H.C. Duke & Son, LLC v. Prism Marketing Corporation et al

Filing 121

ORDER entered by Judge Sara Darrow on September 30, 2013. Plaintiff's 68 Motion to Dismiss is GRANTED in part and DENIED in part. Plaintiff's Motion is GRANTED as to Counts III, IV, V, VIII, and portions of Counts VI and VII of Defendan t Prism's 64 Amended Counterclaim. Plaintiff's Motion to Dismiss is DENIED as to Counts II and IX, and portions of Counts VI and VII. Plaintiff's 75 Motion for Leave to File Replies, Exhibit 1 (75-1), is GRANTED; Exhibit 2 (75-2) is moot in light of 104 Order of July 25, 2013. Defendant Prism is GRANTED leave to amend its counterclaim. If it so chooses, Prism must file its amended counterclaim by October 15, 2013. (JD, ilcd)

E-FILED

Monday, 30 September, 2013 02:50:37 PM
Clerk, U.S. District Court, ILCD
UNITED STATES DISTRICT COURT
CENTRAL DISTRICT OF ILLINOIS
ROCK ISLAND DIVISION
H.C. DUKE & SON, LLC,

)
)
Plaintiff,
)
)
v.
)
)
PRISM MARKETING CORPORATION,
)
SUPERIOR QUALITY EQUIPMENT, INC., )
STEVEN LEVINE, and DOES 1 to 100,
)

Case No. 4:11-cv-04006-SLD-JAG

Defendants.
ORDER
Plaintiff H.C. Duke & Son, LLC’s seeks, among other things, a declaratory judgment as
to its rights and duties under a Distributor’s contract it entered into with Defendant Prism
Marketing Corporation. Duke claims that it properly terminated the agreement; Prism disagrees.
Duke further seeks relief against Prism and Defendant Superior Quality Equipment, which Duke
alleges to be Prism’s alter ego, for breach of contract as well as to foreclose on security interests
in collateral held by Duke and Prism. Finally, Duke seeks to enforce an alleged agreement by
Defendant Steven Levine to personally guarantee payment of Prism’s debts to Duke.
Defendant Prism counterclaimed, alleging breach of contract, multiple counts of fraud,
tortious interference, and violation of Illinois and California franchise statutes. Now before the
Court is Duke’s Motion to Dismiss several of Prism’s counterclaims. Duke’s Motion for Leave
to File Replies, ECF No. 75, Ex. 1, is GRANTED; ECF No. 75, Ex. 2, is moot in light of Order
of July 25, 2013, ECF No. 104. For the reasons set forth below, the Court GRANTS in part and
DENIES in part Duke’s Motion to Dismiss, ECF No. 67.

1

BACKGROUND
Duke produces and distributes a line of soft-serve ice cream machinery and related
equipment marketed under the Electro Freeze trademark. On August 25, 2003, Duke and Prism
executed an Electro Freeze Distributor’s Agreement (“Agreement”) under which Prism would
distribute Duke’s equipment. The equipment was to be shipped from Illinois to portions of
California and Nevada. The agreement expressly prohibited modifications of its terms unless the
modification was in writing and signed by both parties. Prism argues that Duke waived this
written-modification requirement through an attempted oral modification. Duke’s performance
allegedly modified the Agreement whereby Duke agreed to correct and/or credit Prism for
defective equipment supplied by Duke. The Agreement provides for one-, two-, and five-year
limited warranties for various Duke machine parts. ECF No. 105 at 27, Ex. A. In addition to its
attempted modification theory, Prism separately alleges that Duke breached this and other
express warranties, a claim not at issue here. ECF No. 64 at 20-23.
Eventually, on January 18, 2011, Duke notified Prism that it was invoking the
termination provision of the Agreement.

Prism allegedly contested this termination.

In

response, Duke filed a complaint in this Court seeking a declaration of the parties’ rights and
duties under the Agreement regarding termination and amounts allegedly due Duke under the
Agreement, as well as to foreclose security interests Duke held in Prism and Superior assets.
Duke filed an amended complaint on June 23, 2011, followed by a second amended complaint
on September 26, 2011. On July 30, 2012, Defendants filed their Answer, wherein Prism
included a nine-count counterclaim against Duke. Prism filed an amended counterclaim on
September 21, 2012, which is the operative pleading here, ECF No. 64. On October 5, 2012,
Duke moved to dismiss Counts II, III, IV, V, VI, VII, VIII and IX of Prism’s amended

2

counterclaim for failure to state a claim. Duke’s Motion to Dismiss, ECF No. 67, is now before
the Court.
DISCUSSION
I.

Legal Standard
Rule 8(a) of the Federal Rules of Civil Procedure requires a pleading to contain “a short

and plain statement of the claim showing that the pleader is entitled to relief.” Fed. R. Civ. P.
8(a). The pleading may be dismissed for failure to state a claim upon which relief may be
granted. Fed. R. Civ. P. 12(b)(6). To survive a motion to dismiss under Rule 12(b)(6), a
complaint must state a claim to relief that is “plausible on its face.” Bell Atlantic Corp. v.
Twombly, 550 U.S. 544, 570 (2007). A claim “has facial plausibility when the plaintiff pleads
factual content that allows the court to draw the reasonable inference that the defendant is liable
for the misconduct alleged.” Aschroft v. Iqbal, 556 U.S. 662, 678 (2009). The Seventh Circuit
has identified the practical requirements of Twombly and Iqbal for federal pleading:
First, a plaintiff must provide notice to defendants of her claims. Second, courts must
accept a plaintiff's factual allegations as true, but some factual allegations will be so
sketchy or implausible that they fail to provide sufficient notice to defendants of the
plaintiff's claim. Third, in considering the plaintiff's factual allegations, courts should not
accept as adequate abstract recitations of the elements of a cause of action or conclusory
legal statements.
Brooks v. Ross, 578 F.3d 574, 581 (7th Cir. 2009).
II.

Counterclaims
Duke has moved to dismiss the following of Prism’s counterclaims: Count II (Breach of

Agreement—Course of Performance), Count III (Fraud), Count IV (Illinois Consumer Fraud
Act), Count V (Fraudulent Concealment), Count VI (Tortious Interference With Contractual
Relations), Count VII (Tortious Interference With Prospective Economic Advantage), Count

3

VIII (Violation of Illinois Franchise Disclosure Act of 1987), and Count IX (Violation of
California Franchise Relations Act). The Court will address each in turn.
A. Breach of Contract
Count II of Prism’s counterclaim alleges that Duke breached a term of the Agreement
that was established through an attempted oral modification. ECF No. 64 at 23. Duke argues
that this claim should be dismissed because the Agreement prohibits modifications unless they
are in writing and signed by both parties. The Agreement provides: “No changes, modifications,
or alterations of the terms of this Agreement, except as otherwise herein provided, shall be valid
and binding unless reduced to writing and signed by both Duke and the Distributor.” ECF No.
105, Ex. A at ¶ 13. In this provision, Duke argues, the parties contracted away the ability to
modify the terms of the Agreement through course of performance alone.

The Illinois

Commercial Code generally enforces such a restriction on unwritten modifications. See 810
ILCS 5/2-209(2) (“A signed agreement which excludes modification or rescission except by a
signed writing cannot be otherwise modified or rescinded, but except as between merchants such
a writing on a form supplied by the merchant must be separately signed by the other party.”)
Prism counters that Duke waived the prohibition on unwritten modifications. The same
provision of the Illinois Commercial Code that recognizes restrictions on unwritten
modifications also provides that an attempted unwritten modification “can operate as a waiver.”
810 ILCS 5/2-209(4). The Comment to section 209 indicates that subsection 4 is intended “to
prevent contractual provisions except as through signed waiver from limiting in other respects
the legal effect of the parties’ actual later conduct.” Id. cmt. 4. When a party alleges that an
attempted modification constituted a waiver, that party must show either (1) it reasonably relied
on the other party’s waiver of the requirement of a writing or (2) that the waiver was clear and

4

unequivocal. Cloud Corp. v. Hasbro, Inc., 314 F.3d 289, 297-98 (7th Cir. 2002) (citations
omitted).
To defeat Duke’s Motion to Dismiss, therefore, Prism must plausibly allege that Duke
waived the Agreement’s ban on unwritten modifications because either it reasonably relied on
Duke’s purported waiver, or that Duke clearly and unequivocally waived the ban on unwritten
modification provision. In this case, Prism alleges that it reasonably relied on Duke’s attempted
modification. Prism pleaded that the parties’ conduct established an unwritten understanding,
“whether or not so specified” in the Agreement, that it was to be credited for its expenses to
repair or replace defective equipment supplied to it by Duke. The credit line to Prism was to
increase in accordance an oral agreement with Duke. ECF No. 64 at 23-24. Prism further
alleged that it performed its duties under this unwritten understanding, with Duke’s knowledge
and acquiescence, but Duke failed to provide the agreed-upon credit. ECF No. 64 at 24. Thus,
Prism has made allegations which, accepted as true at this stage, stake out a plausible claim that
Duke waived the written modification requirement and Prism reasonably relied on this waiver.
See Brooks v. Ross, 578 F.3d 574, 581 (7th Cir. 2009). Accordingly, Duke’s Motion to Dismiss
Count II is denied.
B. Fraud and Related Claims
Defendants’ counterclaims include fraud (Count III), violation of the Illinois Consumer
Fraud Act (Count IV) and fraudulent concealment (Count V). These claims of, and sounding in,
fraud fail to meet the heightened pleading standard required under the Federal Rules.
The Federal Rules of Civil Procedure impose a heightened pleading standard for fraud
claims, requiring that a party “state with particularity the circumstances constituting fraud.” Fed.
R. Civ. P. 9(b). This particularity has been described as requiring that the party alleging fraud

5

provide the “who, what, when, where and how.” DiLeo v. Ernst & Young, 901 F.2d 624, 627
(7th Cir. 1990). Specifically, this means alleging (1) the identity of the person who made the
misrepresentation, (2) the time, place, and content of the misrepresentation, and (3) the method
by which the misrepresentation was communicated to the plaintiff.

Windy City Metal

Fabricators v. CIT Tech. Fin. Servs., Inc., 536 F.3d 663, 668 (7th Cir. 2008) (internal citation
and quotation marks omitted).

In addition to preserving a defendant’s reputation against

unfounded charges of fraud, Ackerman v. Northwest Mutual Life Ins. Co., 172 F.3d 467, 469 (7th
Cir. 1999), the fundamental concern of providing fair notice drives Rule 9(b) and necessitates
this specificity, see Vicom, Inc. v. Harbridge Merch. Servs., Inc., 20 F.3d 771, 777 (7th Cir.
1994). The party alleging fraud must “reasonably notify the defendants of their purported role
in the scheme.” Id. at 778.
Count III of Prism’s counterclaim charges Duke’s “representatives” with making
misrepresentations in “2009, 2010 and/or the first month of 2011.” ECF No. 64 at 26. Prism
provides an overly broad 25-month time range during which the fraudulent communications
allegedly occurred and thus does not establish the “when” needed for particularity. Nor does
“representatives” sufficiently establish the identity of the person making the alleged
misrepresentation. See Vicom, 20 F.3d at 778 (criticizing a complaint that did not state which
company representative made the misrepresentation and on what date). Further, while long on
the substance of the alleged misrepresentations, Prism’s counterclaim omits any place, particular
mode of communication, or other specific details regarding the alleged fraudulent
communications that would grant Duke adequate notice of its individual representatives’
particular conduct at issue. Count III thus lacks the specificity mandated by Rule 9(b).

6

Count IV of the counterclaim asserts that Duke’s conduct violated the Illinois Consumer
Fraud and Deceptive Business Practices Act (“ILCFA”), 815 ILCS 505/1 et seq. Section 2 of the
ILCFA bars “unfair methods of competition and unfair or deceptive acts or practices.” Id. § 2.
A claim of merely “unfair practices” under the ILCFA will not necessarily implicate fraudulent
conduct and thus Rule 9(b). Windy City Metal Fabricators & Supply, Inc., 536 F.3d at 670.
However, Prism alleges that Duke engaged in “Deceptive Practices,” specifically, a series of
misrepresentations upon which Prism detrimentally relied. ECF No. 64 at 27. Whether common
law or statutory, Rule 9(b) will govern a claim that “sounds in fraud,” i.e., that is “premised on a
fraudulent course of conduct.” Perelli Armstrong Tire Corp. Retiree Medical Benefits Trust v.
Walgreens Co., 631 F.3d 436, 446-47 (7th Cir. 2011) (citation omitted). Thus, because Prism
alleged that Duke engaged in a series of misrepresentations in violation of section 2 of the
ILCFA, Rule 9(b)’s heightened pleading standard is implicated and Prism must therefore plead
Count IV with particularity. See id.
As with the common law fraud claim in Count III, however, Count IV also alleges the
same unspecified 25-month time period and omits any particular details or Duke agents involved
in the alleged deceptive communications. ECF No. 64 at 27. Thus, for the same reasons Count
III is dismissed, Count IV similarly fails to meet Rule 9(b)’s pleading standard.
Count V alleges fraudulent concealment. Rule 9(b) also applies to fraudulent
concealment claims. Wigod v. Wells Fargo Bank, N.A., 673 F.3d 547, 571 (7th Cir. 2012). In
addition to the elements of fraudulent misrepresentation, a plaintiff pleading fraudulent
concealment “must allege that a defendant intentionally omitted or concealed a material fact that
it was under a duty to disclose to the plaintiff.” Id. (citing Weidner v. Karlin, 402 Ill. App. 3d
1084, 1087, 932 N.E.2d 602, 605 (3d Dist. 2010)). Such a duty arises either (1) “if the plaintiff

7

and defendant are in a fiduciary or confidential relationship” or (2) in a situation in which the
plaintiff “places trust and confidence” in the defendant, thus placing the defendant in a “position
of influence and superiority,” which may arise from “friendship, agency, or experience.”
Connick v. Suzuki Motor Co., Ltd., 675 N.E.2d 584, 593 (Ill. 1996) (citations omitted).
A fiduciary or confidential relationship exists between an attorney and client, guardian
and ward, principal and agent, “and may exist in other cases where one party is heavily
dependent upon the advice of another.” Carey Elec. Contracting, Inc. v. First Nat’l Bank of
Elgin, 74 Ill. App. 3d 233, 237-38, 392 N.E.2d 759, 765 (2d Dist. 1979). Such a relationship
“must be shown by proof so clear and convincing, so strong, unequivocal and unmistaken that it
leads to only one conclusion.” Id. (citation omitted).
Prism alleges that it was in a confidential or fiduciary relationship with Duke because
“Duke had undertaken a position of trust and confidence as to Prism in guiding Prism as to
financial, customer and/or business-related matters.” ECF No. 64 at 29. However, Prism makes
no allegations that it was heavily dependent on Duke’s advice, or even that the parties were more
closely related than arm’s length dealers in a business transaction. “Normal trust” between
businesses, even where one has a “slightly dominant” position, does not transmute a formal,
contractual relationship into that of a fiduciary. Carey Elec. Contracting, Inc., 392 N.E.2d at
763-64. Even if the parties’ agreement was in fact a franchise agreement as elsewhere alleged by
Prism, ECF No. 64 at 34, in franchisor-franchisee relationships, operating based on contractual
rights and duties, the franchisee generally is not in “the more subservient position” characteristic
of a fiduciary relationship. Oil Exp. Nat., Inc. v. Burgstone, 958 F. Supp. 366, 371 (N.D. Ill.
1997) (citation omitted). In the absence of further allegations on point, Prism has insufficiently
alleged the existence of a fiduciary or confidential relationship.

8

The standard for identifying the second option, a special relationship of trust of
confidence, is “very similar” to that of a fiduciary relationship. Benson v. Stafford, 407 Ill. App.
3d 902, 918, 941 N.E.2d 386, 402 (1st Dist. 2010). State and federal courts in Illinois rarely find
such an informal relationship to exist in the absence of a formal fiduciary relationship. Wigod,
673 F.3d at 571-72 (surveying federal and state cases on point). The bar is high: the party
accused of fraudulent concealment must “exercise ‘overwhelming influence’ over the
defendant.” Id. (quoting Miller v. Chevrolet/GEO, Inc., 326 Ill. App. 3d 642, 657, 762 N.E.2d 1,
14 (1st Dist. 2001)). Factors to be considered are: “the degree of kinship of the parties; any
disparity in age, health, and mental condition; differences in education and business experience
between the parties; and the extent to which the allegedly servient party entrusted the handling of
her business affairs to the dominant party, and whether the dominant party accepted such
entrustment.” Mitchell v. Norman James Constr. Co., 291 Ill. App. 3d 927, 934, 684 N.E.2d
872, 879 (1st Dist. 1997).
Prism claims it had “placed trust and confidence in Duke, thereby placing Duke in a
position of influence and superiority.” ECF No. 64 at 29. However, Prism provides no further
details concerning disparity of position or entrustment. At most, a disparity in information could
be inferred from Prism’s claim that Duke concealed material information.

Id. at 28-29.

However, “asymmetric information alone does not establish the degree of dominance necessary
to establish a special trust relationship.” Wigod, 673 F.3d at 573. Further, Prism alleges no
dealings with Duke prior to entering the distributorship agreement that would have established a
relationship of trust, nor “particular facts arising from the [parties’ relationship] to indicate
overwhelming influence” on Duke’s part. See Miller, 762 N.E.2d at 14. Finally, the special trust
standard is closely similar to that of a fiduciary relationship, Benson, 941 N.E.2d at 403, which

9

did not exist between the parties, as already discussed. For these reasons, Prism has failed to
aver factual allegations sufficient to state a claim of fraudulent concealment by Duke.
C. Tortious Interference
Prism also alleges tortious interference with contractual relations (Count VI) and tortious
interference with prospective economic advantage (Count VII). Duke argues that because both
counterclaims include references to fraudulent activity, ECF No. 64 at 31, 33, both claims also
sound in fraud and should be dismissed for lacking the specificity required by Rule 9(b). Prism
implicitly denies this assertion by arguing that the counterclaims suffice under the general, lower
pleading standard of Rule 8(a). ECF No. 73 at 6-7, 10-12.
As mentioned, Rule 9(b) applies to any averment of fraud or sounding in fraud, and thus
whether Rule 9(b) governs depends on the claim’s factual allegations. Borsellino v. Goldman
Sachs Group, Inc., 477 F.3d 502, 507 (7th Cir. 2007). If a party alleges both fraudulent and
nonfraudulent conduct violating the same statute, only the fraudulent violation is analyzed under
Rule 9(b). Kennedy v. Venrock Assocs., 348 F.3d 584, 593 (7th Cir. 2003). The nonfraudulent
averment stands so long as it passes muster with general pleading standard of Rule 8(a). See id.;
Windy City Metal Fabricators & Supply, Inc., 536 F.3d at 670. Tortious interference claims are
not by definition fraudulent torts. See Borsellino, 477 F.3d at 507. Therefore, Prism’s factual
allegations must be parsed to determine which amount to averments of fraud and which do not.
1. Tortious Interference With Contractual Relations
Count VI alleges tortious interference with contractual relations. The specific tortious
conduct is Duke’s alleged inducement of a third party, Wienerschnitzel, to breach its contract
with Prism and buy directly from Duke, rather than through Prism. ECF No. 64 at 30, ¶ 53.

10

Prism asserts that Duke “acted with oppression, fraud, and malice, with the intent to unlawfully
deprive Prism of monies and valuable assets and business relationships ….” Id. at 30, ¶ 57.
In Illinois law, tortious interference with contractual relations requires: “1) the existence
of a valid and enforceable contract between the plaintiff and another; (2) the defendant’s
awareness of this contractual relation; (3) the defendant’s intentional and unjustified inducement
of a breach of the contract; (4) a subsequent breach by the other, caused by the defendant’s
wrongful conduct; and (5) damages.” HPI Health Care Servs., Inc. v. Mt. Vernon Hospital, Inc.,
545 N.E.2d 672, 676 (Ill. 1989) (quoting Prudential Ins. Co. of America v. Van Matre, 158 Ill.
App. 3d 298, 304-05, 511 N.E.2d 740, 744 (5th Dist. 1987) (internal quotation omitted)). Prism
made allegations reaching all of these elements: (1) there was a valid, enforceable contract
between Prism and Wienerschnitzel to provide Electro Freeze equipment; (2) Duke was aware
of the contract; (3) Duke intentionally and unjustifiably induced breach of the contract by
refusing to deal through Prism and selling directly to Wienerschnitzel; (4) Duke’s conduct
caused Weinerschnitzel to breach its contract with Prism; and (5) Prism suffered lost income as a
result. ECF No. 64 at 30-31.
Prism does not provide any details about the claim of fraud outside of the threadbare
inclusion of the term itself. Id. at 30, ¶ 57. But tortious interference with contractual relations
does not require a knowing misrepresentation. See HPI Health Care, 545 N.E.2d at 676.
Therefore, because a knowing misrepresentation or fraudulent conduct is not an essential
element of this cause of action, Prism’s allegations currently support a plausible freestanding
nonfraudulent claim. To the extent Prism alleges fraud in this Count, Rule 9(b) is not satisfied.
However, Prism’s remaining allegations—while perhaps lacking the comprehensive
detail demanded by Rule 9(b)—nevertheless meet all the elements of the tort, stating a claim that

11

is both plausible and provides Duke with sufficient notice of the alleged conduct at issue. See
Brooks, 578 F.3d at 581. Thus, Prism has sufficiently stated its tortious interference with
contractual relations claim under Rule 8(a). Accordingly, Duke’s Motion to Dismiss Count VI is
GRANTED in part as to Prism’s allegation of fraud, but otherwise denied.
2. Tortious Interference With Prospective Economic Advantage
Count VII alleges tortious interference with prospective economic advantage. The Illinois
Supreme Court has defined the elements of tortious interference with a prospective economic
advantage as “(1) a reasonable expectancy of entering into a valid business relationship, (2) the
defendant’s knowledge of the expectancy, (3) an intentional or unjustified interference by the
defendant that induced or caused a breach or termination of the expectancy, and (4) damage to
the plaintiff resulting from the defendant’s interference.” Voyles v. Sandia Mortgage Corp., 751
N.E.2d 1126, 1133-34 (Ill. 2001) (quoting Anderson v. Vanden Dorpel, 667 N.E.2d 1296, 1299
(Ill. 1996)).
Prism’s counterclaim sufficiently alleges the first, second, and fourth elements without
dispute. Prism claims: (1) it had a reasonable expectancy of distributing frozen-treat equipment
to existing and prospective customers; (2) Prism’s ordering practices over the years placed Duke
on notice of Prism’s transactions to distribute Duke-made equipment to third parties; and (4)
Duke’s interference with Prism’s existing and prospective business relationships harmed Prism
in excess of $10,000,000. ECF No. 64 at 31-32.
As for the third element, Prism describes four actions by Duke that allegedly constitute
interference inducing termination of expectancy: (1) “wrongfully claiming to have terminated the
Distributor’s Agreement,” (2) “failing to provide non-defective parts and equipment for Prism to
provide to its existing and prospective customers,” (3) “failing to correct defects in Electro

12

Freeze[] parts and equipment,” and (4) “making false representations designed to adversely
affect Prism’s business relationships and prospective economic advantages.” ECF No. 64 at 32.
The first three actions do not sound in fraud. Thus, they are not governed by Rule 9(b)’s
heightened pleading standard, and may survive if they pass muster under Rule 8(a).

See

Kennedy, 348 F.3d at 593. Combined with the other elements of the tort pleaded by Prism, these
three theories each stake out plausible claims for relief for tortious interference with prospective
economic advantage and provide Duke with sufficient notice of the conduct at issue in the claim,
thus meeting Rule 8(a)’s low pleading standard. See Brooks, 578 F.3d at 581.
The fourth action alleges a misrepresentation and thus sounds in fraud.

Even

incorporating by reference Prism’s preceding fraud claims, this claim shares their Rule 9(b)
pleading flaws—e.g., overly broad time period, lack of specific actors, no mention of place or
manner of communications. See ECF No. 64 at 31-33. Similarly, Prism’s assertion that Duke
acted with “fraud” lacks the requisite Rule 9(b) specifics. See id. at 33. Duke’s Motion to
Dismiss is therefore granted as to Prism’s false representations claim, but denied as to the
remaining claims constituting Count VII.
B. Illinois Franchise Disclosure Act
Prism argues that the Agreement establishes it as a franchisee of Duke pursuant to the
Illinois Franchise Disclosure Act (“IFDA”) of 1987, 815 ILCS § 705/1 et seq. ECF No. 64 at 34.
Count VIII of Prism’s counterclaim asserts that Duke violated multiple provisions of the IFDA in
its dealings with Prism. ECF No. 64 at 34-35. Duke seeks dismissal of this claim on the
grounds: (1) Prism’s IFDA claim is time-barred; (2) Duke required no franchise fee of Prism,
and therefore there was no IFDA-cognizable franchise agreement; and (3) Prism is not within the
class protected by the IFDA.

13

1. Statute of Limitations
The IFDA requires that a private civil action under it be brought by the sooner of (1)
three years from the act or transaction constituting the violation at issue, (2) one year after the
franchisee becomes aware of facts or circumstances reasonably indicating that he may have a
claim for relief under the IFDA, or (3) 90 days after the franchisee receives a written notice
disclosing the violation. 815 ILCS 705/27. On January 18, 2011, Duke sent Prism a letter
purporting to terminate the Agreement. Because Prism’s theory of the IFDA violation is that
Duke sought to terminate the putative franchise agreement “prior to the expiration of its term
without cause,” ECF No. 64 at 35, this termination letter constitutes the allegedly unlawful act,
the disclosure of circumstances granting notice of an IFDA violation, and a written notice
disclosing the alleged violation, all at once. Thus, the clock would start running upon Prism’s
receipt of this letter for the shortest of the deadlines, 90 days. See 815 ILCS 705/27.
Prism does not dispute that the 90-day statute of limitations may apply to its claim.
Instead, it argues that a statute of limitations exception under Illinois law bars Duke from
asserting timeliness as a defense. ECF No. 73 at 13. Illinois law allows a defendant to bring an
otherwise-time-barred setoff or counterclaim as long as the plaintiff’s claim arose before the
cause of action brought as a counterclaim became time-barred. 735 ILCS 5/13-207; Bethlehem
Steel Corp. v. Chicago Eastern Corp., 863 F.2d 508, 511 (7th Cir. 1988) (citing Kuh v. Williams,
13 Ill. App. 3d 588, 593, 301 N.E.2d 151, 154 (1st Dist. 1973)). In other words, if Duke’s claim
arose before Prism’s 90-day window expired, then Prism may be able to assert its otherwise
time-barred counterclaim.
Duke’s cause of action against Prism for declaratory judgment arose when Prism refused
to give effect to the Agreement clause allowing either party to terminate the contract on 30 days’

14

notice. ECF No. 105 at 6-7. Prism’s refusal would have occurred sometime after Duke’s written
notice of termination on January 18, 2011. If Prism’s refusal occurred within 90 days from
January 18, 2011, then its claim should be allowed. See 735 ILCS 5/13-207. But if it came after
90 days from January 18, 2011, then its claim will be time-barred. Statute of limitations is an
affirmative defense. Fed. R. Civ. P. 8(c)(1). Because factual scenarios are possible where either
or both of Duke’s causes of action accrued before the IFDA statute of limitations had run on
Prism, Prism has not pleaded itself out of court. See Tamayo v. Blagojevich, 526 F.3d 1074,
1086 (7th Cir. 2008) (citations omitted) (noting that a party has not pleaded itself out of court
until it must contradict its complaint to succeed on the merits).

Therefore, Prism’s IFDA

violation claim may not be dismissed as time-barred at this time.
2. Existence of Franchise Fee
Duke argues that Prism inadequately pleads the existence of a franchise fee requirement
in the parties’ agreement. ECF No. 68 at 12-13. To qualify as a franchise under the IFDA, an
agreement must require that the franchisee pay to the franchisor “directly or indirectly, a
franchise fee of $500 or more.” 815 ILCS 703/3. The IFDA further defines a “franchise fee,” in
pertinent part:
“Franchise fee” means any fee or charge that a franchisee is required to pay directly or
indirectly for the right to enter into a business or sell, resell, or distribute goods, services
or franchises under an agreement, including, but not limited to, any such payment for
goods or services ….1
815 ILCS 705/3(14). A franchise fee “may be present regardless of the designation given to or
the form of the fee … .” 14 Ill. Admin. Code § 200.104. Further, “[a]ny payment(s) in excess of

1

The IFDA specifies a number of payments that are not franchise fees, most notably: “(c) the purchase or agreement
to purchase goods for which there is an established market at a bona fide wholesale price; (d) the payment for
fixtures necessary to operate the business; (e) the payment of rent which reflects payment for the economic value of
the property; or (f) the purchase or agreement to purchase goods for which there is an established market at a bona
fide retail price subject to a bona fide commission or compensation plan.” 815 ILCS 705/3(14)(c)-(f).

15

$500 that is required to be paid by a franchisee to the franchisor … constitutes a franchise fee
unless specifically excluded by Section 3(14) of the Act.” Id. § 200.105.
Thus, the absence of an expressly termed “franchise fee” in the Agreement is not
dispositive. To-Am Equipment Co., Inc. v. Mitsubishi Caterpillar Forklift America, Inc. 152
F.3d 658, 662-63 (7th Cir. 1998). Prism alleged that it (1) was required to assume the debt of a
prior distributor as a condition precedent to entering the Agreement, (2) has made other
payments to Duke to “purchase and carry in good and saleable condition” a required “ample
stock of Duke’s service and repair parts,” and (3) has paid Duke for advertising and promotional
materials. ECF No. 64 at 19. Prism elsewhere alleges that it was required to pay a franchise fee
of $500 or more. Id. at 34. Taken together, these allegations state a plausible claim that a
franchise fee was paid, and therefore meet Rule 8(a)’s notice pleading standard. See Brooks, 578
F.3d at 581.
3. Outside Protected Class
Finally, Duke argues that Prism, describing itself as a Nevada corporation with principal
place of business in Washington, lacks IFDA protection, as the statute only covers franchisees
located in Illinois. ECF No. 68 at 13. The IFDA identifies its purpose as protecting “Illinois
residents” who have suffered at the hands of franchisors. 815 ILCS 705/2(1). Accordingly,
multiple courts have interpreted the IFDA to “protect Illinois residents only.” Highway Equip.
Co. v. Caterpillar, Inc., 908 F.2d 60, 63 (6th Cir. 1990) (holding that IFDA did not cover a Ohio
franchisee’s claim against an Illinois franchisor); see Flynn Beverage, Inc. v. Joseph E. Seagram
& Sons, Inc., 815 F. Supp. 1174, 1178 (C.D. Ill. 1993) (noting that the IFDA’s purpose is “to
protect Illinois franchisors who have suffered substantial losses to franchisors); H.R.R.
Zimmerman Co. v. Tecumseh Products Co., 2001 WL 31018302, at *3 (N.D. Ill. Sept. 9, 2002)

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(“The IFDA’s requirements apply only to franchisees located within the state.”); In re
Montgomery Ward Catalog Sales Litig., 680 F. Supp. 182, 186-87 (E.D. Pa. 1987) (holding that
the IFDA’s legislative history discloses no intent to extend IFDA protection to franchisees not
located in Illinois). Prism claims to be incorporated in Nevada and to have its principal place of
business in Washington. The Agreement contemplates Prism distributing Duke products in
Nevada and California. ECF No. 105, Ex. A at 13. The only argument Prism makes regarding a
claim to be an Illinois franchisee is a recitation of Duke’s jurisdictional pleading. See ECF No.
64 at 35. That is, the Agreement was entered into in Illinois and to be performed in Illinois to the
extent of Duke receiving orders and payment in Illinois, and placing items in shipment “Free on
Board” for Prism’s receipt outside of Illinois. ECF No. 105 at 3. These allegations—including
those cited in Duke’s Complaint—do not plausibly give rise to a reasonable inference that Prism
is a franchisee located in Illinois. See Iqbal, 556 U.S. at 658. Therefore, Duke’s Motion to
Dismiss is granted as to Prism’s claims pursuant to sections 1, 2, 10 and 19 of the IFDA.
Prism additionally asserts a claim under Section 6 of the IFDA, which prohibits
fraudulent practices in the offer or sale of a franchise. Section 6 of the IFDA, which prohibits
fraudulent practices in the offer or sale of a franchise, provides its own jurisdictional limits. It
covers franchise-purchase deals where the offeree is an Illinois domiciliary, the franchisee’s
business is or will be located in Illinois, or the offer or acceptance in the franchise agreement
occurs within Illinois.2 See 815 ILCS 705/6. Prism thus argues that Section 6 implicitly covers
foreign franchisees where the offer for sale of the franchise occurred in Illinois.

2

Section 6 provides, in pertinent part: “For the purposes of this Section 6, a sale of a franchise is made in this state
when: (i) an offer to buy or sell a franchise is made in this State and accepted within or outside of this State, or (ii)
an offer to buy or sell a franchise is made outside of this State and accepted in this State, or (iii) the offeree is
domiciled in this State, or (iv) the franchised business is or will be located in this State.” 815 ILCS 705/6.

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However, the Court need not decide whether Section 6, in contrast with other IFDA
sections, protects franchisees located outside of Illinois.

Because Section 6 prohibits a

fraudulent course of conduct, it sounds in fraud and is therefore subject to Rule 9(b)’s heightened
pleading standard. See Perelli Armstrong Tire Corp., 631 F.3d at 446-47.

In Count VIII, Prism

makes no specific allegations regarding the person, manner, time, or place of this fraud, see
Windy City Metal Fabricators, 536 F.3d at 668, but merely recites the language of Section 6.
ECF No. 64 at 34. While Prism incorporates by reference its allegations of fraudulent conduct in
preceding Counts, these allegations fail to meet Rule 9(b)’s standard, as described. Therefore,
Prism’s claim under Section 6 of the IFDA also lacks Rule 9(b)’s requisite specificity, and
Duke’s Motion to Dismiss is granted as to this claim as well.
C. California Franchise Relations Act
Duke argues that Count IX of Prism’s counterclaim, alleging violations of the California
Franchise Relations Act (“CFRA”), should be dismissed both because it is time-barred and
because Prism inadequately pleaded the existence of a franchise fee, necessary to invoke the
CFRA’s protection. The Court rejects both arguments.
1. Statute of Limitations
Duke asserts that Prism’s counterclaim under the CFRA must be brought within the
limitations periods established in Section 31303 of California Franchise Investment Law
(“CFIL”). Cal. Corp. Code § 31303. However, Section 31303 only applies to actions for
violations of the CFIL. Id. §§ 31300, 31303. Prism’s counterclaim only alleges violations of the
CFRA. ECF No. 64 at 36-38. Accordingly, whether the CFIL limitations period bars Prism’s
complaint is not an issue before this Court.

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2. Existence of Franchise Fee
The franchise fee analysis under the CFRA parallels that under the IFDA. See supra
Section C2. To qualify as a franchise under the CFRA, the franchisee must be required to pay,
“directly or indirectly,” a franchise fee. Cal. Bus. & Prof. Code § 20001(c). The CFRA adopts a
broad definition of “franchise fee.” It is “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 under a franchise agreement
including, but not limited to, any payment for goods or services.” Cal. Bus. & Prof. Code
§ 20007. The provision carves out five categories of potentially requiring a payment that do not
count as “franchise fees.” Id. § 20007(a)-(e). Notably, the payment must exceed $100 on an
annual basis or it is not a “franchise fee.” Id. § 20007(d). Otherwise, a payment may be a
franchise fee “regardless of the designation given to, or the form of, such payment.” Cal. Corp.
Code § 31011. As with the IDFA, Prism has pleaded that it was required to pay a franchise fee.
ECF No. 64 at 37, 87. Prism also alleged multiple payments and obligations to Duke which
could constitute the requisite franchise fee, such as assuming the debt of a prior Duke distributor
or paying Duke for advertising materials. See ECF No. 64 at 19. Prism’s allegations regarding
these expenditures, specifically the requirement to purchase and carry “ample stock” of Duke
products, id., raise the reasonable inference that these putative franchise costs amounted to $100
or more annually. See Iqbal, 556 U.S. at 658. Thus, Prism has sufficiently pleaded the existence
of a franchise fee under Rule 8(a). See Brooks, 578 F.3d at 581.
CONCLUSION
Plaintiff’s Motion to Dismiss, ECF No. 68, is GRANTED in part and DENIED in part.
Plaintiff’s Motion is GRANTED as to Counts III, IV, V, VIII, and portions of Counts VI and VII
of Defendant Prism’s Amended Counterclaim. Plaintiff’s Motion to Dismiss is DENIED as to
Counts II and IX, and portions of Counts VI and VII.
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Plaintiff’s Motion for Leave to File

Replies, ECF No. 75, Ex. 1, is GRANTED; ECF No. 75, Ex. 2, is moot in light of Order of July
25, 2013, ECF No. 104. Defendant Prism is GRANTED leave to amend its counterclaim. If it
so chooses, Prism must file its amended counterclaim by October 15, 2013.

Entered this 30th day of September, 2013.
s/ Sara Darrow
SARA DARROW
UNITED STATES DISTRICT JUDGE

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