The FranChoice, Inc. Cases – A Case Study in Extraterritorial Application of Franchise Laws

A series of cases decided last December included claims under four different states’ franchise laws, and thus serve as a compact case study of the circumstances when the franchise laws of these states—New York, Michigan, Illinois, and Minnesota—may apply to offers and sales of franchises.

Issue / Case Summary

On December 19, 2019, in three separate cases, the U.S. District Court for the District of Minnesota addressed the extraterritorial application of several states’ franchise statutes to a franchise broker and its representatives’ actions in facilitating the purchase of franchises by potential franchisees.

The plaintiffs in each case were purchasers of “iLoveKickboxing.com” franchises from nonparty franchisor ILKB, LLC. They alleged defendants FranChoice, Inc. and its brokers made misrepresentations in violation of multiple states’ franchise statutes in the course of selling iLoveKickBoxing.com franchises to them.  FranChoice, a Minnesota corporation with its principal place of business in Eden Prairie, Minn., is a franchise broker that assists prospective franchisees in identifying, investigating, selecting, and acquiring franchises, and employs brokers in multiple states.  In each case, the defendants moved to dismiss under Federal Rule of Civil Procedure 12(b)(6).

The Report and Recommendations issued in each of the three cases recommended that the court grant in part and deny in part the defendants’ similar motions to dismiss.  Johnson v. FranChoice, Inc., No. 19-cv-1417 (MJD/ECW), 2019 WL 7598623 (D. Minn. Dec. 19, 2019), Xiaolin Li v. FranChoice, Inc., No. 19-cv-1267 (MJD/ECW), 2019 WL 7598656 (D. Minn. Dec. 19, 2019), and Dolphin Kickboxing Co. v. FranChoice, Inc., No. 19-cv-1477 (MJD/ECW), 2019 WL 7598649 (D. Minn. Dec. 19, 2019).

New York Franchise Sale Act – Applies to Offers to Purchase a New York Located Franchise Accepted in New York.

The complaints in Johnson and Xiaolin Li included a claim for violation of the New York Franchise Sales Act (“NYFSA”).  The defendants sought to dismiss this claim on the grounds that “there are no allegations that Defendants or Plaintiffs have connections with New York or that any of the interactions between Plaintiffs and Defendants occurred in New York.”  However, in each case, the defendants solicited the plaintiffs to purchase an iLoveKickBoxing.com franchise from ILKB.  Each complaint alleged that ILKB offered and sold franchises only in and from New York State, and that the plaintiffs’ offers were accepted by ILKB in New York.  The court concluded, “[g]iven that the communications at issue allegedly induced Plaintiffs to ultimately make an offer to purchase a franchise in New York, which was accepted in New York, Plaintiffs’ claim is governed by the NYSFA.”  Johnson, 2019 WL 7598623, at *7 (D. Minn. Dec. 19, 2019).

Michigan Franchise Investment Law—Applies to Michigan Residents’ Purchases of Franchises.

The plaintiffs in Johnson included a claim for a violation of the Michigan Franchise Investment Law, based on their residency in Michigan.  The defendants conceded that the purchase of the franchise occurred in Michigan, but instead argued that the Michigan Franchise Investment Law does not apply to franchise brokers. The court held that it does. Johnson, 2019 WL 7598623, at *14 (D. Minn. Dec. 19, 2019).

Illinois Franchise Disclosure Act—Applies to Purchases of Franchises Solicited by Illinois Residents.

Similarly, the plaintiffs in Xiaolin Li included a claim for a violation of the Illinois Franchise Disclosure Act against FranChoice, Inc. and its broker, Peter Gilfillan—an Illinois resident.  Similar to the Michigan plaintiffs in Johnson, the defendants focused their argument for dismissal on the statute’s inapplicability to franchise brokers. Again, like in Johnson, the court held that it did.  Xiaolin Li v. FranChoice, Inc., 2019 WL 7598656, at *8 (D. Minn. Dec. 19, 2019).

Minnesota Franchise Act—Does Not Apply When Sole Connection to State Is Through Theories of Agency and Respondeat Superior

The plaintiffs in all three cases included a claim for violation of the Minnesota Franchise Act (“MFA”), which is limited to offers to sell or purchase a franchise “in this state.”  Minn. Stat. § 80C.13, subd. 2.  The MFA defines such offers as “when a sale or offer to sell is made in this state; when an offer to purchase is made and accepted in this state; or when the franchise is to be located in this state.” Minn. Stat. § 80C.13, subd. 1. 

In each case, the plaintiffs, franchisor (IKLB), franchises, and brokers were located outside of Minnesota.  The only connection with Minnesota in each case was the location of the principal place of business and state of incorporation of FranChoice, Inc. The plaintiffs in each case argued that, through agency and respondeat superior theories, the individual FranChoice representatives were agents of a Minnesota corporation, and the offer originated from Minnesota for the purposes of the MFA.

Holding that “the Court cannot interpret the MFA so broadly that it will apply to a Minnesota company, such as FCI, even through a theory of respondeat superior or agency as argued by Plaintiffs, if none of the illegal acts complained of originated from Minnesota,” the court dismissed the MFA claims in each case.  See Johnson, 2019 WL 7598623, at *11; Xiaolin Li, 2019 WL 7598656, at *12-13; Dolphin Kickboxing Co., 2019 WL 75986649, at *9.

Key Takeaways:

• The New York Franchise Sales Act applies to offers to purchase a franchise in New York that are accepted in New York. For example, where the franchisor is located in New York and only sells franchises and accepts offers in New York.
• The Michigan Franchise Investment Law applies to purchases of franchises by Michigan residents.
• The Illinois Franchise Disclosure Act applies to purchases of franchises solicited by Illinois residents.
• The Minnesota Franchise Act does not apply to offers or sales of franchises when the only connection to the state is through theories of agency and respondeat superior. Here, the franchise broker was a Minnesota company, but its individual agents were not located in Minnesota, and thus any offers cannot be said to have originated from Minnesota.