Family Wireless #1, LLC v. Auto. Techs., Inc.

• Decision Date: 12 January 2016
• Docket Number: CIVIL ACTION NO. 15-CV-1310 (JCH)
• Court: U.S. District Court — District of Connecticut
• Parties: FAMILY WIRELESS #1, LLC, et al., Plaintiffs, v. AUTOMOTIVE TECHNOLOGIES, INC., Defendant.

FAMILY WIRELESS #1, LLC, et al., Plaintiffs, v. AUTOMOTIVE TECHNOLOGIES, INC., Defendant.

CIVIL ACTION NO. 15-CV-1310 (JCH)

UNITED STATES DISTRICT COURT DISTRICT OF CONNECTICUT

JANUARY 12, 2016

RULING RE: DEFENDANT'S PARTIAL MOTION TO DISMISS (DOC. NO. 52) AND PLAINTIFF'S MOTION FOR LEAVE TO AMEND THE COMPLAINT (DOC. NO. 67)

I. INTRODUCTION

Thirty-nine franchisees bring this diversity action against their mutual franchisor, Automotive Technologies, Inc. ("ATI"), a licensee of Verizon Wireless ("Verizon"). The plaintiffs' Amended Complaint alleges breach of contract; breach of the implied covenant of good faith and fair dealing; fraudulent, negligent, and innocent misrepresentation; violations of the franchise and consumer protection laws of the states of Michigan, Connecticut, New York, Virginia, Maryland, Pennsylvania, Ohio, and West Virginia; and unjust enrichment. Amended Complaint ("Complaint") (Doc. No. 21). Some claims are brought by all the plaintiffs, others by plaintiffs in certain states, and others by a specific group of eleven plaintiffs who executed franchise agreements in 2014 (the "Eleven Plaintiffs").¹

Pursuant to Federal Rule of Civil Procedure 12(b)(6), ATI has moved to dismiss Counts II-XIII of the Amended Complaint for failure to state with particularity, as required under Federal Rule of Civil Procedure 9(b), the circumstances constituting fraud and forfailure to state claims upon which relief can be granted. Motion to Dismiss the Amended Complaint (the "Motion") (Doc. No. 52).

For the reasons set forth below, ATI's Motion is GRANTED IN PART and DENIED IN PART, and the plaintiffs' Motion for Leave to Amend the Complaint is accordingly DENIED AS MOOT.

II. BACKGROUND

A. The Parties

The plaintiffs are thirty-nine commercial entities formed under the laws of, and with principal places of business in, thirteen states: Michigan,² New York,³ Florida,⁴ New Jersey,⁵ Pennsylvania,⁶ Minnesota,⁷ Virginia,⁸ New Hampshire,⁹ Massachusetts,¹⁰ Ohio,¹¹ Indiana,¹² West Virginia,¹³ and Missouri.¹⁴ Complaint ¶¶ 1-43. AutomotiveTechnologies, Inc., their franchisor, is a Connecticut corporation. Id. ¶ 45(a). ATI is an agent of Verizon Wireless. Id. ¶ 56.

Verizon is a wireless telecommunications provider that sells its products and services, in large part, through a network of retail stores. Id. ¶ 49-50. Though many of these retail stores are owned and operated by Verizon itself, Verizon also relies on agents to offer and sell its products and services. Id. ¶ 51. These agents operate under licensing agreements and are generally referred to as "Direct Agents" because they work directly for Verizon. Id.

Some Direct Agents are permitted, through their licensing agreements, to contract with other individuals and commercial entities to act as sub-agents of Verizon. Id. ¶ 52. These Direct Agents are known as "Master Agents." Id. The subagents that contract with the Master Agents do not work directly for Verizon, but they generally operate stores that sell Verizon products and services in much the same manner as Direct Agents. Id.

ATI is a Master Agent of Verizon. Id. ¶ 56. Rather than create subagents by new licensing agreements, ATI elected to create a franchise called Wireless Zone ® ("Wireless Zone"). Id. ¶ 57. ATI has sold the rights to operate Wireless Zone stores to each of the thirty-nine plaintiffs in this case, all of whom operate as franchisees of ATI. Id. ¶ 57-58.

The crux of the Complaint turns on two different facets of the relationships between the plaintiffs and ATI: the terms of the Franchise Agreements and theFranchise Disclosure Document ("FDD") that ATI is required by law to provide to its franchisees. See 16 C.F.R. 436.1 et seq.

B. The Franchise Agreements and the Franchise Disclosure Document

As subagents of Verizon, the plaintiffs are not paid directly by Verizon for the sale of Verizon's products and services, but rather receive their payments, in the form of "Commissions," from ATI, who receive the Commission from Verizon. Id. ¶ 63-64. Though the language of the Franchise Agreements has varied over the years at issue - 2008 to 2015 - the relevant section has, in substance, stayed the same. Id. ¶ 64. Section 6.02 of the 2008 Agreement reads as follows:

Typically under ATI's Provider Contract for your geographical area, certain customer payments are forward to [Verizon] and not retained by you or ATI. [Verizon] then pays ATI commissions ("Commissions") on these customer payments attributable to your Store, which ATI passes along to you as ATI's subagent, minus deductions for amounts you owe ATI. . . . ATI will deduct from the [Verizon] Commissions ATI transmits to you, as Continuing Royalties payable by you to ATI: (i) ten percent (10%) of Commissions ATI receives from [Verizon] attributable to your customer activations, sales and services; plus (ii) ten percent (10%) of amounts you receive attributable to customer payments you retain for sales of other products and services; plus (iii) twenty percent (20%) of residual customer use Commissions ATI receives from [Verizon] attributable to your Store.¹⁵

Complaint, Exhibit 1 (Doc. No. 21-1) at 1. The Franchise Agreements do not define "Commission." Complaint ¶ 68.

The Federal Trade Commission's regulations require franchisors to provide to prospective franchisees an up-to-date Franchise Disclosure Document. C.F.R. § 436.2.Included among the information required to be "disclosed" in the FDD is a description of "all other fees that the franchisee must pay to the franchisor or its affiliates . . . for example, royalties[,]" in addition to "remarks, definitions, or caveats that elaborate on" the information provided. C.F.R. § 436.5(f), (f)(1) and (f)(4). "Disclosed" is defined, for purposes of the regulations, as meaning "to present all material facts accurately, clearly, concisely, and legibly in plain English." C.F.R. § 436.1(d).

In its 2014 FDD, issued to the Eleven Plaintiffs before they opened new franchise stores or renewed existing franchise agreements, Complaint ¶¶ 119-127, ATI explained Section 6.02 of the Franchise Agreements as follows:

Under our current [Contracts with Verizon], we receive commissions for certain of the products and services you sell, and we collect Continuing Royalties from you under the Commission Basis. If the commission formula in one or more of the [Verizon] Contracts changes to our detriment, we reserve the right to charge Continuing Royalties under the Gross Sales Basis, whichever is higher.

Complaint, Exhibit 2 (Doc. No. 21-2) at 29. The FDD goes no further in explaining ATI's rights to royalties, how Commissions are to be defined, or how ATI's rights to royalties might change.

C. Shift from the Contract Model to the Edge Program

With the preceding description of the parties and their commercial relationships as a backdrop, the events giving rise to the instant litigation are alleged to have unfolded as follows. Before April 2014, sales of Verizon devices were made under what was known as the "Contract Model." Complaint ¶ 77. Under the Contract Model, the seller - in this case, each of the plaintiffs - would incentivize the sale of a Verizon service plan by offering the device itself (a cellphone or tablet, for example) at adiscounted price. Id. ¶ 78. The sale of the device would often come at a loss to the seller, because the sales price would fall below the seller's cost of purchasing the device. Id. In return, for certain devices, Verizon would provide "an additional commission," over and above the commission provided to the seller for having sold the service plan to the customer, "to account for the agent's loss in selling the device below cost." Id.

In April 2014, Verizon launched the "Edge Program" with ATI, as a replacement to the Contract model. Id. ¶ 79. Under the Edge Program, customers do not receive a discounted device and a two-year service contract with Verizon. Id. Rather, they receive a month-to-month service plan, and purchase the device at full price, usually through a monthly installment agreement with the seller, which is automatically assigned to Verizon. Id. A customer may make a down payment on the device, payable to the seller. Id. The customer typically pays each installment on the device on the same bill as she pays Verizon for the service plan. Id.

Under the Edge Program, sellers do not sell the devices at a loss, because the customer must pay the entire price of the device. Id. ¶ 80. However, where the customer decides to pay in installments, and the installment contract is assigned to Verizon, Verizon reimburses the retail cost of the device to the seller that made the sale, less any down payment the customer may initially have made to the seller. Id. The plaintiffs refer to this payment as the "Installment Offset." Under the Edge Program, the seller receives two payments from Verizon: a commission on the sale of the service contract, as before under the Contract Model, as well as a payment covering the retailcost of the device where the customer elected to buy the phone on installments rather than entirely up front. Id. ¶

From April 2014 until January 2015, ATI collected a 10% royalty, pursuant to Section 6.02 of the Franchise Agreements, on the commissions received under the Edge Program for the sale of service contracts. Id. ¶ 82. ATI did not, however, withhold any royalty on the Installment Offset. Id. Nor did ATI indicate to the plaintiffs that it ever intended to do so, or that it considered itself to have the right to do so. Id. ¶ 82-83. In fact, the information ATI issued to the plaintiffs concerning the Edge Program characterized the Installment Offset as a "reimbursement" for the equipment sold, not as a "commission." Id. ¶ 84.

On December 30, 2014, ATI announced that it intended to withhold a 10% royalty on Installment Offsets, beginning January 1, 2015. Id. ¶ 86. Two days later, it commenced withholdings. Id. ¶ 87. ATI has maintained that it considers itself entitled to a royalty...