U-Bake Rochester, LLC et al v. Utecht et al
Filing
31
MEMORANDUM OPINION AND ORDER granting 11 Defendants' Motion for Summary Judgment; denying 16 Plaintiffs' Motion for Summary Judgment; all claims in the Complaint 1 are dismissed with prejudice (Written Opinion). Signed by Judge Ann D. Montgomery on 01/21/2014. (TLU)
UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
U-Bake Rochester, LLC, Charles A. Baker,
and Dianna L. Baker,
Plaintiffs,
MEMORANDUM OPINION
AND ORDER
Civil No. 12-1738 ADM/SER
v.
Todd Utecht and Utecht Bakeries, LLC,
Defendants.
______________________________________________________________________________
Jerrie M. Hayes, Esq., and James A. Godwin, Esq., Wendland Utz, Ltd., Rochester, MN, on
behalf of Plaintiffs.
James J. Long, Esq., and Erin O. Dungan, Esq., Briggs and Morgan, P.A., Minneapolis, MN, on
behalf of Defendants.
______________________________________________________________________________
I. INTRODUCTION
On November 21, 2013, the undersigned United States District Judge heard oral
argument on Defendants Todd Utecht (“Utecht”) and Utecht Bakeries, LLC (“Utecht Bakeries”)
Motion for Summary Judgment [Docket No. 11] and Plaintiffs U-Bake Rochester, LLC (“UBake Rochester”), Charles A. Baker, and Dianna L. Baker’s Motion for Summary Judgment
[Docket No. 16]. For the reasons set forth below, Defendants’ Motion is granted and Plaintiffs’
Motion is denied.
II. BACKGROUND1
This action arises out of a Trademark License Agreement (“TLA”) between U-Bake
Rochester and Utecht Bakeries. Plaintiffs contend that although the TLA is labeled as a license
1
On a motion for summary judgment, the Court views the evidence in the light most
favorable to the nonmoving party. Ludwig v. Anderson, 54 F.3d 465, 470 (8th Cir. 1995). As
both parties have moved for summary judgment, any disputed facts are noted.
agreement, it meets the statutory definition of a franchise under the Minnesota Franchise Act
(“MFA”) and the Wisconsin Franchise Investment Law (“WFIL”). Plaintiffs allege Defendants
violated these statutes by failing to register as a franchise, failing to comply with the statutory
disclosure requirements, and misrepresenting the start-up costs, potential sales, and profits
involved in the opening and operation of a U-Bake store. Compl. [Docket No. 1] ¶¶ 45-73.
Plaintiffs also assert claims for common law fraud and negligent misrepresentation. Id. ¶¶ 8195.
Plaintiffs Charles and Dianna Baker are married and own Plaintiff U-Bake Rochester, a
Minnesota entity. Affidavit of James J. Long, Oct. 10, 2013 [Docket No. 14] (“Long Aff.”) Ex.
A (“Charles Baker Dep.”) at 22:4-6; Ex. C (“Dianna Baker Dep.”) at 12:13-15. Defendant Todd
Utecht is vice president and general manager of Utecht Bakeries, a Wisconsin entity that
operates a frozen dough and bulk foods store in Wausau, Wisconsin. Id. Ex. E (“Utecht Dep.”)
at 12:20-22; 13:1-4. Utecht Bakeries owns the U-BAKE trademark. Id. at 13:5-9; 18:22–19-2.
Utecht Bakeries has entered into several trademark license agreements granting the right to use
the U-BAKE trademark with stores located mostly in Wisconsin. Id. at 46:24–47:6; 133:16-19.
In early 2009, the Bakers, then residents of Rochester, Minnesota, began searching for a
business opportunity to supplement their income and retirement. Charles Baker Dep. at
53:18–54:10. At that time, Charles Baker worked approximately 80 hours per week as a
pharmaceutical salesperson, and Dianna Baker worked as a pre-kindergarten screener for the
Rochester Public Schools. Id. at 18:4-15; 19:10-23; Dianna Baker Dep. at 11:16–12:12. Using
the internet, the Bakers investigated food-related franchises such as fast food chains and coffee
shops but decided the initial franchise investment was too expensive. Charles Baker Dep. at
2
55:11–58:16. Through their research, the Bakers learned that franchisors are generally required
to provide prospective franchisees with a financial disclosure document (“FDD”). Id. at
59:16–60:8.
The Bakers became aware of U-BAKE products through their daughter, who lived near a
U-BAKE licensed store in Savage, Minnesota. Id. at 60:19-61:5; Dianna Baker Dep. at 21:3-13.
The Bakers visited the Savage store and spoke with its owners several times before contacting
Utecht to discuss the possibility of selling U-BAKE products. Charles Baker Dep. at
73:21–74:2. The Bakers made the initial contact with Utecht; Utecht did not approach or solicit
the Bakers. See Dianna Baker Dep. at 21:11-22.
On December 29, 2009, the Bakers met with Utecht at the Utecht Bakeries’ Wausau,
Wisconsin store. Id. at 21:19-24. Utecht informed the Bakers they would be buying permission
to use the U-BAKE trademark and that the opportunity “was not a franchise.” Charles Baker
Dep. at 138:18–139:1. Charles Baker’s handwritten notes from the meeting recorded, “buying
trademark not a franchise.” Id. at 141:2-13 (emphasis in original); Long Aff. Ex. G. Utecht also
encouraged the Bakers to visit and meet the owners of the U-BAKE store in La Crosse,
Wisconsin, and to have further discussions with the Savage, Minnesota, store owner before
making the decision to go forward with the business opportunity. Charles Baker Dep. at
65:20–66:16. The Bakers made several trips to the La Crosse store and spoke with the owners
by phone approximately a dozen times. Id. at 70:1-13.
Approximately one week after the Bakers’ first meeting with Utecht, Charles Baker sent
a January 5, 2010 email to Utecht stating that John Hicks, their banker at Wells Fargo who was
working on their Small Business Association (“SBA”) loan, had requested a copy of the
3
franchise agreement and FDD. Id. at 146:14–147:2. Utecht responded that there was no FDD.
Id. at 147:3-6.
In January or February of 2010, Charles Baker prepared an extensive business plan for
U-Bake Rochester (the “Business Plan”) that the Bakers presented to the SBA for their SBA
loan. Id. at 78:1-14; Long Aff. Ex. H. The Business Plan touted the benefits of not being a
franchise, explaining:
Not being a franchise, you have the option of partnering with other
specialty products or taking a different focus to increase sales at your
discretion. You are not limited by a franchise agreement with what
has to be on the shelf.
Long Aff. Ex. H, at 10. The Business Plan also projected start up costs of $205,000, increased
sales of 30% from year one to year two, and increased sales of 17% from year two to year three.
Charles Baker Dep. at 132:25–134:6; 137:10–138:12. Charles Baker stated the accuracy of the
information in the Business Plan “was important because it was what we used to try to make a
decision whether or not to go forward.” Id. at 81:10-15.
Prior to the parties’ execution of the TLA, Utecht provided the Bakers with a draft of the
agreement. Id. at 144:3-7. The Bakers gave the draft to their attorney, who is a partner in the
firm that serves as Plaintiffs’ counsel of record in this case. Id. at 105:20–106:8. The attorney
reviewed the draft, suggested changes, and made revisions. Id. at 30:6-19; 106:16–107:11. All
of the suggested changes and revisions were incorporated into the final version of the TLA,
which the attorney then recommended the Plaintiffs sign. Id. at 107:20-25.
The parties executed the TLA in early May 2010. See Long Aff. Ex. F (“TLA”). The
TLA provides that Utecht Bakeries will grant U-Bake Rochester a license to use the U-BAKE
trademark, and requires U-Bake Rochester to pay Utecht Bakeries an initial license fee of
4
$30,000 and 2.5% of its monthly gross receipts. Id. ¶¶ 1, 2. The TLA further provides in
relevant part:
2. UTECHT BAKERIES[,] L.L.C. will assist and advise LICENSEE
[U-Bake Rochester] with the setup and arrangement of licenses, on
the inventory ordering process, bookkeeping procedures of the
STORE level, and introduce LICENSEE to the appropriate suppliers
of inventory.
3. An employee of UTECHT BAKERIES, L.L.C. will be on the
premises and licensed during normal business hours for a period of
time not to exceed two (2) weeks. The first week being one week
immediately prior to the STORE opening and the second week being
the first week the STORE is open for business. Employees of
UTECHT BAKERIES, L.L.C. will be on the premises to assist with
the day-to-day operations of the STORE including the training of
employees licensed in the operation of the STORE, and to include
instructions in the process of baking merchandise offered for sale.
...
9. It is understood and agreed by the parties hereto that UTECHT
will not exercise any control over Licensee’s Method of Operation,
Business Organization, Promotional Activities, Management,
Marketing Plan or Business Affairs, and that UTECHT has not and
will not furnish assistance to LICENSEE in areas relating to
Licensee’s Method of Operation, Business Organization, Promotional
Activities, Management, Marketing Plan or Business Affairs.
...
10. LICENSEE acknowledges that UTECHT is not its partner, joint
venture or franchiser, and that the relationship between LICENSEE
and UTECHT is not a franchise relationship but is that of LICENSEE
and LICENSOR, and that LICENSEE is not required to follow any
specific merchandizing plan set forth by UTECHT or anyone
associated with UTECHT.
11. It is understood and agreed by the parties hereto that UTECHT
has made NO claims about actual or potential earnings.
12. It is understood and agreed by the parties hereto that no oral
agreements of any kind have been made and that this agreement
supersedes all prior representations and constitutes the entire
understanding and agreement between the LICENSEE and UTECHT,
5
and may be modified only in writing.
Id. ¶¶ 2-3, 9-12 (underlining in original).
Plaintiffs opened the U-Bake Rochester store in September 2010. See Long Aff. Ex. I.
The store grossed over $415,000 in its first fiscal year. Charles Baker Dep. at 134:18-22.
During 2011, sales declined sharply, and the store was not profitable. Dianna Baker Dep. at
62:6-11. The Bakers “were having to put money in to keep the doors open.” Id. at 62:13-14.
In March of 2012, after the Bakers’ store had been operating for 18 months, Utecht
informed Charles Baker that the Savage, Minnesota, location had filed a lawsuit against Utecht
Bakeries. Charles Baker Dep. at 148:2-5. The lawsuit alleged, among other things, violations of
the MFA and the WFIL for failure to register as a franchise and for alleged misrepresentations
relating to the sale of a franchise. See Long Aff. Ex. L.2 Upon receiving this information,
Charles Baker “had a meeting immediately” with the same attorney who had reviewed, revised,
and advised them to sign the TLA. Dianna Baker Dep. at 64:17-19. On April 2, 2012, the
attorney sent Utecht a letter stating, “your arrangement with our client undoubtedly constitutes a
franchise under Minnesota law.” Long Aff. Ex. J.
Plaintiffs filed this action on July 19, 2012. They allege the TLA meets the statutory
definition of a franchise under the MFA and the WFIL, and that Defendants have violated the
statutory registration and disclosure requirements (Counts I and III) and made false statements
concerning U-Bake Rochester’s start up costs, potential sales, and prospective profits (Counts II
and IV). Plaintiffs further allege Defendants are liable for common law fraud and negligent
2
The franchise claims in the lawsuit filed by the Savage, Minnesota, store owners were
later dismissed based on the statute of limitations. See id. at 1, 8.
6
misrepresentation (Counts VI and VII) based on the alleged misrepresentations about start up
costs, potential sales, and prospective profits.3 Plaintiffs seek recission of the TLA, damages of
approximately $250,000, and attorneys’ fees and costs.
Defendants argue Plaintiffs are equitably estopped from claiming Defendants violated the
registration and disclosure provisions of the MFA and WFIL. Defendants further argue no
misrepresentations were made in connection with the sale of the trademark license, and that even
if misrepresentations were made, Plaintiffs did not reasonably rely on them.
III. DISCUSSION
A. Summary Judgment Standard
Federal Rule of Civil Procedure 56(a) provides that summary judgment shall be granted
if “there is no genuine dispute as to any material fact and the movant is entitled to judgment as a
matter of law.” Fed. R. Civ. P. 56(a); see Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475
U.S. 574, 587 (1986) (citing Fed. R. Civ. P. 56(c)).4 On a motion for summary judgment, the
court views the evidence in the light most favorable to the nonmoving party, giving the
nonmovant the “benefit of all reasonable inferences to be drawn from the facts.” Schrader v.
Royal Caribbean Cruise Line, Inc., 952 F.2d 1008, 1013 (8th Cir. 1991) (quoting Woodsmith
Pub. Co. v. Meredith Corp., 904 F.2d 1244, 1247 (8th Cir. 1990)). The nonmoving party,
however, may not “rest on mere allegations or denials, but must demonstrate on the record the
3
The Complaint also alleges a claim under the Minnesota Consumer Fraud Act, Minn.
Stat. § 325F.68 (“MCFA”). See Compl. ¶¶ 74-80 (Count V). However, Plaintiffs did not
address the MCFA claim in their briefs and conceded at oral argument that the claim is not
viable and should be dismissed.
4
The summary judgment standard was previously located in Rule 56(c).
7
existence of specific facts which create a genuine issue for trial.” Krenik v. Cnty. of Le Sueur,
47 F.3d 953, 957 (8th Cir. 1995).
B. Analysis
1. Alleged Violations of Franchise Statutes
Plaintiffs allege the TLA was a franchise as defined by the Minnesota and Wisconsin
franchise statutes. The definitions of a franchise under the MFA and the WFIL are similar. Both
define a franchise as a contract or agreement that includes three essential elements, two of which
are: (1) the franchisee is granted the right to use a franchisor’s commercial symbol or trademark;
and (2) the franchisee pays, directly or indirectly, a franchise fee. See Minn. Stat. § 80C.01,
subd. 4(a)(i),(iii); Wis. Stat. § 553.03(4)(a). The third element of a franchise under the MFA is
that the “franchisor and franchisee have a community of interest in the marketing of goods or
services.” Minn. Stat. § 80C.01, subd. 4(a)(ii). The third element of a franchise under the WFIL
is that the franchisee is granted the right to offer, sell, or distribute goods or services “under a
marketing plan or system prescribed or suggested in substantial part by a franchisor.” Wis. Stat.
§ 553.03(4)(a)(1). Assuming without deciding that the TLA meets the definition of a franchise
under the MFA and the WFIL, Plaintiffs’ claims under these franchise statutes nevertheless fail
because Plaintiffs are estopped from claiming Defendants violated the statutes’ registration and
financial disclosure requirements, and because Plaintiffs did not rely on Defendants’ alleged
misrepresentations.
a. Failure to Register and Disclose (Counts I and III)
Plaintiffs allege Defendants failed to register as a franchisor and to provide Defendants
with the requisite financial disclosures under §§ 80C.02 and 80C.06 of the MFA (Count I) and
8
§§ 553.21 and 553.27 of the WFIL (Count III). Under these provisions, one who offers to sell a
franchise must file an effective registration with the state and provide potential franchisees with
a public offering statement or offering circular. Minn. Stat. § 80C.02 (registration requirement),
Minn. Stat. § 80C.06, subd. 5 (public offering requirement); Wis. Stat. § 553.21 (registration
requirement), Wis. Stat. § 553.27(4) (offering circular requirement). There is no dispute that
Defendants did not register as a franchisor and did not provide Plaintiffs with a public offering
statement or offering circular.
Defendants argue Plaintiffs are equitably estopped from asserting the registration and
disclosure provisions have been violated. “Equitable estoppel prevents the assertion of
otherwise valid rights where one has acted in such a way as to induce another party to
detrimentally rely on those actions.” Drake v. Reile’s Transfer & Delivery, Inc., 613 N.W.2d
428, 434 (Minn. Ct. App. 2000).
Plaintiffs contend the defense of equitable estoppel is precluded by anti-waiver clauses in
the MFA and WFIL. Those clauses prevent parties from contractually agreeing to waive
compliance with any of the franchise statute’s provisions. See Minn. Stat. § 80C.21; Wis. Stat. §
553.76. However, Defendants’ defense is one of estoppel, not contractual waiver, as Defendants
argue Plaintiffs engaged in conduct that estops them from now claiming violations of the MFA
and WFIL. See Milas v. Labor Ass’n of Wis., Inc., 571 N.W.2d 656, 660 (Wis. 1997) (“The
estoppel doctrine . . . focuses on the conduct of the parties.”). Minnesota and Wisconsin law
both provide that equitable estoppel may apply to prevent a franchisee from obtaining recission
of a franchise agreement based on technical violations of Minnesota and Wisconsin’s franchise
statutes. See Clapp v. Peterson, 327 N.W.2d 585, 587 (Minn. 1982) (applying equitable estoppel
9
to avoid inequitable result in action for recission based on alleged registration and disclosure
violations of the MFA); Dr. Performance of Minn., Inc. v. Dr. Performance Mgmt., L.L.C., No.
Civ. 01-1524 (DSD/SRN), 2002 WL 31628440, at *6 (D. Minn. Nov. 12, 2002) (“Both state and
federal courts applying Minnesota law have held that franchisees seeking recission and
restitution under the MFA must first overcome any equitable defenses to recission.”); Sterling
Vision DKM, Inc. v. Gordon, 976 F. Supp. 1194, 1200 (E.D. Wis. 1997) (analyzing equitable
defenses of waiver and estoppel to claim for failure to register under WFIL). Therefore,
Defendants are not precluded from asserting the defense of equitable estoppel.
The elements for equitable estoppel are very similar under Minnesota and Wisconsin law.
Minnesota law requires a party to prove: (1) promises or inducements were made; (2) the party
reasonably relied upon the promises; and (3) the party “will be harmed if estoppel is not
applied.” Pollard v. Southdale Gardens of Edina Condo. Ass’n, Inc., 698 N.W.2d 449, 454
(Minn. Ct. App. 2005) (citing Hydra-Mac, Inc. v. Onan Corp., 450 N.W.2d 913, 919 (Minn.
1990)). Wisconsin law requires a party to show: (1) a person with “knowledge of the true facts”
made a misleading communication to another through “words, conduct or silence;” (2) the other
relied on the communication; and (3) the other would be materially harmed if the party were
“later permitted to assert any claim inconsistent with his earlier conduct.” Sterling Vision, 976
F. Supp. at 1200.
Here, the words, conduct, and silence of Plaintiffs and their attorney equitably estop
Plaintiffs from now asserting violations of the MFA and WFIL’s registration and disclosure
requirements. Plaintiffs’ attorney contributed to the drafting of the TLA by suggesting changes
and drafting revisions, all of which were incorporated into the final version of the business
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arrangement set forth in the TLA. The same attorney expressed his knowledge of the type of
business arrangement that constitutes a franchise. See Long Aff. Ex. J (letter from Plaintiffs’
attorney stating U-Bake Rochester’s arrangement with Defendants “undoubtedly constitutes a
franchise”).5 This knowledge is imputed to Plaintiffs. See, e.g., Benson v. Sbarro Licensing,
Inc., Bus. Franchise Guide (CCH) ¶ 7967 (Minn. 2d Jud. Dist. 1983) (stating plaintiff’s
attorney’s “knowledge of the illegality of the sale of the franchise and the right to exercise the
remedy of recission . . . is imputed to the plaintiffs”). Thus, Plaintiffs, through their attorney,
were aware of the type of business arrangement that constitutes a franchise.
The same characteristics of the business relationship which Plaintiffs now argue show the
existence of a franchise were largely present when the terms of the TLA were reviewed, revised,
and approved by Plaintiffs’ attorney. For example, the TLA agreement grants Plaintiffs the right
to use the U-BAKE trademark, requires Plaintiffs to pay an initial fee and monthly royalty fees,
and obligates Defendants to assist with store set up, inventory ordering process, bookkeeping
procedures and supplier introductions. See TLA ¶¶ 1-3. During the process of reviewing and
revising the TLA, Plaintiffs remained silent as to any assertion that these terms created a
franchise. Plaintiffs also left intact the provision in the TLA that expressly states the business
relationship is not a franchise relationship. See id. ¶ 10. Additionally, Plaintiffs knew at the
5
There is no basis to dispute that Plaintiffs’ attorney possessed this knowledge at the
time he reviewed, changed, and recommended execution of the TLA in 2010. When Plaintiffs’
attorney was asked what he had done and thought in connection with the draft and revisions of
the TLA, he refused to answer based upon Plaintiffs’ assertion of the attorney-client privilege.
See Long Aff. Ex. D at 7:2-13 (stating Plaintiffs were unwilling to waive attorney-client
privilege); 15:25–19:8 (refusing to answer on basis of attorney-client privilege); 23:11-13
(same); 28:2-19 (same); 33:13–34:8 (same). Thus, the only evidence of record is that Plaintiffs’
attorney knew at the time the TLA was negotiated and executed that the existence of a franchise
is determined by the examining the characteristics of the parties’ business arrangement.
11
time they executed the TLA that they had not been provided with an FDD, as Utecht told Charles
Baker an FDD did not exist.
In addition to their passive conduct representing they understood the business
arrangement was not a franchise, Plaintiffs engaged in affirmative conduct consistent with this
position. For example, Plaintiffs prepared a Business Plan that expressly stated the business was
not a franchise. Plaintiffs touted the non-franchise relationship as a benefit when seeking a loan
from the SBA. Thus, Plaintiffs represented through words, silence, and conduct that their
business arrangement with Defendants was not a franchise. In turn, Defendants entered into the
TLA without registering as a franchisor and without providing Plaintiffs with an FDD.
After Plaintiffs had been operating under the U-BAKE trademark for 18 months, the
same attorney who had assisted with the drafting and approval of the TLA made an about-face
and asserted the arrangement “undoubtedly constitutes a franchise under Minnesota law.” Long
Aff. Ex. J. Plaintiffs then hired the attorney’s law firm to file this lawsuit alleging inter alia that
the TLA created a franchise and that Defendants were required to register as a franchisor and
provide Plaintiffs with an FDD. Plaintiffs seeks recission of the TLA as well as $250,000 in
damages and their attorneys’ fees and costs in bringing this action. Defendants will be
materially harmed if Plaintiffs are now allowed to assert claims that are entirely inconsistent with
their earlier representations and conduct.
Applying estoppel under the unique circumstances here does not defeat the purpose of
the franchise statutes, which are meant to “protect potential franchisees . . . from unfair contracts
and other prevalent and previously unregulated abuses in a growing franchise industry.” Martin
Investors, Inc. v. Vander Bie, 269 N.W.2d 868, 872 (Minn. 1978). This is not a fact pattern
12
where a putative franchisee was lured into purchasing a franchise and duped into relinquishing
unknown rights. Plaintiffs sought out Utecht to pursue this business opportunity. The TLA was
the product of an informed and deliberate negotiation process, as evidenced by Plaintiffs’
attorney’s active involvement in revising the terms of the TLA and his knowledge that the
existence of a franchise is determined by the characteristics of a business relationship.
Significantly, Plaintiffs affirmatively adopted the no-franchise position when it inured to
their benefit, such as when they were seeking an SBA loan for their business. They maintained
this position throughout their first year of operations, when sales exceeded the figures projected
in their Business Plan. It was not until sales declined and Plaintiffs learned of the Savage store’s
allegations that Plaintiffs’ attorney—the same individual who revised and approved the TLA
expressly stating the relationship was not a franchise—took a completely opposite stance and
claimed the terms of the negotiated business arrangement “undoubtedly” constituted a franchise.
Allowing Plaintiffs to insist on their strict rights under the franchise laws based on these facts
would be inequitable. See Clapp, 327 N.W.2d at 587 (“To hold that the legislature intended that
franchisees have the absolute right to rescind a franchise agreement which violates the
Minnesota Franchise Act could lead to harsh and unfair results where no actual fraud is
present.”). Given Plaintiffs’ earlier conduct, they should not now be allowed to use the franchise
laws as an escape hatch to undo a business decision they now regret. See id. at 586 (analogizing
MFA to the Minnesota Blue Sky Law, which was not “meant to be used to protect the investor
from all of his errors of business judgment no matter how unrelated to, or distant from, the sale
of unregistered securities”) (quoting Logan v. Panuska, 293 N.W.2d 359, 363 (Minn. 1980)).
Accordingly, Plaintiffs are equitably estopped from claiming Defendants violated the
13
registration and disclosure requirements of the Minnesota and Wisconsin franchise statutes, and
summary judgment is granted to Defendants on Counts I and III.
b. Misrepresentations under MFA and WFIL (Counts II and IV)
Plaintiffs also allege Defendants violated the MFA and WFIL by falsely representing that
sales from the Rochester U-Bake Store would be between $300,000-$400,000 the first year, the
net profit for the operation would be 10%, that sales would increase by 10% each year, and that
the start up costs for the business would be $132,970. Compl. ¶¶ 12, 15-16, 18, 81-88.
The Minnesota and Wisconsin franchise statutes include highly similar anti-fraud
provisions. Both prohibit the offer or sale of a franchise “by means of any written or oral
communication” that includes “an untrue statement of a material fact.” See Minn. Stat. §
80C.13, subd. 2; Wis. Stat. § 553.41(3).
To prevail on a misrepresentation claim under the MFA, a plaintiff must prove it
reasonably relied on the misrepresentation. See Teng Moua v. Jani-King of Minn., Inc., 810 F.
Supp. 2d 882, 891 (D. Minn. 2011) (acknowledging difference of opinion on whether reasonable
reliance required for MFA misrepresentation claim and concluding reasonable reliance a
necessary element); see also Ellering v. Sellstate Realty Sys. Network, Inc., 801 F. Supp. 2d 834,
845 n.13 (D. Minn. 2011) (rejecting MFA claim where plaintiffs did not reasonably rely on
alleged misrepresentations); but see Randall v. Lady of Am. Franchise Corp., 532 F. Supp. 2d
1071, 1086 (D. Minn. 2007) (“[T]he Court is not convinced that justifiable or reasonable reliance
is an element of a claim for misrepresentation under the Minnesota Franchise Act.”). Reliance is
unreasonable as a matter of law where an oral representation is “plainly contradicted by the
terms of [a] written contract.” Crowell v. Campbell Soup Co., 264 F.3d 756, 762 (8th Cir.
14
2001); see also Ellering, 801 F. Supp. 2d at 844-45 (dismissing MFA claim premised on earnings
representation where agreement expressly disclaimed such representations); Kieland v. Rocky
Mountain Chocolate Factory, Inc., Civil No. 05-150, 2006 WL 2990336, at *8 (D. Minn. Oct.
18, 2006) (same).
To establish liability for a misrepresentation under the WFIL, a plaintiff must prove at
least actual reliance:
Any person who violates s. 553.41(3), (4) or (5) is liable for damages
to any person who does not know or have cause to believe that the
statement or representation was false or misleading and who, while
relying upon the statement or representation, purchased a franchise
....
Wis. Stat. § 553.51(2) (emphasis added); see also Simos v. Embassy Suites, Inc., 983 F.2d 1404,
1410 (7th Cir. 1993) (stating “the enforcement provisions of the WFIL essentially write the
element of detrimental reliance into the statute”).
The alleged misrepresentations concerning start up costs and yearly sales increases do
not satisfy the elements for a claim under the MFA or the WFIL because the undisputed
evidence shows Plaintiffs did not actually or reasonably rely on those statements. The Business
Plan prepared by Charles Baker projects start up costs of $205,000 rather than the $132,000
figure allegedly presented by Utecht. Charles Baker testified that he did not rely on the
$132,000 figure:
Q. So you were relying on the 205 number that you came up with,
not the 132,000 number?
A. At the—at this point, yes.
Charles Baker Dep. at 138:10-12. The Business Plan also projected a 30% increase from years
one to two, and a 17% increase from years two to three, rather than the 10% yearly increases
15
allegedly represented by Utecht. Id. at 132:25–134:6. Charles Baker admits Plaintiffs relied on
the figures in the Business Plan “to make a decision whether or not to go forward.” Id. at 81:1015. Thus, Plaintiffs cannot satisfy the element of actual reliance for the statements concerning
start up costs and yearly sales increases. Furthermore, any reliance on Utecht’s oral
representations as to yearly sales would not have been reasonable because the representations are
completely contradicted by the terms of the TLA. The TLA explicitly states “UTECHT has
made NO claims about actual or potential earnings.” TLA ¶ 11 (underlining in original).
Finally, the alleged representation that Plaintiffs would achieve sales of $300,000 to $400,000 in
the first year is not actionable because it was true: Plaintiffs admit first year sales were $415,000.
Thus, Plaintiffs cannot satisfy the elements of a misrepresentation claim under the MFA
or the WFIL, and Defendants are granted summary judgment on Counts II and IV.
2. Common Law Fraud and Negligent Misrepresentation (Counts VI and VII)
Plaintiffs also assert claims for common law fraud and negligent misrepresentation based
on Defendants’ alleged representations concerning first year sales, yearly sales increases, and
start up costs. Compl. ¶¶ 12, 15-16, 18, 81-95.
Under both Minnesota and Wisconsin common law, the elements of a fraud claim include
a plaintiff’s actual and reasonable reliance on a misrepresentation. See Hoyt Props., Inc. v. Prod.
Res. Grp., L.L.C., 736 N.W.2d 313, 320-21 (Minn. 2007) (“To prevail on a claim of fraudulent
misrepresentation, the complaining party must set forth evidence demonstrating both actual and
reasonable reliance.”); Ritchie v. Clappier, 326 N.W.2d 131, 134 (Wis. Ct. App. 1982) (stating
fraud elements are false representation made with intent to defraud and justifiable reliance by
injured party on the misrepresentation). Actual and reasonable reliance are also required to
16
prove negligent misrepresentation under Minnesota and Wisconsin law. See Williams v. Smith,
820 N.W.2d 807, 815 (Minn. 2012) (listing justifiable reliance by plaintiff as an element of
negligent misrepresentation); Schweiger v. Loewi & Co., Inc., 221 N.W.2d 882, 887 (Wis. 1974)
(stating an element for negligent misrepresentation claim is “[t]he plaintiff must believe such
representation to be true and rely thereon to his damage”); Amcore Bank v. Heus Mfg. LLC, No.
2011AP935, 2012 WL 385495, at *5 (Wis. Ct. App. Feb. 8, 2012) (“A representation upon
which no reasonable reliance may be placed will not support a [negligent] misrepresentation
action.”).
As discussed above, Plaintiffs did not actually or reasonably rely on Defendants’ alleged
misrepresentations. Therefore, summary judgment is granted to Defendants on the claims for
common law fraud and negligent misrepresentation alleged in Counts VI and VII.
IV. CONCLUSION
Based upon the foregoing, and all the files, records, and proceedings herein, IT IS
HEREBY ORDERED:
1.
Defendants’ Motion for Summary Judgment [Docket No. 11] is GRANTED; and
2.
Plaintiffs’ Motion for Summary Judgment [Docket No. 16] is DENIED.
3.
All claims in the Complaint [Docket No. 1] are dismissed with prejudice.
LET JUDGMENT BE ENTERED ACCORDINGLY.
BY THE COURT:
s/Ann D. Montgomery
ANN D. MONTGOMERY
U.S. DISTRICT JUDGE
Dated: January 21, 2014.
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