Hanley v. Doctors Express Franchising, LLC, Civil Action No. ELH-12-795

CourtUnited States District Courts. 4th Circuit. United States District Court (Maryland)
Writing for the CourtEllen Lipton Hollander
PartiesRAYMOND V. HANLEY, et al., Plaintiffs, v. DOCTORS EXPRESS FRANCHISING, LLC, et al., Defendants.
Docket NumberCivil Action No. ELH-12-795
Decision Date25 February 2013

RAYMOND V. HANLEY, et al., Plaintiffs,
v.
DOCTORS EXPRESS FRANCHISING, LLC, et al., Defendants.

Civil Action No. ELH-12-795

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND

Date: February 25, 2013


MEMORANDUM OPINION

Raymond V. Hanley, Marsha E. Hanley, and Hanley Limited Partners, LLC (collectively, the "Hartleys"), plaintiffs, filed suit against Doctors Express Franchising, LLC and its members, Peter Ross, Anthony J. Bonacuse, and Scott Burger (collectively, "Doctors Express"), as well as Rhino 7 Consulting Company ("Rhino"), defendants.1 Doctors Express is a franchisor of urgent care medical center businesses under the "Doctors Express" or "DRX" brand, and Rhino is a franchise broker that was Doctors Express's agent in marketing DRX franchises.2 The Hanleys assert that, as a result of defendants' misrepresentations in connection with the Hanleys' establishment of a DRX franchise, defendants are liable under Maryland statutory and common law. See Complaint ¶¶ 85, 94-95, 98 (ECF 1).3

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In particular, the Hanleys advance three counts against all of the defendants. Count I alleges violations of the Maryland Franchise Registration and Disclosure Law ("Maryland Franchise Law"), Md. Code (2010 Repl. Vol., 2012 Supp.), §§ 14-201 et seq. of the Business Regulation Article ("B.R."). Count II asserts a common law action for fraud. Count III alleges common law constructive fraud. Plaintiffs seek more than $1.3 million in damages and rescission of their franchise agreement with Doctors Express. See Complaint at 32.

Rhino has filed a motion to dismiss for failure to state a claim ("Rhino Motion") (ECF 12), pursuant to Fed. R. Civ. P. 12(b)(6). Doctors Express has also moved to dismiss under Rule 12(b)(6) or, alternatively, for summary judgment under Rule 56 ("DRX Motion") (ECF 13 & 13-1). The Hanleys filed a combined Opposition (ECF 17) to both motions, and Doctors Express and Rhino each filed a reply (respectively, "DRX Reply" and "Rhino Reply") (ECF 19 & 20). No hearing is necessary to resolve the motions. See Local Rule 105.6. For the reasons set forth below, I will deny both motions with respect to Count I (Maryland Franchise Law), except as to one alleged statutory violation. I will grant both motions with respect to Count III (Constructive Fraud). As to Count II (Fraud), I will deny the DRX Motion and grant the Rhino Motion.

Background4

Since approximately September 2008, Doctors Express has sold franchises for management of urgent care medical centers. See id. ¶ 9. According to plaintiffs, Doctors

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Express markets its DRX franchises to non-medical professionals. Id. Plaintiffs claim that Doctors Express promises to provide its franchisees with "substantial and on-going expert support in the operation of urgent care medical centers including (but not limited to) physician credentialing, third-party payer contracting, medical billing, and providing equipment and discounted prices." Id.

In January 2010, Mr. Hanley began to explore opportunities to purchase an urgent care medical center franchise. See Complaint ¶ 11. On January 25, 2010, Douglas Schadle of Rhino contacted Mr. Hanley on behalf of Doctors Express. Id. The next day, Mr. Schadle emailed to Mr. Hanley a copy of Doctors Express's "Franchise Disclosure Document," along with an "Urgent Care Benchmarking Study," which described, among other things, the average number of patients treated per day at urgent care medical centers and the average revenue per patient. Id.

A "Franchise Disclosure Document," or "FDD," is a document containing certain specified disclosures that a franchisor must furnish to a prospective franchisee in connection with the offer or sale of a franchise to be located in the United States, under regulations issued by the Federal Trade Commission ("FTC"). See 16 C.F.R. § 436.2 (stating obligation to furnish FDD); see generally 16 C.F.R. part 436 (the "Franchise Rule").5 The Franchise Rule permits individual states and local governments to enact regulations of franchise practices that "afford[ ] prospective franchisees equal or greater protection" than the federal Franchise Rule, "such as registration of disclosure documents or more extensive disclosures." 16 C.F.R. § 436.10(b). Maryland has enacted such provisions, by way of the Maryland Franchise Law.

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According to plaintiffs, the version of Doctors Express's FDD that Mr. Schadle emailed to Mr. Hanley was the FDD that Doctors Express had filed with the California Commissioner of Corporations on or about May 21, 2009, pursuant to California franchise law. As an exhibit to the DRX Motion, Doctors Express has submitted a copy of this version of the FDD, dated May 15, 2009. See "FDD" or "2009 FDD," Ex.A to DRX Motion (ECF 13-2 at 1).6

The FDD contemplated establishment by a franchisee of a "DRX Management Business" to manage an urgent care medical center under the "Doctors Express" brand and marks, utilizing a management system developed by Doctors Express. FDD at 2. Because the DRX franchises were not necessarily marketed to medical professionals, the FDD contemplated that medical care at a DRX center ordinarily would not be provided by the franchisee, but rather would be provided by physicians, nurses, and medical technicians employed by a separate professional corporation or similar entity ("PC"), with which the franchisee would enter into a management agreement. Id. at 2-4. The franchised DRX Management Business consisted of providing a PC with management and administrative services and support, including leasing the physical plant of the urgent care center, purchasing or leasing necessary medical equipment and supplies, advertising, acquisition of permits and certifications, and billing of patients and health insurance providers. Id.

From January through March 2010, Mr. Schadle emailed to Mr. Hanley links to Doctors Express's marketing materials. The materials described how to open a DRX franchise and purportedly promised that Doctors Express would provide expertise "so that franchisees would acquire a 'turn-key' operation." Complaint ¶ 12.

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On January 28, 2010, via email, Mr. Hanley asked Mr. Schadle to refer him to a Small Business Administration lender that could finance Mr. Hanley's potential DRX franchise. See Complaint ¶ 13. On January 29, 2010, via email, Mr. Schadle referred Mr. Hanley to "First Financial," a Florida lending institution apparently affiliated with Doctors Express. See id. ¶ 13. A representative of First Financial emailed a document to Mr. Hanley on March 25, 2010, titled "Doctor's [sic] Express Financial Data and Operating Assumptions" ("DRX Business Model"). See Complaint ¶ 15.7 Plaintiffs contend, on information and belief, that the DRX Business Model was prepared by Doctors Express or was developed from information provided by Doctors Express. Id. The DRX Business Model contained estimates of income, expenses, and patient volume for the first two years of operation of a DRX franchise. See id. During a telephone conversation, Cindy Watson, a Vice President of First Financial, told Mr. Hanley that the DRX Business Model accurately portrayed a typical DRX franchise's performance. See id.

Plaintiffs assert that, upon review of the DRX Business Model, Mr. and Ms. Hanley "concluded that the financial information in the model was consistent with, and in some ways more favorable than," the financial performance statements contained in the FDD, "including, in particular, that per patient revenues would be $125 and that the center would receive substantial operating revenues starting with its first month of operation." Id. The DRX Business Model was also consistent with Doctors Express's internet marketing materials, which stated that DRX franchises usually received payment for insurance claims in about fourteen days. See id. Accordingly, "[i]n reliance upon the statements and representations made in the [FDD] and marketing materials, as well as materials, statements and representations communicated to them orally and in writing by Rhino [ ], First Financial, and other representatives" of Doctors Express,

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Mr. and Ms. Hanley decided to purchase a DRX franchise unit from Doctors Express, and form a new business entity for that purpose. Id. ¶ 16.

On or about March 26, 2010, Mr. Hanley, acting on behalf of Hanley Limited Partners, LLC, sent to Doctors Express a signed "Franchise Agreement" for the development of a DRX urgent care center in Missouri, at an exact location to be determined. See id. ¶ 17. On or about March 29, 2010, Mr. and Ms. Hanley established Hanley Limited Partners, LLC as a Missouri limited liability company. See id. ¶ 18. Doctors Express countersigned the Franchise Agreement on March 31, 2010. Id. ¶ 17. As an exhibit to the DRX Motion, Doctors Express submitted a copy of the executed Franchise Agreement. See Franchise Agreement, Ex.B to DRX Motion (ECF 13-2 at 53).8

On April 22, 2010, the Hanleys sent to Doctors Express a business plan for their proposed franchise, based on a business plan template made available to franchisees on a private intranet website operated by Doctors Express. Complaint ¶ 19.9 According to plaintiffs, the template was "consistent with the financial information disclosed in the FDD and the [DRX] [B]usiness [M]odel supplied by First Financial." Id. Doctors Express advised plaintiffs that their business plan, as well as two subsequent revisions of the business plan prepared by the Hanleys in August and December 2010, were consistent with Doctors Express's expectations. Id.

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