Continental Basketball Ass'n, Inc. v. Ellenstein Enterprises, Inc.

• Citation: 669 N.E.2d 134
• Decision Date: 20 June 1996
• Docket Number: No. 87S01-9505-CV-519,87S01-9505-CV-519
• Parties: CONTINENTAL BASKETBALL ASSOCIATION, INC., Appellant, v. ELLENSTEIN ENTERPRISES, INC., Appellee.
• Court: Supreme Court of Indiana

Page 134

669 N.E.2d 134

CONTINENTAL BASKETBALL ASSOCIATION, INC., Appellant, v. ELLENSTEIN ENTERPRISES, INC., Appellee.

No. 87S01-9505-CV-519.

Supreme Court of Indiana.

June 20, 1996.

James H. Ham, III, David K. Herzog, David A. Given, Baker & Daniels, Indianapolis, for appellant.

Marilyn R. Ratliff, Kahn, Dees, Donovan & Kahn, Evansville, for appellee.

ON PETITION TO TRANSFER

SULLIVAN, Justice.

Franchising is a major method of doing business in the United States today, with auto dealerships, gas stations, fast food restaurants, and a myriad of other franchised enterprises accounting for perhaps one-third of the economy's retail sales. ¹ The close working relationship of a franchisor and its franchisees has given rise to a number of interesting legal problems. ² Arising under the Indiana Franchise Act ³ and the Indiana Deceptive Franchise Practices Act, ⁴ this case involves a dispute between a professional basketball franchise and the league of which it was a member.

Background

The Continental Basketball Association ("CBA") operates a professional basketball league, and in the course of its business sells what it calls "franchises." In 1984, Ellenstein Enterprises, Inc. ("Ellenstein"), entered into a contract entitled "Franchise Purchase Offer" with CBA. Under this agreement, Ellenstein purchased a "franchise" from CBA for the sum of $300,000. The franchise was for a CBA-affiliated professional basketball team to be located in Evansville, Indiana (the "Evansville Thunder"), that would participate in professional basketball games with teams formed by other franchise owners. In addition, under the contract, Ellenstein was granted the right to use the CBA logo and have access to the marketing system created by the CBA. Ellenstein also agreed to abide by the terms of CBA by-laws, its Operations Manual, and any other CBA rules and regulations.

This case began several years back when the Thunder sought an injunction to prevent the CBA from conducting its playoffs without including the Thunder. The litigation evolved into a dispute between Ellenstein and the CBA, with the CBA seeking amounts due from Ellenstein under the franchise agreement and Ellenstein seeking damages from the CBA under the Indiana Franchise Disclosure Act (the "Disclosure Act") and the Indiana Deceptive Franchise Practices Act (the "Practices Act") (together, the "Franchise Acts"). Specifically, Ellenstein claimed that it suffered damages due to:

(i) CBA's "fail[ure] to comply with the disclosure requirements imposed by the" Disclosure Act (the "Disclosure Claim");

(ii) Ellenstein's reliance on "false, misleading and/or incomplete information provided by CBA in deciding to purchase the franchise" (the "Franchise Fraud Claim"); and

(iii) CBA's termination of Ellenstein's franchise in violation of the Practices Act (the "Termination Claim").

This interlocutory appeal was taken by the CBA after the trial court ruled (i) that Ellenstein's purchase of a CBA franchise was subject to the Franchise Acts, thereby permitting Ellenstein's Disclosure, Franchise Fraud, and Termination Claims to go forward; and (ii) that because the CBA had not complied with the Franchise Acts, the CBA could not enforce the franchise agreement against Ellenstein. The Court of Appeals affirmed. Continental Basketball, Inc. v. Ellenstein Enterprises, Inc., 640 N.E.2d 705, 712 (Ind.Ct.App.1994).

Discussion

I

Ellenstein asserts, and the trial court and Court of Appeals held, that the contract between Ellenstein and CBA constituted a "franchise" under the Franchise Acts and therefore is subject to their mandates.

The Franchise Acts govern transactions in which a person offers or sells "franchises" as defined by the Acts. Both Acts define "franchise" as a contract by which:

(i) a franchisee is granted the right to engage in the business of dispensing goods or services, under a marketing plan or system prescribed in substantial part by a franchisor;

(ii) the operation of the franchisee's business pursuant to such a plan is substantially associated with the franchisor's trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchisor or its affiliate; and

(iii) the person granted the right to engage in this business is required to pay a franchise fee.

Ind.Code § 23-2-2.5-1(a) and Ind.Code § 23-2-2.7-5.

The Disclosure Act provides statutory exclusions from its coverage and additional exemptions from its coverage upon approval of an application by the Indiana securities commissioner. Ind.Code §§ 23-2-2.5-2 through 5. However, the agreement does not fall into any of the statutory exclusions and CBA did not apply for an exemption under the Disclosure Act.

The Court of Appeals concluded that the following facts supported the trial court's conclusion that the agreement was governed by the Franchise Acts: (i) "Ellenstein bought the right to operate a team in the league, entitling it to an equal share of the revenue generated by the league," Continental Basketball, Inc., 640 N.E.2d at 708; (ii) Ellenstein agreed to comply with CBA requirements, id.; (iii) under the agreement, Ellenstein purchased the right to associate the Evansville Thunder with the CBA, id.; and (iv) the Evansville Thunder "would be substantially associated with CBA's service mark, trade name, and advertising," id. at 708-9. We add that the fact that the CBA entitled the contract a "Franchise Purchase Offer" bolsters Ellenstein's argument that it purchased a franchise. In light of these factors, we agree with the Court of Appeals that the contract constituted a franchise agreement under the Franchise Acts and adopt and incorporate its opinion with respect thereto. Ind.Appellate Rule 11(B)(3).

II

Having found that a franchise exists within the meaning of the Franchise Acts, we consider the extent to which Ellenstein has a cause of action against the CBA on Ellenstein's Disclosure, Franchise Fraud, and Termination Claims under those statutes.

Disclosure Claim. In Hardee's of Maumelle, Arkansas, Inc. v. Hardee's Food Systems, Inc., 31 F.3d 573, 577 (7th Cir.1994), plaintiff franchisee sought damages from franchisor for, inter alia, violating the disclosure provisions of the Disclosure Act. Holding that the statute does not provide a private right of action for violations of its disclosure provisions, the Seventh Circuit affirmed summary judgment for the franchisor on this issue. In reaching this decision, the Seventh Circuit predicted that, if faced with this issue, our court would likely follow the holdings of the Indiana Court of Appeals that the Disclosure Act creates a private right of action only for acts which constitute fraud, deceit or misrepresentation. Id. at 577, citing Moll v. South Central Solar Systems, 419 N.E.2d 154, 162 (Ind.Ct.App.1981) and Master Abrasives Corp. v. Williams, 469 N.E.2d 1196, 1200 (Ind.Ct.App.1984), both disapproved in part on other grounds, Enservco, Inc. v. Indiana Securities Div., 623 N.E.2d 416, 425 (Ind.1993).

We agree. As Judge Ratliff noted in Moll, the Disclosure Act is structured in such a way as to provide both public and private enforcement of certain of its provisions. Broad enforcement authority is conferred on the state securities commissioner and the prosecutor to combat violations of any provisions of the statute. See, e.g., Ind.Code §§ 23-2-2.5-32 (injunctive and other relief); 23-2-2.5-34 (cease and desist orders); 23-2-2.5-35 (criminal prosecution). But enforcement authority conferred on private parties is limited to combating violations of the anti-fraud provision of the Disclosure Act, ⁵ which paraphrases Rule 10b-5 under the Securities Exchange Act of 1934. ⁶ A private right of action "arises for failure to comply with the [Disclosure Act] only upon allegations of facts which would support an inference of fraud, deceit, or misrepresentation." Id., 419 N.E.2d at 162, citing Gerald L. Bepko, Survey of Recent Developments in Indiana Law-Contracts and Commercial Law, 9 Ind.L.Rev. 132, 152 (1975). Ellenstein may not maintain its Disclosure Claim as it seeks private enforcement for violations of the disclosure provisions of the Disclosure Act.

Franchise Fraud Claim. In Enservco, Inc. v. Indiana Securities Div., we disapproved Moll and Master Abrasives to the extent that those cases required proof of culpability or scienter as an element of franchise fraud. 623 N.E.2d at 425. However, even though the elements of franchise fraud are not as extensive as the elements of common law fraud, the plaintiff in a franchise fraud action must nevertheless plead the facts and circumstances alleged to constitute fraud, deceit or misrepresentation with at least the same degree of particularity and detail as would be necessary to maintain an action for common law fraud. See Moll, 419 N.E.2d at 162-63. That is, the mandate of Ind.Trial Rule 9(B) that "[i]n all averments of fraud, or mistake, the circumstances constituting fraud or mistake shall be specifically averred," is equally applicable to common law and statutory fraud claims. ⁷

We now turn to the question of whether Ellenstein sufficiently pled franchise fraud here. In Dutton v. International Harvester Co., the Court of Appeals helped define the particularity needed to satisfy T.R. 9(B) when it said: "The circumstances constituting fraud include 'the time, the place, the substance of the false representations, the facts misrepresented, and the identification of what was procured by fraud.' Wilson v. Palmer (1983), Ind.App., 452 N.E.2d 426, 428; quoting Cunningham v. Associates Capital Services Corp. (1981), Ind.App., 421 N.E.2d 681, 683." Dutton v. International Harvester Co., 504 N.E.2d 313, 318 (Ind.Ct.App.1987), trans. denied.

Additional guidance is provided in Moll, where the court cited to Professor Harvey's Indiana Practice:

The circumstances constituting fraud or mistake must be stated with particularity. In general the circumstances of fraud would...