Putzier v. Ace Hardware Corp.
| Decision Date | 25 June 2014 |
| Docket Number | No. 13 C 2849,13 C 2849 |
| Citation | 50 F.Supp.3d 964 |
| Parties | Marvin D. Putzier, Hometown Hardware, Inc. d/b/a Hometown Ace Hardware, Don West, Midlothian Home Center, Inc. d/b/a/ Ace Hardware, Douglas Lorenz, and Four Aces, LLC d/b/a Ace Hardware of Arvada, on behalf of themselves and all others similarly situated, Plaintiffs, v. Ace Hardware Corporation, Defendant. |
| Court | U.S. District Court — Northern District of Illinois |
Kara Anne Elgersma, Amy Elisabeth Keller, Kenneth A. Wexler, Wexler Wallace LLP, Chicago, IL, Janine D Arno, Robert J. Robbins, Robbins Geller Rudman & Dowd LLP, Boca Raton, FL, for Plaintiffs.
Clement Ryan Reetz, Harout Jack Samra, Dla Piper LLP, Miami, FL, Norman Mitchell Leon, John Aaron Hughes, DLA Piper US LLP, Chicago, IL, for Defendant.
Plaintiffs Marvin D. Putzier, Hometown Hardware, Inc. d/b/a/ Hometown Ace Hardware (“Hometown Ace”), Don West, Midlothian Home Center, Inc. d/b/a/ Ace Hardware (“Midlothian Ace”), Douglas Lorenz, and Four Aces, LLC d/b/a/ Ace Hardware of Arvada (“Arvada Ace”), bring this purported class action in fraud against Defendant Ace Hardware Corporation (“Ace”). Plaintiffs allege common law fraud, fraudulent inducement, and statutory fraud in violation of the Illinois Franchise Disclosure Act (“IFDA”), 815 Ill. Comp. Stat. 705/1 et seq. Presently before the Court is Ace's motion to dismiss the complaint pursuant to Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim and failure to plead with the specificity required by Federal Rule of Civil Procedure 9(b). For the reasons stated below, Ace's motion is granted.
Ace is a Delaware corporation in the business of selling wholesale hardware products and retail hardware franchises. .) Ace's principal place of business is in Oak Brook, Illinois. (Id. ) Over 4,000 Ace-franchised hardware stores currently exist in the United States. (Id. ¶ 17.) Putzier, West, and Lorenz (collectively, the “Franchisees”), through their respective corporations, entered into franchise agreements with Ace to open and operate Ace franchise stores. (Id. ¶¶ 10–15.) Putzier is a citizen and resident of Washington and the president of Hometown Ace, a Washington corporation. (Id. ¶¶ 10–11.) In 2006, Hometown Ace entered into a franchise agreement with Ace to open a “Vision 21” Ace franchise. (Id. ¶ 11.) West is a citizen and resident of Texas and the president of Midlothian Ace, a Texas corporation. (Id. ¶¶ 12–13.) In 2002, Midlothian Ace entered into a franchise agreement with Ace to operate a “Vision 21” Ace franchise. (Id. ¶ 13.) Lorenz is a citizen and resident of Colorado and the managing member of Four Aces, a Colorado limited liability company. (Id. ¶¶ 14–15.) In 2005, Four Aces entered into a franchise agreement with Ace to operate a “Vision 21” Ace franchise. (Id. ¶ 15.)
Under the franchise agreements, each Franchisee agreed to operate his store under Ace's Vision 21 franchise plan. (Id. ¶ 1.) Ace created its Vision 21 plan in 2000 as a new business model for some of its larger franchise stores. (Id. ¶¶ 1, 19.) Ace implemented the Vision 21 strategy to improve retail success of these stores and better compete with “big box” home improvement companies like Home Depot or Lowe's. (Id. ¶ 20.) Under the Vision 21 plan, Ace prescribed certain inventory, merchandising, fixtures, signage, decor, and other miscellaneous purchases for its franchises, which required substantial start-up investments from each Franchisee in preparation to open his store. (Id. ¶¶ 30, 49, 65.)
Each Franchisee alleges that after he contacted Ace about franchising opportunities, Ace provided financial information and sales forecasts for a new store in a proposed location, as well a Uniform Franchise Offering Circular (“UFOC”), a document containing historical data about the performance of existing Ace stores.1 (Id. ¶¶ 2, 25–26, 46, 62.) Plaintiffs assert that this factual information was misleading because, although Ace claimed that the historical figures represented averages of all stores that reported their financial performance to Ace, the figures were actually averages of only the relatively successful stores. (Id. ¶¶ 2, 27, 47, 63.) Plaintiffs assert that Ace cherry-picked the stores it included in its averages in order to make Ace franchises more appealing to potential franchisees. (Id. ¶¶ 79.)
Ace also provided each Franchisee with a draft “pro forma” document containing forecasts of profitability, sales, and cash flow specific to a new Ace store at the proposed location. (Id. ¶¶ 28, 48, 64.) Ace represented to each Franchisee that it derived these pro forma forecasts from the historical performance data of existing franchise stores. (Id. ¶¶ 3.) Ace stated that it could predict the future performance of new or converted Vision 21 stores with over 90% accuracy by applying a “tried and true” method of deriving future projections to historical performance data. (Id. ) Through these individualized pro forma documents, Ace represented that each Franchisee's own Vision 21 store would be “sustainably profitable” and would generate positive cash flow within the first few years of operation. (Id. ¶¶ 28, 48, 64.) Based on the pro formas and forecasts Ace provided, each Franchisee believed his Vision 21 Ace franchise would be successful. (Id. ¶¶ 29, 48, 64.) After investing significantly to open their Ace franchise stores, however, none of the Franchisees' stores ever approached the forecasted sales or projected revenue. (Id. ¶ 5.) Like many other Vision 21 stores, the Franchisees' stores are each failing or have already closed. (Id. )
After investing $315,000.00 of his own money and obtaining a small business loan in excess of $600,000.00, Putzier opened Hometown Ace in Milton, Washington in April 2007. (Id. ¶¶ 25, 30, 33.) The pro forma documents Ace gave him in 2006 predicted that Hometown Ace would have more than $1 million of sales in its first year and more than $1.5 million in its second year. (Id. ¶ 28.) In fact, Hometown Ace made less than 60% of its projected sales in the first year and less than 50% of its projected sales each year since then. (Id. ¶ 40.)
In August 2002, West opened Midlothian Ace in Midlothian, Texas. (Id. ¶¶ 44, 51.) West invested $300,000.00 of his own money to cover the start-up costs and an additional $300,000.00 through his real estate business to build the store from the ground up. (Id. ¶ 49.) The pro forma documents Ace gave West represented that he would recapture his initial cash investment within the first three to five years of owning his store. (Id. ¶ 50.) In the first year of operation, Midlothian Ace made less than 70% of its projected sales. (Id. ¶ 58.) The franchise closed its doors and West sold the store “at a significant loss” in 2008. (Id. ¶ 59.)
In March 2005, Lorenz opened Arvada Ace in Arvada, Colorado after investing $300,000.00 of his own money and $300,000.00 he borrowed from family members. (Id. ¶¶ 65, 68.) In the pro forma documents it gave to Lorenz, Ace represented that Arvada Ace would make around $1 million in sales in its first year. (Id. ¶ 75.) Plaintiffs allege, however, that Arvada Ace has lost an average of $100,000.00 a year every year since it opened. (Id. )
Plaintiffs allege that the Franchisees were successful entrepreneurs whose stores failed despite their best efforts. (Id. ¶¶ 21, 41, 43, 44, 52, 59, 60, 69.) Plaintiffs allege that Ace manipulated the UFOC figures and pro forma data to show attractive projections rather than reasonable ones. (Id. ¶ 83.) Plaintiffs allege that Ace inflated variable numbers, such as projected sales, to compensate for the occupancy costs of Vision 21 stores, which were significantly higher than the occupancy costs of other franchises. (Id. ¶¶ 38, 56, 73, 82.) Plaintiffs allege that reasonable sales projections would not have been manipulated to compensate for the high occupancy costs and would have projected an “unacceptable cash flow.” (Id. ¶¶ 39, 57, 74.) Plaintiffs contend that, based on Ace's omissions and misrepresentations, the Franchisees entered into franchise agreements for stores that were “destined to fail.” (E.g., id. ¶ 45.) Plaintiffs further allege that Ace intentionally concealed accurate data and plausible financial projections and instead provided false projections based on manipulated data in order to entice the Franchisees to make substantial investments in franchising. (Id. ¶¶ 83, 85.) Due to this concealment, Plaintiffs allege that the Franchisees did not become aware of Ace's conduct until the spring of 2011. (Id. ¶ 87.)
This putative class action was originally filed in the Southern District of Florida on January 6, 2012. (R. 1, Compl.) The initial complaint was brought on behalf of the proposed class by Advanced Caregivers LLC, a Florida limited liability company d/b/a Hialeah Ace Hardware, and William Bloodworm, the chief executive officer of Advanced Caregivers. (Id. ) On March 1, 2012, Ace filed a motion to compel arbitration in the Northern District of Illinois, contending that the parties' written agreements required arbitration in Chicago, Illinois. Ace Hardware Corp. v. Advanced Caregivers, LLC, No. 12 C 1479. Ace alleged that it began including arbitration in its franchise agreements in March 2009. See Ace Hardware Corp. v. Advanced Caregivers, LLC, No. 1:12–CV–01479, 2012 WL 5197942, at *2 (N.D.Ill. Oct. 18, 2012). After extensive briefing, Judge Darrah concluded that the franchise agreement between Ace and Advanced Caregivers contained a valid arbitration provision, and he granted Ace's motion to compel arbitration on October 18, 2012. Id. at *6.
The district court in Florida stayed the instant case pending the arbitrability ruling. (R. 14, Order.) Upon Judge Darrah's ruling, Advanced Caregivers and Bloodworm moved the district court in Florida to reopen this case and allow them to file an...
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