Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Mich.: Franchisee’s contract claims against franchisor proceed, remaining claims dismissed, (Dec 16, 2015)

By Michael Menzhuber, J.D., LL.M.

An electronic device franchisee’s breach of contract claims—alleging wrongful termination, failure to approve substitute locations, refusal to pay commissions, and failure to provide advertising, training, and support—could proceed against the franchisor, Wireless Toyz, according to the federal district court in Detroit. However, the franchisee’s claims of conversion, breach of fiduciary duty, and accounting were dismissed (AKB Wireless, Inc. v. Wireless Toyz Franchise, LLC, December 15, 2015, Cox, S.).

Wireless Toyz brought an action against former franchisee AKB Wireless, Inc. and AKB’s owner, who also operated a competing wireless business, for breaching the franchise agreement’s non-competition and/or confidentiality provisions. After AKB and its owner’s motion to dismiss was denied, AKB filed a complaint against Wireless Toyz for (1) breach of contract; (2) statutory and/or common law conversion; (3) breach of fiduciary duty; and (4) an action for accounting. Wireless Toyz responded by filing a motion to dismiss.

Breach of contract. AKB’s breach of contract claim against Wireless Toyz alleged wrongful termination, failure to approve substitute locations, refusal to pay commissions, and failure to provide advertising, training, and support. In its motion to dismiss, Wireless Toyz argued that AKB could not establish any of the claimed breaches, in light of the express terms of the franchise agreement.

The court determined that it was not necessary to rule on each of AKB’s breach of contract allegations because, if any one of the alleged breaches was viable, the breach of contract claim should not be dismissed. The court noted that one of AKB’s allegations was that Wireless Toyz withheld commissions. Because the issue of whether AKB was actually owed the commissions was a factual question, the court determined that Wireless Toyz’ motion to dismiss was more appropriately raised at the summary judgment stage of the litigation.

Conversion. Wireless Toyz noted that a necessary element of a conversion claim was that money was obtained without the owner’s consent. Because it was contractually authorized to receive the commission payments at issue, Wireless Toyz argued that AKB’s conversion claim should be dismissed. The court agreed and held that, to the extent AKB was owed commission, that claim sounded in contract, not tort.

Breach of fiduciary duty. Wireless Toyz argued that a relationship between a franchisor and a franchisee does not give rise to a fiduciary relationship between the parties. AKB countered that Wireless Toyz’s fiduciary duty did not arise from the franchisor-franchisee relationship but, instead, arose by virtue of the arrangement under which Wireless Toyz would obtain commissions and hold them in trust accounts for franchisees. In the absence of a challenge to this type of arrangement, the court denied Wireless Toyz’s motion to dismiss.

Action for accounting. The court noted that, to establish a claim for accounting there must be: (1) mutual demands, a series of transactions on one side, and payments on the other; or (2) if the accounts are not mutual, there are circumstances of great complication or difficulty in the way of adequate relief at law. Because AKB’s complaint contained no series of mutual demands, and there were no allegations of complexity such that the amount allegedly owed to AKB could not be determined in discovery, the court determined that AKB failed to state a cause of action for an accounting.

The case number is 14-13424.

Attorneys: John T. Hermann (Law Offices of John T. Hermann, PC) and Leon Hirzel (Hirzel & Dreyfuss, PA) for AKB Wireless, Inc. Brian Witus (Jaffe, Raitt, Heuer & Weiss) for Wireless Toyz Franchise, LLC.

Companies: AKB Wireless, Inc.; Wireless Toyz Franchise, LLC

Cases: FranchisingDistribution MichiganNews