United States District Court, S.D. Indiana, Indianapolis Division
OPINION AND ORDER ON MOTION TO DISMISS (DKTS. 9,
EVANS BARKER, JUDGE
Gre-Ter Enterprises (“Gre-Ter”), an Indiana
corporation, sued defendants Management Recruiters
International, a Delaware corporation, and its
Recruiters”) for breach of a franchise agreement and
violations of the Indiana Franchise Act (“Franchise
Act”), Ind. Code ch. 23-2-2.5, and the Indiana
Deceptive Franchise Practices Act (“Practices
Act”). Ind. Code ch. 23-2-2.7. Management Recruiters
has moved to dismiss Gre-Ter's complaint for failure to
state a claim. Dkt. 9. Management Recruiters also seeks oral
argument on its motion. Dkt. 12.
reasons explained below, the motion to dismiss is granted in
part and denied in part. Because the briefs adequately
present the issues for decision, we deny the motion for oral
and Procedural Background
complaint alleges the following, which, read together with
the materials attached to the complaint,  we take as true
for the purposes of the instant motion. Management Recruiters
is a franchisor of recruiting and contract-staffing
businesses. In 1998 and again in 2005, Gre-Ter entered into
franchise agreements with Management Recruiters (“the
1998 agreement” and “the 2005 agreement”;
together, “the franchise agreements”). For at
least part of the terms of the franchise agreements,
Gre-Ter's interest in the franchise has been shared with
several individual franchisees, at least some of whom were or
are Gre-Ter shareholders. This lawsuit, however, has been
brought by Gre-Ter only.
1998 agreement granted Gre-Ter the exclusive right to operate
a franchise office in the territory of Boone County, Indiana.
No. restrictions were placed on Gre-Ter's right to do
business outside the territory from its Boone County office,
nor on the right of other franchisees to do business within
Boone County from offices outside the territory. The 2005
agreement granted Gre-Ter the same rights for the territory
of Hamilton County, Indiana, excluding the city of
Noblesville. But at the time this case was filed, Management
Recruiters's website informed prospective franchisees
that its franchises have “no territory or border
restrictions[, ]” and that their prospective
“success is not limited by restrictive franchise
territories.” Compl. ¶ 50. In this way or in
others, Management Recruiters “ha[s] allowed other
franchisees to locate their offices and operate within”
Gre-Ter's exclusive territory. Id. ¶ 51.
franchise agreements further provide that Gre-Ter would pay
to Management Recruiters a “national advertising fee,
” Dkt. 1 Ex. A, at 22 (1998 agreement), or an
“advertising, marketing, and public relations fee,
” id. at 159 (2005 agreement), equal to
one-half percent of Gre-Ter's gross receipts from the
franchise. Other than their designation as advertising fees,
the franchise agreements specified nothing about what
Management Recruiters was to do with the funds so collected.
The 2005 agreement provided that the fees were “for
[Management Recruiters's] benefit[.]” Id.
franchise agreements were occasionally amended. In 2002, four
new shareholders purchased stock in Gre-Ter. In 2005,
Gre-Ter's majority shareholders transferred control of
the corporation to its minority shareholders. Both
transactions were memorialized in the second and fifth
amendments to the franchise agreements, respectively. See
Id. at 36 (second amendment),  174 (fifth
amendment). In 2015, the thirteenth amendment to the
franchise agreements memorialized the transfer of a portion
of the individual franchisees' interest in the franchise
to a new individual. See Id. at 299.
are required by state and federal law to make certain
disclosures to prospective franchisees. 16 C.F.R. §
436.2(a); Ind. Code § 23-2-2.5-13. The complaint does
not allege that Management Recruiters failed to make the
required disclosures to Gre-Ter before it became a franchisee
of Management Recruiters in 1998 or 2005. The complaint does
allege that, in connection with the changes to Gre-Ter's
ownership structure memorialized in the second and fifth
amendments, Management Recruiters supplied Gre-Ter with
copies of its 2002 and 2004 disclosure statements (“the
2002 disclosure statement” and “the 2004
disclosure statement”; together, “the disclosure
statements”). The complaint alleges further that
Management Recruiters failed to supply Gre-Ter with its
newest disclosure statement upon the 2015 transfer
memorialized in the thirteenth amendment.
other requirements, federal regulation required the
disclosure statements to state “the franchisor's
principal assistance and related obligations” with
respect to the “franchisor's assistance,
advertising, computer systems, and training.” 16 C.F.R.
§ 436.5(k) (initial capitals omitted). The regulation
instructed that, “[f]or each obligation, ” the
franchisor was to “cite the section number of the
[standard or form] franchise agreement imposing the
obligation.” Id. The disclosure statements
dutifully included a statement of the “Franchisor's
Obligations, ” with sections for inter alia
“Marketing and Advertising.” Dkt. 1 Ex. A, at 191
(2004 disclosure statement), 54 (2002 disclosure statement).
this heading, Management Recruiters disclosed that they
administered an “Advertising, Marketing and Public
Relations Fund (the ‘Fund'), ” id.
at 191 (2004 disclosure statement), 54 (2002 disclosure
statement), which was supported by franchisees'
advertising fees. The disclosure statements represented that
“[t]he Fund is used exclusively” for advertising
and “any other activities which [Management Recruiters]
believes will enhance the image of [its] offices.”
Id. at 191 (2004 disclosure statement), 54 (2002
disclosure statement). The disclosure statements represented
further that Management Recruiters would supply franchisees
with an annual accounting of payments into and from the Fund.
While every other section of the disclosure statements
describing the franchisor's obligations cited the section
number of Management Recruiters's standard franchise
agreement that imposed the particular obligation described,
none of the disclosures relating to advertising referred to
any part of the standard franchise agreement.
April 2017, Gre-Ter received a “Rep Update
article” from Management Recruiters's “U.S.
Representative Council.” Compl. ¶ 55. The
“Rep Update article” is not attached to the
complaint and the nature of the “U.S. Representative
Council” is not explained there. “The April
2017 Article relay[ed] the representative council members
communicated their concerns regarding Fund assets being spent
for meetings.” Id. ¶ 56. Neither the
nature of these meetings nor of the spending for them is
further explained, though the complaint alleges that the
disclosure statements represented that the uses of the Fund
“did not include meetings.” Id.
¶¶ 23 (2002 disclosure statement), 42 (2004
disclosure statement). “The April 2017 Article note[d]
both [Management Recruiters] and the representative council
agreed the Fund would ideally be spent marketing the brands
and offices rather than on meetings.” Id.
2012 and 2016, Management Recruiters spent $1, 446, 301
“on meetings.” Id. ¶ 60. The
complaint does not specifically allege what proportion of
these expenditures were made from the Fund. The complaint
does allege that Management Recruiters has failed to make an
accounting of the Fund when requested to do so by Gre-Ter,
despite Management Recruiters's representation of an
annual accounting made in the disclosure statements.
filed suit in Hamilton Superior Court, Hamilton County,
Indiana, on September 7, 2017. Dkt. 1, at 1. Management
Recruiters removed the case to this Court on October 4, 2017,
id., properly invoking our diversity jurisdiction.
Id. at 4. Gre-Ter's six-count complaint charges
Count I, breach of contract; Count II, violation of Section 3
of the Franchise Act; Count III, violation of the Practices
Act; Count IV, violation of Section 2 of the Practices Act;
Count V, violation of Section 9 of the Franchise Act; and
Count VI, franchise fraud under Section 27 of the Franchise
Act. On October 11, 2017, Management Recruiters moved to
dismiss the complaint for failure to state a claim. Dkt. 9;
see Fed. R. Civ. P. 12(b)(6). The motion is now
fully briefed and ripe for decision.
Rule of Civil Procedure 8(a) requires “a short and
plain statement showing that the pleader is entitled to
relief[.]” Fed.R.Civ.P. 8(a)(2). To satisfy the
requirements of Rule 8(a) and withstand a motion to dismiss
under Rule 12(b)(6), a complaint must “state a claim to
relief that is plausible on its face . . . .”
Swanson v. Citibank, N.A., 614 F.3d 400, 404 (7th
Cir. 2010) (quoting Ashcroft v. Iqbal, 556 U.S. 662,
678 (2009)). A claim is facially plausible when supported by
sufficient factual allegations which, taken as true, give
rise to a reasonable inference of liability. Iqbal,
556 U.S. at 678 (citing Bell Atl. Corp. v. Twombly,
550 U.S. 544, 556 (2007)). Legal conclusions, formulaic
recitation of elements of the cause of action, and
speculative possibilities will not do. Id. In all,
the pleader must simply “give enough details about the
subject-matter of the case to present a story that holds
together.” Swanson, 614 F.3d at 404.
II, V, and VI of the complaint are subject to a heightened
pleading standard. Because such claims sound in fraud, the
circumstances alleged to constitute the fraud must be pleaded
with “particularity.” Fed.R.Civ.P. 9(b). Under
Rule 9(b), a plaintiff must allege “‘the first
paragraph of any newspaper story'”:
“‘the who, what, when, where, and how'”
of the alleged fraud. United States ex rel. Lusby v.
Rolls-Royce Corp., 570 F.3d 849, 853 (7th Cir. 2009)
(quoting DiLeo v. Ernst & Young, 901 F.2d 624,
627 (7th Cir. 1990)). While it is “erroneous”
to “take an overly rigid view of th[is] formulation,
” Pirelli Armstrong Tire Corp. Retiree Med.
Benefits Trust v. Walgreen Co., 631 F.3d 436, 442 (7th
Cir. 2011), the application of which “may vary on the
facts of a given case[, ]” id., Rule 9(b) must
require “some . . . means of injecting precision and
some measure of substantiation . . . [, ]” id.
(quoting 2 James W. Moore, Moore's Federal
Practice § 9.03 (3d ed. 2010)), if it is to serve
its important functions of “forc[ing] the plaintiff to
conduct a careful pretrial investigation” and
“protect[ing] defendants from [the] ‘privileged
libel'” of fraud charges. Id. at 441
(quoting Fid. Nat'l Title Ins. Co. of N.Y. v.
Intercounty Nat'l Title Ins. Co., 412 F.3d 745, 749
(7th Cir. 2005); Kennedy v. Venrock Assocs., 348
F.3d 584, 594 (7th Cir. 2003)).
Choice of Law
address as a preliminary matter the law governing
Gre-Ter's claims. Indiana courts (whose choice-of-law
rules we adopt in diversity, Klaxon Co. v. Stentor Elec.
Mfg. Co., 313 U.S. 487, 496 (1941)) routinely enforce
and, indeed, “favor contractual stipulations as to
governing law.” Allen v. Great Am. Reserve Ins.
Co., 766 N.E.2d 1157, 1162 (Ind. 2002). By their terms,
the franchise agreements “and all matters relating to
or arising out of the relationship between the parties”
to them are governed by Ohio law. Dkt. 1 Ex. A, at 170 (2005
agreement), 33 (1998 agreement).
developing an argument from it or explaining its relevance to
this case, Gre-Ter points us to (more accurately, pilfers
from, by quoting it without quotation marks and appending a
“see” signal, Br. Opp. 3)
Wright-Moore Corp. v. Ricoh Corp., 908 F.2d 128 (7th
Cir. 1990). There, our federal court of appeals considered
the interaction of certain Practices Act prohibitions and an
Indiana franchisee's franchise agreement purporting to be
governed by New York law.
the Practices Act prohibits franchise agreements
“requiring the franchisee to . . . assent to a release
. . . [or] waiver . . . which purports to relieve any person
from liability to be imposed by” the Practices Act,
Ind. Code § 23-2-2.7-1(5), or “limiting litigation
brought for breach of the agreement in any manner
whatsoever.” Id. § 23-2-2.7-1(10).
Because the franchise agreement permitted termination without
good cause and a unilateral change of credit terms,
enforceable under New York law but in violation of the
Practices Act, and enforcement of the franchise agreement
therefore would have permitted the franchisor to contract
away the franchisee's statutory protections in violation
of the forum state's declared public policy, the Seventh
Circuit held that an Indiana court would apply Indiana law to
the franchise agreement. Wright-Moore Corp., 908
F.2d at 133, 133 n.1.
whereas nothing in the franchise agreements here or their
chosen law conflicts with Indiana franchise law, to that
extent the parties' choice of law controls. Id.
at 133 n.1 (citing Sheldon v. Munford, Inc., 660
F.Supp. 130 (N.D. Ind. 1987) (no Indiana public policy
against contractual provisions at bar relating to territory
and noncompetition provisions)); Hubbard Auto Ctr., Inc.
v. Gen. Motors Corp., 422 F.Supp.2d 999, 1003 (N.D. Ind.
2006) (party choice controls where no conflict).
State-specific riders to the instant franchise agreements,
purporting to rely on the statutory interpretation of the
Indiana securities commissioner, contemplate this result.
Dkt. 1 Ex. A, at 172 (Indiana rider to 2005 agreement)
(citing Practices Act's prohibitions on waiver of
Practices Act rights and litigation limitation, stating
opinion of Indiana securities commissioner that Indiana
franchise law must prevail if in conflict with Ohio law), 35
(Indiana rider to 1998 agreement) (same).
event, federal “[c]ourts do not worry about conflict of
laws unless the parties disagree on which state's law
applies.” Wood v. Mid-Valley Inc., 942 F.2d
425, 427 (7th Cir. 1991). Here, the parties do not disagree;
by failing to make any argument as to which
jurisdiction's law applies to its case, Gre-Ter has only
vaguely gestured in the direction of a potential
disagreement. Thus, we hold, Ohio law governs the
franchise agreements without limitation of any Franchise or
Practices Act liability.
Count I: Breach of Contract
Ohio law, “[i]n order to substantiate a breach of
contract claim, a party must establish four elements: (1) a
binding contract or agreement was formed; ‘(2) the
nonbreaching party performed its contractual obligations; (3)
the other party failed to fulfill its contractual obligations
without legal excuse; and (4) the nonbreaching party suffered
damages as a result of the breach.'” Carbone v.
Nueva Constr. Grp., L.L.C., 83 N.E.3d 375, 380 (Ohio Ct.
App. 2017) (quoting Textron Fin. Corp. v. Nationwide Mut.
Ins. Co., 684 N.E.2d 1261, 1266 (Ohio Ct. App. 1996))
complaint, Gre-Ter asserts, sufficiently “alleges
breaches of [the parties'] contracts in numerous ways
including provisions related to territory, use of the Fund,
and failure to provide an accounting.” Br. Opp. 9. The
sufficiency of the latter two allegations depends on
Gre-Ter's assertion that Management Recruiters's
disclosure statements are enforceable against it as part of
the parties' contracts. We address that assertion below,
for Count I is saved by a single nonconclusory allegation of
breach of the franchise agreements themselves.
Breach of the ...