Tag: franchise litigation

ReMax Franchisor Defeats Tortious Interference Claim With Privilege Defense – IL 4th Dist.

The plaintiffs in Byram v. Danner, 2018 IL App (4th) 170058-U, sued after their planned purchase of a Remax real estate franchise imploded.  The plaintiffs missed an installment payment and the defendants responded by cancelling the agreement. Plaintiffs then filed a flurry of tort claims including fraud and tortious interference with contract.

Plaintiffs’ fraud count alleged the defendants lacked Remax authority to sell the franchise and hid this fact from the plaintiffs. The tortious interference claim asserted defendants bad-mouthed plaintiffs to certain agents, causing them to disassociate from plaintiffs.

The plaintiffs sought to recover their franchise fee, their first installment payment and unpaid commissions earned over a 16-month period. The trial court dismissed all of plaintiffs’ claims under Code Sections 2-615 and 2-619.  Plaintiffs appealed.

In finding the trial court properly jettisoned the fraud claim, the court noted that a valid cause of action for fraud requires (1) a false representation of material fact, (2) by a party who knows or believes it to be false, (3) with the intent to induce the plaintiff to act, (4) action by the plaintiff in reliance on the statement, and (5) injury to the plaintiff as a consequence of the reliance.

However, where a contractual provision negates one of the fraud elements, the fraud claim fails. Here, the underlying contract expressly conditioned defendants’ sale of the franchise on Remax accepting plaintiffs as a franchisee. This qualified language precluded plaintiffs from alleging that defendants misrepresented that they had authority from Remax to sell their franchise. (⁋ 43)

The appeals court also affirmed the trial court’s dismissal of plaintiffs’ tortious interference with prospective economic advantage claim.  To prevail on this theory, a plaintiff must plead and prove (1) his reasonable expectation of entering into a valid business relationship, (2) the defendant’s knowledge of the plaintiff’s expectancy, (3) purposeful interference by defendant that prevents plaintiff’s legitimate expectation from coming to fruition, and (4) damages to the plaintiff.

The ‘purposeful interference’ prong of the tort requires a showing of more than interference.  The plaintiff must also prove a defendant’s improper conduct done primarily to injure the plaintiff.  Where a defendant acts to protect or enhance his own business interests, he is privileged to act in a way that may collaterally harm another’s business expectancy.  Where a defendant invokes a privilege to interfere with a plaintiff’s business expectancy, the burden shifts to the plaintiff to show that the defendant’s conduct was unjustified or malicious.  (¶ 46)

The Court found defendants’ actions were done to protect the future success of their real estate franchise and listings.  Since plaintiffs failed to plead any specific facts showing defendants’ intent to financially harm the plaintiffs, dismissal of the tortious interference count was proper.

The Court reversed the dismissal of plaintiff’s breach of contract claims, however. This was because the affidavit filed in support of defendant’s Section 2-619 motion didn’t qualify as affirmative matter.  An affirmative matter is any defense other than a negation of the essential allegations of the plaintiff’s cause of action.  Affirmative matter is not evidence a defendant expects to contest an ultimate fact alleged in a complaint.

Here, defendants’ Section 2-619 affidavit effectively plaintiffs’ allegations were “not true:” that defendants didn’t owe plaintiffs any commissions.  The Court found that a motion affidavit that simply denies a complaint’s material facts does not constitute affirmative matter. (¶¶ 56-59)

Afterwords:

Byram provides a useful summary of the relevant guideposts and distinctions between section 2-615 and 2-619 motions to dismiss. Where a supporting affidavit merely disputes plaintiff’s factual allegations, it will equate to a denial of the plaintiff’s allegations. Such an affidavit will not constitute proper affirmative matter than wholly defeats a claim.

The case also provides value for its discussion of the Darwinian privilege defense to tortious interference. When a defendant acts to protect herself or her business, she can likely withstand a tortious interference claim by a competitor – even where that competitor is deprived of a remedy.

Non-Parties Can Enforce Sushi Restaurant Franchise Arbitration Clause – IL Court

(photo credit: https://www.amazon.com/SUSHI-SOCKS-Salmon-Tamago-Europe/dp/B0776Y99TY)

In a franchise dispute involving a sushi restaurant in the Chicago suburbs, the First District in Kim v. Kim, 2016 IL App (1st) 153296-U examines the scope of contractual arbitration clauses and when arbitration can be insisted on by non-parties to a contract.

The franchisee plaintiff sued the two principals of the franchisor for fraud.  He alleged the defendants tricked him into entering the franchise by grossly inflating the daily sales of the restaurant.  The plaintiff sued for rescission and fraud when the restaurant’s actual sales didn’t match the defendants’ pre-contract projections.  

The court dismissed the suit based on an arbitration clause contained in the franchise agreement and the plaintiff appealed.  He argued that since the defendants were not parties to the franchise agreement (the agreement was between plaintiff and the corporate franchisor), the defendants couldn’t use the arbitration clause as a “sword” and require the plaintiff to arbitrate his claims.

Affirming the case’s dismissal, the appeals court first discussed the burden-shifting machinery of a Section 2-619 motion to dismiss.  With such a motion, the movant must offer affirmative matter appearing on the face of the complaint or that is supported by affidavits.  Once the defendant meets this initial burden, the non-moving plaintiff must then establish that the affirmative matter is unfounded or requires the resolution of a material fact.  If the plaintiff fails to carry his burden, the motion to dismiss can be granted.  (¶ 23)

The court then zeroed in on whether the defendants – non-parties to the franchise agreement – could enforce the agreement’s arbitration clause against the plaintiff.  Generally, only parties to a contract can enforce its terms.  Non-parties can’t.  An exception to this rule is equitable estoppel.

For this exception to apply, (1) the signatory must rely on terms of a contract to make its claims against the nonsignatory, (2) the signatory must allege concerted misconduct by the nonparty and one or more contracting parties, and (3) there must be a connection between the alleged wrong, the non-party and the written contract terms.  (¶¶ 44-45)

Here, the crux of plaintiff’s lawsuit was that the defendants induced him into signing the franchise agreement and related restaurant lease.  Since the plaintiff’s claims were premised on the franchise agreement which contained a broad arbitration clause, the court held the plaintiff was subject to the arbitration clause and the defendants could enforce it.

Afterwords:

This case illustrates a situation where a non-party to a contract can still enforce it. Where a plaintiff’s claim against the non-party relates to or is factually intertwined with a written contract, an arbitration clause in that contract can be invoked by the non-party.