Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Mich.: Insurance agency franchisor faces fraud, contract, deceptive practices counterclaims, (Mar 14, 2016)

By Greg Hammond, J.D.

The owner of various L.A. Insurance Agency franchisees may bring breach of contract, fraud, and other counterclaims against the franchisor, the federal district court in Ann Arbor, Michigan, has decided. In granting leave to amend and supplement counterclaims, the court found that, in accepting the factual averments as true, it could not find that the franchisee’s fraud, breach of contract, tortious interference, and Nevada deceptive trade practices counterclaims fail pursuant to the terms of the various franchise agreements (L.A. Insurance Agency Franchising, LLC v. Montes, March 11, 2016, Grand, D.).

L.A. Insurance Agency Franchising, LLC filed suit against the owner of four L.A. Insurance Agency stores, alleging breach of contract, trademark infringement, and unfair competition claims due to the owner’s unilateral termination of a franchise location and opening of a competing insurance agency. The owner sought leave to amend and supplement counterclaims, asserting that L.A. Insurance made various misrepresentations to induce the owner to open the original franchise location; that revised franchise agreements were “adhesion contracts,” which L.A. Insurance “foisted upon” the franchisees after placing them in duress; that L.A. Insurance fraudulently induced the owner into signing the various franchise agreements; that the owner was not provided with the required 14-day notice period to review the franchise agreements prior to execution; and that the revised agreements were unenforceable because they were not supported by consideration.

Validity of agreements. The court rejected L.A. Insurance’s argument that the franchisees’ proposed counterclaims for fraud, breach of contract, tortious interference, and Nevada deceptive trade practices fail pursuant to the terms of the various franchise agreements. First, allegations that L.A. Insurance “forced” the owner to sign the revised franchise agreements by threatening to take away all of her existing businesses if she refused and that L.A. Insurance offered no consideration for the substantially-altered terms presented in the revised agreement were sufficient to demonstrate that the owner did not “fail to explain” the assertion that at least certain agreements were “foisted upon” her or were signed under duress.

Second, L.A. Insurance’s argument that the owner lied about not receiving draft franchise agreements in advance was not a basis for denying her instant motions because the court was required to accept her factual averments as true. Finally, L.A. Insurance’s assertion that the franchisees signed four different contracts over a five-year period of time—which could eventually help disprove many of the owners’ factual assertions and theories supporting her counterclaims—was considered “simply some of the relevant evidence” that must be sorted out through discovery before the court can determine whether a material question of fact exists.

Fraud. The fact that the franchise agreements contain a merger clause did not necessarily doom the franchisees’ fraud claims, the court next concluded. The franchisees alleged that L.A. Insurance fraudulently induced the owner to execute the franchise agreements by falsely asserting that it had “negotiated better than market commission rates with insurance carriers,” had “dozens of authorized carriers,” and had “an aggressive marketing and advertising arm” and “a comprehensive system of support and assistance,” knowing the assertions were untrue. The court reasoned that these alleged fraudulent misrepresentations were not ones that attempted to alter the franchise agreements’ terms, but were allegedly false representations of fact made by L.A. Insurance to induce the owner to enter in to a contract, which could conceivably invalidate the entire contract.

Michigan deceptive trade practices. The franchisees’ motion was denied, however, with regard to allegations that L.A. Insurance violated the Michigan Consumer Protection Act (MCPA). The court reasoned that L.A. Insurance was exempt from liability under the unfair and deceptive acts provision of the MCPA because its alleged conduct does not remotely resemble a “pyramid or chain promotion” as defined in the Franchise Investment Law. In addition, the franchisees’ “cursory allegation” that L.A. Insurance can be held liable under the MCPA if its franchise includes a pyramid or chain promotion was deemed “so devoid of any meaningful analysis” that it could not possibly salvage the counterclaim.

The case is No. 14-14432.

Attorneys: Bernard J. Fuhs (Butzel Long) for L.A. Insurance Agency Franchising, LLC. Fred M. Thurber for Claudia Montes.

Companies: L.A. Insurance Agency Franchising, LLC

Cases: FranchisingDistribution StateUnfairTradePractices MichiganNews