Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Minn.: Licensees estopped from claiming violations of Minnesota, Wisconsin franchise laws, (Jan 23, 2014)

By John W. Arden, J.D., LL.M.

Licensees of a trademark license agreement—granting the right to use U-BAKE in connection with a bakery goods store—were equitably estopped from claiming that the licensor violated the presale disclosure and registration requirements of the Minnesota Franchise Act and the Wisconsin Franchise Investment Law, the federal district court in Minneapolis has ruled (U-Bake Rochester, LLC v. Utecht, January 21, 2014, Montgomery, A.).

The licensees’ representation that the business was not a franchise and touting of the benefits of its non-franchise status in a Small Business Administration loan application precluded them from later claiming that the license was a “franchise” under the Minnesota and Wisconsin franchise laws, the court held.

Charles and Dianna Baker of Rochester, Minnesota, investigated franchises and business opportunities in an effort to supplement their income. The couple became aware of U-BAKE products through a licensed store in Savage, Minnesota. After having discussions with the owners of that store, they contacted Todd Utecht, vice president and general manager of Utecht Bakeries, which operates a frozen dough and bulk foods business in Wausau, Wisconsin.

On December 29, 2009, the Bakers met with Utecht about the possibility of selling U-BAKE products in the Rochester, Minnesota area. Utecht informed them that they were buying permission to use the U-BAKE trademark and that the opportunity “was not a franchise.” He also encouraged the Bakers to discuss the business with the owners of the La Crosse, Wisconsin and Savage, Minnesota stores. The Bakers made several trips to the La Crosse store and spoke with the owners by phone approximately a dozen times.

About a week after their initial meeting, Charles Baker sent Utecht an email, stating that the Bakers’ banker was working on a Small Business Administration loan and requested a copy of the franchise agreement and the franchise disclosure document. Utecht responded that there was no franchise disclosure document.

Soon thereafter, Charles Baker prepared an extensive business plan for presentation to the SBA. The plan stated that the business was not a franchise and touted the advantages of the non-franchise status, such as having the option to sell other specialty products and being able to change the focus of the business at your own discretion.

Utecht provided the Bakers with a draft of the trademark license agreement, which the Bakers gave to their attorney. The attorney reviewed the document and suggested several revisions, which were incorporated in the final version. The parties executed the agreement in May 2010. It provided that Utecht Bakeries would grant U-Bake Rochester a license to use the U-BAKE trademark in exchange for an initial license fee of $30,000 and 2.5% of monthly gross receipts. Utecht promised to assist the licensees with the setup of the store, the opening, the inventory ordering process, and bookkeeping procedures. The agreement stated that Utecht made no earnings claims and there were no oral agreements supplementing the contract.

The Bakers opened the Rochester store in September 2010, grossing more than $415,000 in its first fiscal year. Sales declined during 2011, and the store became unprofitable. In March 2012, Utecht informed Charles Baker that the Savage store had filed a lawsuit against Utecht Bakeries. On July 19, 2012, the Bakers filed their own lawsuit, alleging that the trademark license agreement met the statutory definition of a “franchise” under the Minnesota and Wisconsin franchise laws, that Utecht violated the disclosure and registration requirements of the franchise laws; that Utecht made false statements regarding start-up costs, potential sales, and prospective profits in violation of the franchise laws; and that Utecht was liable for common law fraud and negligent misrepresentation. The complaint sought rescission of the trademark license agreement, damages of approximately $250,000, attorney fees, and costs of suit. Both sides filed motions for summary judgment.

Violations of franchise statutes—estoppel. The Bakers alleged that the trademark license agreement was a franchise as defined by the Minnesota and Wisconsin statutes. Both laws define a “franchise” as an agreement that includes three essential elements, two of which are (1) the franchisee is granted the right to use the franchisor’s trademark or commercial symbol and (2) the franchisee pays, directly or indirectly, a franchise fee. The third element under the Minnesota law is that the “franchisor and franchisee have a community of interest in the marketing of goods or services.” The third element under the Wisconsin law is that the franchisee is granted the right to offer, sell, or distribute goods or services “under a marketing plan or system prescribed in substantial part by a franchisor.”

“Assuming without deciding that the [trademark license agreement] 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,” the court ruled.

Failure to register and disclose. There was no dispute that Utecht did not register as a franchisor and did not provide the Bakers with an offering circular prior to the execution of the agreement. Utecht argued that the Bakers were equitably estopped from asserting registration and disclosure violations, but the Bakers contended that the defense of equitable estoppel was precluded by the anti-waiver provisions of the Minnesota and Wisconsin franchise laws. Those provisions prevent parties from contractually agreeing to waive compliance with the statutory requirements.

In this case, Utecht asserted estoppel, not contractual waiver, the court observed. “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.” Thus, the defendants were not precluded from asserting the defense of equitable estoppel.

In order to demonstrate equitable estoppel under Minnesota law, a party must prove (1) promises or inducements were made, (2) the party reasonably relied on the promises, and (3) the party would be harmed if estoppel was not applied. 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.

The words, conduct, and silence of the Bakers and their attorney equitably estopped the Bakers from later asserting violations of the Minnesota and Wisconsin registration and disclosure requirements, the court held. The Bakers’ attorney contributed to the drafting of the trademark license agreement by suggesting changes that were incorporated in the agreement. He expressed his knowledge of the type of business arrangement that constitutes a franchise, and his knowledge was imputed to the Bakers. Accordingly, the Bakers were aware of the type of business arrangement that constitutes a franchise.

In addition to their passive conduct representing they understood that the business arrangement was not a franchise, the Bakers engaged in affirmative conduct consistent with that position by expressly stating in the business plan that the business was not a franchise. After the Bakers had operated for 18 months, the same attorney who negotiated their agreement “made an about-face” and asserted that the arrangement was a franchise under Minnesota law and his firm filed this lawsuit.

Applying estoppel under these unique circumstances did not defeat the purpose of the franchise statutes, the court noted. This was not a fact pattern where a franchisee was lured into purchasing a franchise and duped into relinquishing unknown rights. The trademark license agreement “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 characteristics of a business relationship.”

Misrepresentations under the franchise laws. The Bakers further alleged that Utecht violated the franchise laws by falsely representing that sales would be between $300,000 and $400,000 per year, that net profit would be 10%, that sales would increase by 10% every year, and that start-up costs would be $132,970. To establish a misrepresentation claim under the Minnesota franchise law, a party must prove that it reasonably relied on the misrepresentation. To establish a misrepresentation claim under the Wisconsin franchise law, a party must show at least actual reliance.

The alleged misrepresentations concerning start-up costs and annual sales increases did not satisfy the elements of the franchise laws because the undisputed evidence demonstrated that the Bakers did not actually or reasonably rely on those statements. The business plan prepared by Charles Baker projected start-up costs of $205,000 and projected a 30% increase in sales from years one to two and a 17% increase from years two to three. Moreover, any reliance on oral representations would not have been reasonable in view of the trademark license agreement’s statement that Utecht mad no earnings claims.

Common law claims. The common law fraud and negligent misrepresentation claims were also dismissed based on the findings that the Bakers did not actually or reasonably rely on the alleged misrepresentations regarding the start-up costs and sales.

The case is Civil No. 12-1738 ADM/SER.

Attorneys: Jerrie M. Hayes and James A. Godwin (Wendland Utz, Ltd.) for U-Bake Rochester, LLC, Charles Baker, and Dianna Baker. James J. Long and Erin O. Dungan (Briggs and Morgan) for Todd Utecht and Utecht Bakeries, LLC.

Companies: U-Bake Rochester, LLC; Utecht Bakeries, LLC

Cases: FranchisingDistribution MinnesotaNews