word “offering” in the Franchise Investment Law was interpreted to have only such a meaning, the word would have been redundant of the word “selling,” the court determined. Therefore, the term “offer” in the statute must be interpreted more broadly, and less technically, to refer to making goods or services available in a practical, rather than a legal, sense.

By soliciting orders for insurance coverage, with the intention and expectation that the orders would be accepted, insurance agents would fall within this definition. Thus, the agency agreement fell within this part of the “franchise” definition in the Franchise Investment Act, the court held.

Franchise Fee

The issue of whether the agent paid the company a “franchise fee,” as required of a franchisee, could not be determined on the pleadings, the court ruled.

The agent’s claim that he was required to purchase excessively-priced office supplies as a condition of becoming the company’s agent seemed unlikely. However, the court could not make such a factual determination on the pleadings.

An allegation that the agent’s payment for office furniture and computers was a franchise fee was entitled to a presumption of truth at this stage of the litigation. The agent claimed that he was required to pay $12,900 for four-year-old furniture and approximately $3,000 for four-year-old computers.

The purchase of goods was not considered to be a franchise fee under the statute when the goods were purchased at bona fide wholesale prices. However, the agent adequately alleged that the prices paid for the furniture and computers were excessive.

The decision is Bucciarelli v. Nationwide Mutual Insurance Co., CCH Business Franchise Guide ¶14,200.

For a previous blog posting on whether an insurance agent could be considered a "franchisee," see the May 21, 2009 entry on Trade Regulation Talk.

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