Franchisor Did Not Commit Fraud, Violate Minnesota Franchise Act in Franchise Sale

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

A janitorial business franchisor did not commit common law fraud or violate the anti-fraud provisions of the Minnesota Franchise Act (MFA) in connection with the sale of a franchise to three franchisees because the franchisor made no untrue statements of material fact or misrepresentations, a federal district court in Minneapolis has decided.

The claims were initially brought as part of a putative class action against the franchisor, but the motion for class certification was denied in an earlier ruling (CCH Business Franchise Guide ¶14,335). After proceeding jointly through discovery, the parties agreed that the franchisor would move for summary judgment on the claims of three representative plaintiffs.

As to the first of the three plaintiffs, the franchisor’s alleged statement to that "[i]f you buy more, you’ll get more" was not untrue, the court held. The franchisor structured its franchising business to correlate the amount of business it promised to offer a franchisee with the amount of initial investment made by the franchisee. In that sense, it was true that the more a franchisee bought (or the larger his initial investment), the more he would receive in gross billings of offered accounts, the court determined.

Puffery

The statement that owning one of the franchises was a "good business" and that the business could continue for "a long time" were puffery, the court ruled. In general, puffery includes statements of exaggerated boasting or vague, subjective claims of superiority. The franchisee’s counsel contended that the franchisor’s puffery should be evaluated in the context of the lack of sophistication of the franchisee—an immigrant with limited English ability and business acumen. However, immigrants were not a group so gullible that they could not recognize obvious puffery, the court reasoned.

The first plaintiff also asserted that the franchisor falsely represented a guarantee of $1,000 per month in account billings, but the franchisee admitted in his deposition that he was not promised any level of profits or income. Even if such a representation was made by the franchisor, any reliance on representations regarding profitability was unreasonable as a matter of law because it was directly contradicted by the franchise agreement, the court held.

The fraud claimed by the second of the three plaintiffs hinged on the franchisor’s alleged representations that he could earn as much money as a medical doctor or Ph.D., and its failure to inform him that declined accounts would be counted against the amount of business the franchisor was obligated to provide.

Reliance of Statement

The franchisee could not have reasonably relied on the alleged statement because it was made after he signed the franchise agreement, the court held. Further, the statement directly contradicted the franchisor’s Uniform Franchise Offering Circular (UFOC), which disclaimed any representations as to profitability or income level and was incorporated into the franchise agreement. The franchisee could not impose liability under a common law or MFA-based fraud claim merely because he chose not to read the UFOC, according to the court.

The franchisor could not have defrauded the third plaintiff by allegedly failing to disclose that any offers of accounts that the franchisee declined would count against the total amount of accounts that the franchisor was obligated to offer the franchisee, the court ruled. A reasonable jury would find that the franchisee received a version of the franchisor’s UFOC that unambiguously made such a disclosure, the court decided.

Evidence showed that: (1) the franchisee admitted, while a prospective franchisee, to receiving a "black book" from the franchisor; (2) the franchisor’s May 28, 2002 UFOC was bound as a black book; (3) the franchisee signed a written acknowledgment of having received the May 28, 2002, UFOC; and (4) most importantly, the franchisee produced the first two pages of the May 28, 2002 UFOC in the course of the litigation.

Statute of Limitations

The third franchisee’s claim that the franchisor violated the MFA by making misrepresentations regarding profitability, the availability of evening accounts, and the ability to hire employees was time-barred by the Act’s three-year statute of limitations.

Had the franchisor made the alleged statements, and if they were false, the franchisee would have been aware of the facts constituting the claim within months of purchasing his franchise, the court decided. Thus, even if the discovery rule applied to the MFA to toll the statute of limitations, the claim was barred. The franchisee knew all of the facts constituting the claim in early 2003 but did not file the claim until approximately five years later.

The decisions in Moua v. Jani-King of Minnesota, Inc., will appear at CCH Business Franchise Guide ¶14,665 and ¶14,681.

Novell Can Proceed with Antitrust Claim Against Microsoft

This posting was written by Jeffrey May, Editor of CCH Trade Regulation Reporter.

Novell, Inc. did not assign to a third party an antitrust claim based on alleged harm to office-productivity applications resulting from Microsoft Corporation’s alleged anticompetitive conduct, the U.S. Court of Appeals in Richmond, Virginia, has ruled.

The court reversed summary judgment in favor of Microsoft (2010-1 Trade Cases ¶76,983) on Novell’s claim that Microsoft “engage[d] in anticompetitive conduct to thwart the development of products that threatened to weaken the applications barrier to entry” to the operating systems market. Specifically, Novell contended that Microsoft’s conduct had damaged Novell’s WordPerfect word processing applications and its other office productivity applications in violation of Section 2 of the Sherman Act.

Statute of Limitations

Unlike other claims asserted by Novell, this count was not time-barred, because the statute of limitations was tolled during the pendency of the government’s case against Microsoft for antitrust violations in the operating systems market.

A 1996 Asset Purchase Agreement (APA), under which Novell sold its various DOS products to Caldera, Inc. and assigned the rights to any antitrust litigation related to those products, did not assign claims related to office-productivity applications, the court ruled.

The term “DOS Products” was defined in the APA to include Novell’s PC operating systems DR DOS and Novell DOS, among other products. The APA conveyed claims “associated” with an expressly enumerated body of property that did not include Novell’s office productivity applications. The mere existence of a possible conceptual link between the DOS products and those applications did not mean that the agreement divested Novell of the claim based on harm to related to office-productivity applications, the court explained.

Claim Preclusion

The court also rejected Microsoft’s res judicata defense. Nonmutual claim preclusion was generally disfavored, but Microsoft still argued that Novell’s assignment of some of its claims to the third part was sufficient to establish a substantive legal relationship between them that fell within exceptions to that principle.

Microsoft also contended that the claims arose out of the same basic core of operative facts. However, Caldera’s suit addressed a distinct set of harms from those addressed in the present dispute. While both suits implicated Microsoft’s desire to control the operating system market, overlapping motivation for separate harms was insufficient to render those harms identical for purposes of claim preclusion. Moreover, Caldera likely would not have served as an adequate representative of the complaining company’s interests. As a practical matter, only Novell had the incentive to recover for damages to its office productivity applications.

Dissent

A dissent contended that because Novell’s claim was premised on Microsoft’s anticompetitive conduct in the operating systems market, the claim was “associated directly or indirectly with” DR DOS. According to the dissent, “the majority ignore[d] the plain, patently broad language in the APA, choosing instead to craft its own narrow reading of the phrase.”

The decision is Novell Inc. v. Microsoft Corp., 2011-1 Trade Cases ¶77,434.

Refusal to Sell Parts to Competitor Could Be Monopolization

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

A company in the business of providing heavy lift helicopter services and supplying replacement parts to other owners of several particular models could have engaged in unlawful monopolization or attempted monopolization by refusing to sell parts to a competing operator of heavy helicopter services, the federal district court in Portland, Oregon, has decided.

The defending parts seller/services competitor was obligated to sell parts to other owners of a particular model of heavy lift helicopter under a 14-year-old contract with the manufacturer. The claims were neither time-barred nor insufficient as a matter of law, the court held. The defending company’s motion for summary judgment on the antitrust claims was therefore denied.

Statute of Limitations

Although the complaining helicopter services operator first suffered injury upon the parts seller’s initial refusal to deal following execution of its contract with the manufacturer well before the four-year limitations period applicable to federal antitrust actions, the Sherman Act claims were not barred under the statute of limitations, the court ruled.

Even if the parts seller’s initial refusal to deal was final, any damages suffered within the four-year limitations period were not time-barred unless all of the damages resulted solely from that initial refusal.

Any overt act inflicting damages generally was its own cause of action with a fresh four-year statute of limitations, and any new injury within the limitations period resulting from a continuing violation was a separate cause of action.

Questions of fact existed as to whether the refusal to deal was final and irrevocable or was instead continuing, given allegations that the company had provided some service manuals and updates in prior years and that it had ultimately reversed course and begun providing parts and service again on the heels of an antitrust settlement with another heavy lift helicopter services competitor sixteen years after that initial refusal, the court observed.

Merits of Claims

Even if federal jurisprudence demanded the termination of a prior course of dealing as a prerequisite to finding a refusal to deal illegal under federal antitrust law, the claims against the defendant did not fail on the merits, the court said.

Given that the manufacturer of the parts had provided overhaul manuals and parts to helicopter operators prior to the entry of a contract between itself and the defending parts supplier/helicopter services provider—and that the defendant had thereafter abruptly ceased to sell parts to those operators—a reasonable juror could conclude that the defendant unilaterally terminated a voluntary course of dealing with the complaining competitor, in the court’s view.

The legitimacy of the defendant’s claim that it had decided not to follow the manufacturer’s course—owing to liability concerns—was a factual issue not suitable for summary judgment, the court concluded.

Other disputed questions of material fact also precluded summary judgment, including whether there was a relevant market for heavy lift helicopters, whether the defendant’s decision to not provide parts or manuals was motivated by good business sense or monopolistic intent, and whether it improperly prohibited third-party manufacturers from dealing with the plaintiff.

The January 26 decision is Evergreen Helicopters, Inc. v. Erickson Air-Crane Inc., 2011-1 Trade Cases ¶77,327.

Price Fixing Claims Against Urethane Producers Take Shape

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

In multidistrict litigation consisting of numerous putative class action lawsuits alleging a conspiracy among urethane chemical producers to fix prices of polyether polyol products, 56 opt-out plaintiffs sufficiently alleged a federal antitrust claim based on charges of conspiratorial conduct prior to 1999, the federal district court in Kansas City, Kansas, has ruled.

The court declined, however, to exercise supplemental jurisdiction over claims that were brought by European plaintiffs under European law and barred claims against two individual executives under the statute of limitations. The defendants’ motions to dismiss the claims were, therefore, granted in part and denied in part.

Pleading

The complaining purchasers corrected the pleading deficiencies that led to dismissal of their claims of a conspiracy existing prior to 1999 (2009-2 TRADE CASES ¶76,754), the court decided. In support of these pre-1999 conspiracy allegations, the plaintiffs’ second amended complaints included allegations of meetings and communications, involving specific participants and locations, in furtherance of the alleged conspiracy.

Rejected was an argument that the plaintiffs failed to plead sufficient non-conclusory facts to state a plausible claim for the pre-1999 period because they did not allege the particular dates, participants, products discussed, markets discussed, agreements reached, and actions taken for each meeting or communication alleged for that time period, or the specific way in which all of the meetings and communications were connected. Requiring such allegations would impose an overly strict pleading standard, the court said.

Statute of Limitations

The court refused to dismiss the pre-1999 claims as time-barred on the ground that the complaining purchasers had failed to sufficiently allege affirmative acts of fraudulent concealment for that time period. The plaintiffs could rely on their allegations of false and pretextual announcements and letters by the defendants during that time period—such as a statement that prices were being increased because of rising costs—as acts of fraudulent concealment. They did not have to plead with particularity why the alleged misrepresentations were actually false, such as by alleging facts showing that costs were not in fact rising. Nevertheless, the plaintiffs did so plead by claiming that the price increases actually resulted from the alleged price fixing conspiracy instead of from rising costs.

The plaintiffs’ allegations of secret meetings, communications, and agreements to conceal the conspiracy also sufficed as affirmative acts of concealment, the court said. Claims against two individuals—who were executives for one of the chemical producing companies—were time-barred, however, because fraudulent concealment of the alleged conspiracy could not toll the limitations period sufficiently to render the claims timely, the court found.

The statute of limitations, as it related to the individual defendants, began to run, at the latest, when the plaintiffs admittedly discovered the existence of a claim against the individuals’ employer—November 23, 2004, the date upon which the first polyether polyols class action had been filed. This was approximately four years and four months before the individuals were first made parties to the suit.

The court rejected the plaintiffs’ argument that their claims should have been tolled for more than three more years because they did not discover that they had claims against the individuals until December 2007. Once the plaintiffs discovered in November 2004 that the employer was a member of the alleged conspiracy, their exercise of due diligence should have led them to investigate and discover the identity of additional individual defendants who acted on behalf of the employer, the court explained.

Four years was ample time to conduct that inquiry. As the plaintiffs themselves conceded, they actually did discover that they had claims against the individuals well within that window, the court noted. The plaintiffs offered no explanation for their subsequent failure to add those individuals as defendants to the suit at that time or within the year that followed.

European Law Claims

Finally, the court chose not to exercise supplemental jurisdiction over claims brought by 26 European plaintiffs under European law. Litigation of the claims would raise novel and complex issues of European law, such as the issue of cross-jurisdictional tolling from the filing of a class action complaint and the issue of the effect of some nations’ joining the European Union (EU) only after the defendants’ price fixing conduct, the court said.

The court added that while it could determine any question of European law to the best of its ability, it would do so without the benefit of review by and instruction from the European Court of Justice and the European Commission. Given the state of European antitrust law, such law would be more ably interpreted and applied in Europe, in the court's view.

In addition, resolution of the European law claims in the United States would undermine principles of international comity. Dismissal of the claims would also have been appropriate under the doctrine of forum non conveniens, the court concluded.

The decision is In re: Urethane Antitrust Litigation, 2010-1 Trade Cases ¶76,903.

Rejection of Thermostat Buyer’s Antitrust Claims Against Honeywell Upheld

This posting was written by Darius Sturmer, Editor of CCH Trade Regulation Reporter.

A consumer’s putative class action—alleging that Honeywell International, Inc. violated Maine’s antitrust statute by misrepresenting its trademark on circular thermostats and threatening rival manufacturers with litigation—was properly found to have been barred by the statute of limitations and to have failed to state cognizable injury, the Maine Supreme Judicial Court has ruled. Summary judgment in favor of Honeywell was affirmed.

Statute of Limitations

The consumer’s antitrust claims were based on his purchase of three Honeywell thermostats in Maine in approximately 1986 and his purchase of a single thermostat in New Hampshire in 2001. The cause of action based on the purchases in Maine accrued at the time of his injury—in 1986, 18 years before he filed suit. Therefore, the claim fell well outside of Maine’s six-year statute of limitations, the court determined.

Rejected were contentions that the statute of limitations should have been tolled under the continuing violation doctrine and the fraudulent concealment exception.

The consumer’s alleged purchase of a single thermostat in New Hampshire 15 years later did not serve to revive the cause of action, the court held. In addition, the consumer failed to present sufficient facts to prove fraudulent concealment, particularly given that many of the facts relevant to fraudulent concealment had been publicly available in the documents filed by Honeywell with the U.S. Patent and Trademark Office in 1968 and 1986.

Antitrust Standing, Injury

The consumer lacked standing to assert a claim based on the single thermostat purchase in New Hampshire in 2001 because his allegations were insufficient to demonstrate that he suffered injury from the alleged conduct, the court held. The consumer expressed uncertainty about the location of the store at which he bought the thermostat, the price he paid for it, and whether he received any discounts or rebates for the purchase.

He had no sales slip, invoice, or other evidence of what he paid. Without such evidence, the court noted, he could not prove that he had paid an inflated price, as opposed to the possibility that price increases were absorbed at the retail level.

Partial Dissent

An opinion filed by two justices, partially dissenting from the majority holding, contended that the consumer should have been entitled (1) to complete discovery with respect to the antitrust claim based on the 2001 purchase and (2) to have the issue of antitrust injury and damages addressed in a decision on his motion for class certification before the court ruled on Honeywell’s summary judgment motion.

The partially dissenting justices did agree with the majority that any claim based on the 1986 purchases was time-barred. However, they argued, that majority’s characterization of the claim based on the New Hampshire purchase in 2001 as speculative was premature.

If the consumer had been allowed to present his expert’s opinion that much of the injury and damages were common to the class—and if the expert could convince the trial court that common proof was sufficient—then the consumer’s lack of a receipt for the purchase might not have impeded his claim or his status as a class representative, the partial dissent argued.

The decision in McKinnon v. Honeywell International, Inc. appears here. It will be reported at 2009-2 Trade Cases ¶76,704.

Suit Challenging Discount Club Marketing Practices Not Time Barred

This posting was written by William Zale, Editor of CCH Advertising Law Guide.

Claims that the marketing firm Vertrue, Inc. and its affiliates violated the federal Electronic Funds Transfer Act (EFTA) by enrolling consumers in a discount club and imposing unauthorized monthly charges in billing statements were not barred by the law’s one-year statute of limitations, the U.S. Court of Appeals in Cincinnati has ruled.

Margaret Wike, who in March 2006 asserted class action claims on behalf of other consumers, successfully appealed a ruling that her EFTA claims were time-barred.

The court also held that the federal district court in Nashville should reconsider the question of whether Wike should be allowed to add claims under the federal Racketeer Influenced and Corrupt Organizations (RICO) Act alleging that Vertrue had ensnared hundreds of thousands of consumers in a deceptive marketing scheme.

Telemarketing Preauthorization of Funds Transfer

The court set out the facts underlying Wike’s complaint as follows. In February 2005, Wike called America Online (AOL) to set up an Internet service account for a friend. An AOL representative told Wike that she was eligible to claim a free $50 Wal-Mart gift card. With Wike’s permission, the AOL rep transferred Wike’s call to another operator who would provide more details. That operator turned out to be a telemarketer for Influent, which sold memberships in discount clubs and other programs for Vertrue.

The telemarketer confirmed Wike’s name, address and telephone number and told her that, as a Galleria member, she would receive a “membership kit” explaining how to claim her Wal-Mart gift card. Galleria membership, the telemarketer explained, was not free: Wike would be billed $1 that day and, after a 30-day trial period, $19.95 each month thereafter, unless and until Wike cancelled her membership. Wike agreed, provided her Visa debit-card number, and declined an offer for a second discount club the telemarketer pitched.

Wike claims she never received the promised membership kit (which Vertrue insists it sent), though she acknowledges she might have disregarded it as junk mail. Nor did Wike question the first $19.95 charge for “galleriausa” on her March 2005 bank-account statement, mistakenly believing that it pertained to an unrelated purchase.

A second monthly charge, which showed up in April, got Wike’s attention. She called Galleria’s support number several times over the ensuing months, asking that her membership be canceled and the monthly charges refunded. None of this worked—she received no refunds, and the monthly charges continued—until October 2005, when Wike canceled her account and received a partial refund.

EFTA Statute of Limitations Trigger

Wike claimed that Vertrue violated the EFTA’s restriction on “preauthorized electronic fund transfer[s],” which may be permitted by consumers “only in writing,” a copy of which must be given “to the consumer when made.”

The question presented was whether EFTA’s one-year statute of limitations was triggered in February 2006 when the telemarketer arranged the funds transfer (in which case Wike’s March 2006 EFTA claim was time-barred) or when the first of the recurring transfers of funds from Wike’s bank account occurred less than a year before the lawsuit (in which case Wike’s EFTA claim was timely).

The district court, confronting a difficult question that no federal court of appeals had yet faced, held that the EFTA claim was time-barred because the statute imposed obligations on Vertrue before the first recurring transfer took place.

The better view, according to the appellate court, was to pin accrual on an identifiable date when the plaintiff has been injured and an EFTA duty necessarily has been violated—the date of the first funds transfer.

Remanding the case to the district court for further proceedings on the EFTA claim, the appellate court directed consideration of the question of whether Wike should be allowed to amend her complaint to add a RICO claim.

The June 2 decision in Wike v. Vetrue, Inc. will be reported at CCH Advertising Law Guide ¶63,431.