Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—NDInd: Tort, Statutory, and Contract Claims Based on Termination of Distributor Agreements Survived Dismissal, (Mar 6, 2013)

By Peter Reap, J.D., LLM

Five assorted tort, statutory, and contract claims brought by two distributors and their principals (the “Plaintiffs”) against Math-U-See, Inc., Steven Demme, and Ethan Demme (the “Defendants”) that centered around the termination of the distributor agreements survived the Plaintiffs’ motion to dismiss, the federal district court in South Bend, Indiana, has ruled (Lynch v. Math-U-See, Inc., March 4, 2013, DeGuilio, J.). A magistrate judge’s report and recommendation was adopted in part and rejected in part.

Background. The parties entered into the agreements for the purpose of selling Defendants’ Math-U-See, Inc. products which assisted with the teaching of mathematics to home schooled elementary and high school aged students. After the Defendants moved to dismiss five of the Plaintiffs’ 20 alleged claims, the magistrate issued a report in which he recommended that the district court grant Defendants’ motion to dismiss with respect to the violation of the Tennessee Consumer Protection Act, and deny Defendants’ motion to dismiss with respect to the other four claims.

Specifically, the claims at issue were: count five (breach of fiduciary duty); six (violation of Indiana Franchise Act); seven (violation of Idaho Consumer Protection Act); eight (violation of the Tennessee Consumer Protection Act); nine (tortious interference with contract); and ten (tortious interference with business relations).

Analysis

The magistrate judge provided an appropriate factual background and employed the proper standard of review for a motion to dismiss, the court found. There was no clear error in the portions of the magistrate judge’s decision that remained uncontested, except as to the magistrate judge’s finding that count eight should be dismissed because the Tennessee Consumer Protection Act does not create a private cause of action. After conducting a de novo review of the contested portions of the report and recommendation, the magistrate judge’s conclusions were proper, the court held.

Choice of law. The year-long distributor agreement (which remained identical since its implementation in 1996) stated that “[t]his agreement shall be construed in all aspects in accordance with and shall be governed by the laws of the State of Pennsylvania.” The magistrate judge rejected the Defendants’ argument that all claims not based on Pennsylvania law, including Plaintiffs’ statutory claims and tort claims, should be dismissed. No party objected to this conclusion, and the court adopted the report and recommendation in this respect.

The language of the choice of law provision did not suggest that Pennsylvania law applied to anything besides the “agreement” itself and the court would not rewrite the contract. Therefore the agreement did not require any non-contractual claims to be governed by Pennsylvania law. For this reason, statutory claims could be based on other state statutes and tort claims had to be evaluated under Indiana choice of law rules to determine which laws will apply, the court held.

The parties acknowledged that the difference between the laws of Indiana and Pennsylvania were important enough to affect the outcome of the tort claims asserted in counts five, nine, and ten, and therefore, the presumption was that the traditional doctrine of lex loci delicti—the law of the place where the injury occurred—would apply.

However, in Hubbard Mfg. Co., Inc. v. Greeson, 515 N.E.2d 1071, 1073 (Ind. 1987), the Indiana Supreme Court noted that lex loci delicti is the starting point for conflict of law analysis in tort cases and governs the analysis unless the state in which the tort occurred “is an insignificant contact.” In those cases, other relevant factors, including the place of the conduct causing the injury, the residence or place of business of the parties, and the place where the relationship is centered, can be considered. The evaluation should focus on the essential elements of the whole cause of action, rather than on the issues one party forecasts would be the most hotly contested.

The magistrate judge determined that in considering the Hubbard factors, the state with the most significant contacts between the torts alleged and the action as a whole was Pennsylvania, and thus, Indiana choice of law rules dictated that Pennsylvania law governed counts five, nine, and ten.

No party objected to this conclusion, and the court adopted it as its own. The most important factor was where the conduct causing the injury occurred because Defendants’ actions and the recovery available to others as a result of those actions should be governed by the law of the state in which Defendants acted—Pennsylvania, according to the court.

Tennessee Consumer Protection Act claim. Count eight was brought pursuant to the Tennessee Consumer Protection Act (TCPA) and was presumably brought under the catch-all provision of the Act. The catch-all provision explicitly vests the enforcement of subsection (b)(27) “exclusively in the office of the attorney general and reporter and the director of the division.” For this reason, the magistrate judge recommended the dismissal of count eight, to which no party objected.

However, the elimination of a private right of action under that subsection did not occur until October 1, 2011, and the amendment did not apply to causes of action accruing prior to October 2011, the court noted.

According to the complaint, Defendants’ actions took place prior to October 2011. As a result, the magistrate judge’s findings in this respect were rejected, because a private right of action was created under Tenn. Code Ann. §47-18-104(b)(27) for events occurring prior to October 1, 2011.

Because the Tennessee Consumer Protection Act prohibited a broad range of unfair and deceptive conduct, including the sale of a franchise or distributorship without proper disclosures, the court declined the request by the Defendants to dismiss count eight on insufficiency grounds.

“Gist of the action” doctrine. Defendants argued that Plaintiffs’ tort claims alleged in counts five, nine, and ten should be precluded by the “gist of the action” doctrine because the claims were based solely on the contractual distributorship relationship of the parties. Under Pennsylvania law, the “gist of the action” doctrine precluded a plaintiff from re-casting ordinary breach of contract actions into tort actions.

Plaintiffs’ complaint noted that their agreements were entered into every year from 1996; however, at some point the agreements were no longer sent but the parties continued to perform, and no termination notices were issued prior to late 2010. Moreover, the written agreements did not constitute the whole of the relationship between the parties.

The distributorship arrangement then ended in late 2009 and early 2010 based on a series of allegedly fraudulent announcements by Defendants. When asked about the contracts, Defendant Steve Demme allegedly stated that there “never was a contract; that the contracts had been abandoned; [and] that he was ‘not a contract guy.’”

The gravamen of Plaintiffs’ tort claims did not sound solely in contract, the court ruled. The Plaintiffs pled sufficient facts supporting their tort claims, and thus, it was premature to dismiss Plaintiffs’ alternative tort claims at this stage in the proceeding. At this point, it was not clear whether Defendants would admit to or deny the existence of an agreement between themselves and Plaintiffs, or whether, even if there was such an agreement, the parties’ relationship was entirely dictated by it.

Further, the Plaintiffs alleged facts supporting the existence of contractual relations (or prospective contractual relations) between themselves and third party customers with which the Defendants interfered. Such third party relationships were not the subject of the Distributorship Agreements. It could eventually be found, as supported by the factual contentions asserted by Plaintiffs, that their claims arose outside of any agreement between the parties of this case. Thus, the court would not dismiss the tort claims at this point.

Fiduciary duty claim. Under Pennsylvania law, a fiduciary duty is created when there is a confidential relationship between parties, and the duty represents “the law’s expectation of conduct between the parties and the concomitant obligations of the superior party.”

The Plaintiffs specifically alleged that the Defendants made repeated promises that they would keep Plaintiffs’ best interests paramount and that the distributorship arrangement would remain effective so long as Plaintiffs continued to perform their jobs—and as a result, Plaintiffs allowed Defendants to control their businesses and disclosed otherwise confidential business information to Defendants, such as customer lists and copyrighted works.

Accepting these allegations as true, the Plaintiffs sufficiently alleged the existence of a legally cognizable fiduciary duty and the breach thereof by Defendants, the court determined. The Defendants argued that under Pennsylvania law there was no fiduciary duty in franchise relationships. However, a confidential relationship was not confined to any specific association of the parties, the court explained.

Idaho Consumer Protection Act claim. The Defendants argued that the Plaintiffs’ claim under the Idaho Consumer Protection Act ICPA should be dismissed for failure to state a claim because the Plaintiffs’ allegations did not indicate any purchase of goods or materials from the Defendants. However, the Plaintiffs alleged that the Defendants sold them a franchise in violation of Idaho disclosure requirements and then engaged in deceptive practices relative to various services and goods that would be provided to the Plaintiffs. These allegations were sufficient to state a cause of action under the ICPA at this stage of the proceedings, the court held.

The case is Cause No. 3:11-CV-233 JD.

Attorneys: Brent E Inabnit (Sopko Nussbaum Inabnit & Kaczmarek) for Susan Lynch. D. Michael Anderson (Barnes & Thornburg LLP) for Math-U-See Inc.

Companies: Math-U-See Inc.

Cases: FranchisingDistribution IndianaNews