Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—NDIll: Limited Liability Company Was Not a “Consumer,” Lacked Standing to Bring Illinois Consumer Fraud Act Suit, (Jan 4, 2013)

By John W. Arden, J.D., LLM.

A limited liability company lacked standing as a “consumer” to bring an action under the Illinois Consumer Fraud and Deceptive Practices Act against a corporation licensing and overseeing medical clinics treating men for erectile dysfunction, the federal district court in Chicago has held (Chicago Male Medical Clinic, LLC v. Ultimate Management, Inc., December 28, 2012, Leinenweber, H.).

Claims that the corporation committed fraud in the sale of the medical clinic, in violation of the Illinois Franchise Disclosure Act, failed to allege exact false statements and knowledge of falsity. However, other Franchise Disclosure Act claims survived dismissal because a genuine issue of fact existed about the medical clinic’s status as a “franchise.”

On November 10, 2010, Chicago Male Medical Clinic, LLC entered into a continuing consultation and compensation agreement with Ultimate Management, Inc., a California corporation that licenses the operation of medical clinics under the name “National Male Medical Clinics.” Ultimate Management agreed to assist Chicago Male in setting up a medical clinic and to consult with Chicago Male on how to market and operate the clinic effectively. In exchange, Chicago Male agreed to pay a $300,000 set up fee and a percentage of gross revenues.

Chicago Male brought suit in state court, alleging that the agreement was a franchise agreement, that Ultimate Management violated the Illinois Franchise Disclosure Act, that Ultimate Management committed common law fraud, and that Ultimate Management violated the Illinois Consumer Fraud and Deceptive Practices Act. Ultimate Management later removed the case to federal district court and made a motion to dismiss.

Before the court was Ultimate Management’s motion to dismiss or strike the complaint and Chicago Male’s motion for summary judgment.

Fraudulent Inducement

Ultimate Management moved to dismiss claims for violation of the Illinois Franchise Disclosure Act and fraud for failure to plead with the requisite particularity under Federal Rule of Civil Procedure 9(b). Although Count II alleged that Ultimate Management violated Section 6 of the Illinois Franchise Disclosure Act by inducing the investment in the clinic based on lies and deception, Chicago Male failed to adequately plead that Ultimate Management made a false statement of material fact or that Ultimate Management knew of believed the material fact was false at the time the statement was made, the court held. Chicago Male failed to allege “with any degree of specificity” what proprietary information its claim was based on or what information in the pro forma projection provided was unsubstantiated.

Because the claim failed to allege what exact statements of Ultimate Management were false or that Ultimate Management knew they were false, the claim was dismissed.

Common Law Fraud

Likewise, the allegations of common law fraud were deficient. Although they made the requisite claim that Ultimate Management knew its representations were false, the allegations did not specify how or why Ultimate Management knew they were false. These conclusory assertions failed to satisfy the heightened pleading requirements of Rule 9(b), the court held. Thus, the common law fraud claim was dismissed without prejudice.

Consumer Fraud Act Claim—Standing

In Count IV, Chicago Male alleged that Ultimate Management violated the Consumer Fraud and Deceptive Practices Act by selling unregistered franchises within the State of Illinois and by making financial performance representations in violation of the FTC franchise disclosure rule. However, the district court held that Chicago Male lacked standing to sue under the statute because it was not a “consumer.” The term “consumer” means any purchaser who purchases or contracts to purchase merchandise not for resale in the ordinary course of his trade or business but for his use or the use of a member of his household.

Chicago Male failed to allege that it purchased merchandise for its personal use, the court found. Moreover, consulting or franchise services purchased by Chicago Male could not be for personal use, as the statute required, the court ruled. Thus, the court held that Chicago Male lacked standing to bring a claim under the Illinois Consumer Fraud and Deceptive Practices Act. The claim was dismissed with prejudice.

Franchise Agreement

Chicago Male’s claim that the consultation and compensation agreement was a franchise agreement raised a genuine issue of fact and thus could not be dismissed. Chicago Male argued that the agreement (1) prescribed or suggested a marketing plan, (2) gave Chicago Male the right to use Ultimate Management’s trademark, and (3) required Chicago Male to pay a franchise fee. Ultimate Management argued that the agreement did not prescribe a marketing plan, but only offered its knowledge as part of the consulting arrangement. It further disputed that the agreement contemplated the right to use any of its trademarks.

The court found a disputed fact existed as to the agreement’s status as a “franchise” under the Illinois Franchise Disclosure Act. Thus, the claim could not be dismissed.

Transfer of Venue

However, the court did grant Ultimate Management’s motion to transfer venue to the federal district court in Los Angeles. Venue was proper in the forum and in the transferee district, the court found. Moreover, a transfer would satisfy both the private interests and the public interests at stake. The convenience of the witnesses was a neutral factor, but the convenience of the parties favored transfer, since one of the principals of Ultimate Management lived in the California district and was in poor health.

The case is No. 12 C 5542.

Carmen David Caruso (Carmen D. Caruso Law Firm) for Chicago Male Medical Clinic, LLC. Claire Perona Murphy (Sperling & Slater) for Ultimate Management, Inc.

Cases: FranchisingDistribution IllinoisNews