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Gre-Ter Enterprises, Inc. v. Management Recruiters International, Inc.

United States District Court, S.D. Indiana, Indianapolis Division

June 26, 2018




         Plaintiff Gre-Ter Enterprises (“Gre-Ter”), an Indiana corporation, sued defendants Management Recruiters International, a Delaware corporation, and its affiliates[1](together, “Management 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.

         For the 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 argument.

         Factual and Procedural Background

         The complaint alleges the following, which, read together with the materials attached to the complaint, [2] 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.

         The 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.

         The 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.

         The 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), [3] 174 (fifth amendment).[4] 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.

         Franchisors 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.

         Among 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).

         Under 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.

         In 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.[5] “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. ¶ 57.

         Between 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.

         Gre-Ter 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.

         Standard of Decision

         Federal 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.

         Counts 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)).


         I. Choice of Law

         We 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).

         Without 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.

         Specifically, 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.

         However, 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).

         In any 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.[6] Thus, we hold, Ohio law governs the franchise agreements without limitation of any Franchise or Practices Act liability.

         II. Count I: Breach of Contract

         Under 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)) (alterations omitted).

         The 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.

         A. Breach of the ...

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