Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Minn.: Statute of limitations did not bar franchisee’s Minnesota Franchise Act claim, (Aug 21, 2013)

By Peter Reap, J.D., LL.M.

The Minnesota Franchise Act’s three-year statute of limitations did not bar a terminated automotive glass repair business franchisee’s (Michael Dawson’s) counterclaim against his franchisor, Novus Franchising, Inc., because the franchisee pled sufficient facts supporting an inference that he did not know of the facts underlying his MFA claim until the middle of 2010, well within the three-year limitations period, the federal district court in Minneapolis has decided (Novus Franchising, Inc. v. Dawson, August 20, 2013, Tunheim, J.). Thus, the franchisee’s objections to a magistrate judge’s Report and Recommendation (R & R) were sustained to the extent it recommended dismissal of the MFA counterclaim.

Background. Novus brought this action claiming that the franchisee breached the parties’ agreement by failing to pay royalties as required. Novus alleged that the franchisee has since violated the agreement’s noncompete provisions by operating a competing automotive glass replacement and repair business, CarMike, and by using Novus’s trade name, trademarks, and products in connection with that business.

The franchisee brought counterclaims against Novus alleging common law fraud and violations of the MFA. In his R & R, the magistrate judge recommended that the court grant Novus’s motion to dismiss the MFA claim but deny its motion to dismiss the common law fraud claim. Before the court was the franchisee’s objection to the R & R’s conclusion that his MFA claim should be dismissed because the three-year statute of limitations has run.

In his statutory counterclaim, the franchisee alleged that Novus violated the MFA by falsely promising him that it would not sell another franchise in his territory without granting him the right of first refusal. The franchisee alleged that he signed the franchise agreement in reliance on this promise and that Novus later broke that promise by selling a franchise to a third-party in Dawson’s franchise territory.

Minnesota Franchise Act. The MFA prohibits offering or selling a franchise by means that include either “an untrue statement of a material fact” or an omission of a material fact that would be necessary to make a previously made statement not misleading. Minn. Stat. § 80C.13, subd. 2. The MFA allows a plaintiff to bring a claim “to recover the actual damages sustained by the plaintiff,” by reason of the defendant’s violation of the statute. Minn. Stat. § 80C.17, subd. 3.

Statute of limitations. The MFA provides that “[n]o action may be commenced [under the MFA] more than three years after the cause of action accrues,” but does not define when a cause of action under the statute accrues. Minn. Stat. § 80C.17, subd. 5. Dawson filed his answer and counterclaim on September 21, 2012. Therefore, for Dawson’s counterclaim to be timely, the cause of action would have had to accrue after September 21, 2009, the court reasoned.

Generally, a plaintiff’s cause of action accrues when all of the elements of the action have occurred, such that the cause of action could be brought and would survive a motion to dismiss for failure to state a claim. Under the discovery rule of accrual, however, the statute of limitations begins running when the plaintiff knew, or should have known through the exercise of reasonable diligence, of the facts constituting the cause of action.

Although Minnesota state courts have not yet addressed this issue, courts in this district have concluded that the discovery rule of accrual applies to claims for misrepresentations under the MFA. These courts concluded that the discovery rule applies because claims of misrepresentation under the MFA sound in fraud, and Minnesota law applies the discovery rule to fraud claims. Because the franchisee’s MFA claim arose out of alleged misrepresentations, the discovery rule of accrual applied to his claim, the court ruled.

The franchisee argued that his cause of action under the MFA did not accrue until October 2010, because that is when he discovered that he had been damaged by Novus’s alleged MFA violation. Novus, on the other hand, argues that Dawson’s cause of action accrued in late 2008, when Dawson learned that Novus had sold a franchise to the third-party, in contravention of Novus’s alleged representations.

If a cause of action contains damage as an element, that cause of action cannot survive a motion to dismiss until damage has been sustained, the court noted. Therefore, if damages are a required element of a cause of action, that claim will not accrue, and the statute of limitations will not begin to run until some damage has been sustained. Applying this principle, where a plaintiff’s cause of action—such as the franchisee’s claim seeking to recover damages under the MFA—requires allegations of damage to survive a motion to dismiss, the plaintiff’s cause of action does not accrue until he knew or should have known that he had suffered damage, the court determined.

The franchisee met his burden of alleging that he did not know of the facts underlying his MFA claim until the middle of 2010, when he learned that he had been damaged by Novus’s alleged violation of the MFA, the court held. Although the third-party opened his franchise in late 2008, the franchisee alleged that the third party’s business virtually destroyed his own business “within a few years,” indicating that Dawson may not have known or had reason to know that he had sustained damage prior to September 21, 2009.

Dawson also alleged that he knew his business was damaged when his revenues were reduced from $10,000 per month to $3,000 to $4,000 per month in the middle of 2010 and when he was unable to pay his franchise royalties in October 2010. Based on these allegations, Dawson met his burden of alleging that he did not discover the facts constituting the entirety of his MFA claim until after September 21, 2009, within three years before the commencement of the action.

Furthermore, dismissal on the basis that the franchisee should have known of his damages prior to September 21, 2009, was inappropriate, according to the court. The court declined to find that, as a matter of law, reasonable due diligence required Dawson to have investigated and discovered prior to September 21, 2009, that the third-party’s low prices and shoddy work were harming his customer relationships and business.

Reasonable reliance. Having decided that the statute of limitations barred the MFA claim, the magistrate judge did not reach the issue of whether the franchisee’s MFA claim would also be subject to dismissal for failure to plead reasonable reliance. The magistrate judge did, however, conclude that the franchisee’s counterclaim for common law fraud adequately pled reasonable reliance and therefore recommended that the court deny Novus’s motion to dismiss with respect to that claim.

Assuming, without deciding, that reasonable reliance is an element of an MFA claim, the magistrate judge’s conclusions about the adequacy of the franchisee’s reasonable reliance allegations for common law fraud applied equally to his MFA claim because the two claims were based on identical misrepresentations, the court reasoned. Because Novus did not object to the magistrate judge’s conclusion that the franchisee’s fraud claim adequately pled reasonable reliance, the court declined to review that determination as it applied to Dawson’s MFA claim.

The case is Civil No. 12-529 (JRT/JJG).

Attorneys: James M. Susag (Larkin Hoffman Daly & Lindgren Ltd.) for Novus Franchising, Inc. Michael Dawson, Pro se.

Companies: Novus Franchising, Inc.

Cases: FranchisingDistribution MinnesotaNews