Jerry Morrison v. Back Yard Burgers ( 1996 )

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No. 95-3903
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Jerry Morrison and *
Helen Morrison, *
*
Appellants, *
*
v. * Appeal from the United States
* District Court for the Eastern
Back Yard Burgers, Inc., * District of Arkansas.
*
Appellee. *
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Submitted: April 12, 1996
Filed: August 8, 1996
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Before MAGILL and LOKEN, Circuit Judges, and GOLDBERG,* Judge.
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GOLDBERG, Judge.
This case involves plaintiffs' attempt to prove a common law fraud
claim and a constructive fraud claim arising from a franchise agreement
with evidence of a violation of administrative regulations. Plaintiffs
Jerry and Helen Morrison filed suit against defendant Back Yard Burgers
("BYB") seeking damages and attorney's fees for, among other things, common
law fraud arising from alleged misrepresentations concerning projected
profits. In response, BYB filed a counterclaim seeking a preliminary
injunction to prohibit plaintiffs from continuing to use its trademark.
BYB
*THE HONORABLE RICHARD W. GOLDBERG, Judge, United States
Court of International Trade, sitting by designation.
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also sought money damages for unpaid franchise fees and advertising
contributions pursuant to the franchise agreement, and prejudgment
interest. BYB then sought summary judgment with respect to all claims
asserted against it, as well as its counterclaim. The district court
granted defendant's cross motion for summary judgment and awarded defendant
monetary damages.
Plaintiffs appeal to this Court, making the following arguments: (1)
the district court improperly held that evidence of violations of the
Federal Trade Commission Act, 15 U.S.C. §§ 41 et. seq. (1994), regarding
projections of future earnings do not qualify under the "bad faith"
exception to the common law rule that speculative business projections can
not form the basis of a fraud claim; and (2) the district court erred in
granting summary judgment because the false statements are actionable under
a constructive fraud theory because of their tendency to deceive others.
For the reasons set forth below, we affirm the district court's grant of
defendant's motion for summary judgment.
I. BACKGROUND
On January 18, 1993, plaintiffs Jerry and Helen Morrison entered into
a franchise agreement with Back Yard Burgers, a Delaware corporation with
its principal place of business in Memphis, Tennessee. The plaintiffs'
purpose in entering the agreement was to build and operate a fast food
restaurant in Russellville, Arkansas. Before plaintiffs entered into the
franchise agreement, they met with BYB personnel. They also met with two
BYB franchisees, Joe Weiss and Tommy Hilburn. Weiss provided plaintiffs
with financial statements from his franchises in the Memphis area, and
Hilburn provided financial information from his Little Rock franchises.
Plaintiffs allege that Weiss assured them that they could expect to make
$750,000 in annual sales at their Russellville franchise. The actual gross
sales for
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plaintiffs' Russellville Back Yard Burgers amounted to approximately
$235,000 per year.
At the time of Weiss' representation, Federal Trade Commission
("FTC") regulations prohibited a franchisor from making representations
about future sales to a potential franchisee, unless they are supported by
demographic research, set forth in a legible document, and accompanied by
a disclaimer.1 BYB failed to comply with these requirements. There has
never been a BYB site in Russellville previous to plaintiffs' franchise,
and BYB had not conducted a marketing survey of that area. Joe Weiss did
not set forth his representations in a single legible document, and did not
1
FTC Rule 16 CFR § 436.1 (1995) provides in part:
In connection with the advertising, offering, licensing,
contracting, sale, or other promotion . . . of any franchise, . .
. it is an unfair or deceptive act or practice . . . for any
franchisor or franchise broker:
***
(b) To make any oral, written, or visual representation to a
prospective franchisee which states a specific level of potential
sales, income, gross or net profit for that prospective franchisee,
or which states other facts which suggest such a specific level,
unless:
(1) At the time such representation is made, such representation is
relevant to the geographic market in which the franchise is to be
located;
(2) At the time such representation is made, a reasonable basis
exists for such representation and the franchisor has in its
possession material which constitutes a reasonable basis for such
representation, and such material is made available to any
prospective franchisee . . . ;
(3) Such representation is set forth in detail along with the
material bases and assumptions therefor in a single legible written
document whose text accurately, clearly and concisely discloses
such information, and none other than that provided for by this
part or by State law not preempted by this part. . .;
(4) The following statement is clearly and conspicuously disclosed
in the document described by paragraph (b)(3) of this section in
immediate conjunction with such representation and in not less than
twelve point upper and lower-case boldface type:
CAUTION
These figures are only estimates of what we think you may
earn. There is no assurance you'll do as well. If you rely upon
our figures, you must accept the risk of not doing as well.
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make a specific disclaimer when presenting sales information. However,
prior to meeting with Weiss, BYB sent plaintiffs a Uniform Franchise
Offering Circular, which is required by the FTC, and which contained a
general disclaimer as to earnings projections.
Both Barry Pitts, Director of Franchise Development for BYB at the
time, and Lattimore Michael, BYB's President, knew that Joe Weiss presented
potential franchisees with financial projections or specific financial
statements of franchisees in violation of the FTC regulations. At the time
of the meeting with plaintiffs, Joe Weiss not only owned two franchises,
but he was also the Secretary-Treasurer of BYB and a member of its board
of directors.
II. DISCUSSION
In reviewing a district court's grant of summary judgment, we apply
the same standards as the district court. McLaughlin v. Esselte Pendaflex
Corp., 50 F.3d 507, 510 (8th Cir. 1995). The Court will affirm the grant
of a summary judgment motion if the evidence, viewed in the light most
favorable to the non-moving party, demonstrates that there is no genuine
issue as to any material fact and that the moving party is entitled to
judgment as a matter of law. Id.; Fed. R. Civ. P. 56(c).
A. Profit Projections under Common Law Fraud
Under Arkansas law, the tort of fraud, misrepresentation or deceit
consists of five elements: (1) a false representation of a material fact;
(2) knowledge that the representation is false, or an assertion of fact
which he or she does not know to be true; (3) intent to induce action or
inaction in reliance upon the representations; (4) justifiable reliance
on the representation; and (5) damages suffered as a result of the
reliance. Grendell v. Kiehl, 291 Ark. 228, 230, 723 S.W.2d 830, 832
(1987).
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In applying the first prong of this test, ascertaining whether
defendant made a false statement of material fact, the general rule in
Arkansas is that "an action for fraud or deceit may not be predicated on
representations relating solely to future events." Delta School of
Commerce, Inc. v. Wood, 298 Ark. 195, 200, 766 S.W.2d 424, 427 (1989).
Representations related solely to future events are considered to be mere
opinion under Arkansas law, rather than a matter of accurate knowledge as
would be a statement of fact. Delta, 298 Ark. at 199, 766 S.W.2d at 426
("In general, an expression of opinion, i.e., a statement concerning a
matter not susceptible of accurate knowledge, cannot furnish the basis for
a cause of action for deceit or fraud."); see also, Grendell, 291 Ark. at
231, 723 S.W.2d at 832 (statement in sales presentation that an oil well
would pump "fifty barrels a day" was mere puffery and not actionable).
This is also the rule adopted by other circuits and one district
court in this circuit. See, e.g., Hardee's of Maumelle, Arkansas, Inc. v.
Hardee's Food Sys., Inc., 31 F.3d 573, 579 (7th Cir. 1994) (rejecting
plaintiff's assertion that the projected financial statements can support
a claim of fraud because they are predictions or opinions regarding future
profitability, not representations of pre-existing material fact); Hengel,
Inc. v. Hot 'N Now, Inc., 825 F. Supp. 1311, 1321 (N.D. Ill. 1993); Carlock
v. Pillsbury Co., 719 F. Supp. 791, 829 (D. Minn. 1989) (representations
as to franchise start-up and operating costs "were predictions as to the
future, not statements of past or present fact"); Brill v. Catfish Shaks
of America, Inc., 727 F. Supp. 1035, 1045 (E.D. La. 1989) (franchisor's
profit projections were not actionable where they were reasonable, based
upon earnings of existing franchised restaurants).
Projections related to franchise profits are representations related
to future events. Without more, this suggests that plaintiffs have failed
to state a claim under Arkansas common law
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fraud theories and that summary judgment in favor of defendant was
appropriate.
B. Violation of FTC Regulations as evidence of Bad Faith Exception to
Common Law Fraud Rule
Plaintiffs argue that BYB's knowing violation of FTC regulations
shows bad faith intent under an exception to the general state common law
rule that mere opinion cannot support a fraud claim. This "bad faith"
exception was enunciated in Delta School of Commerce, Inc. v. Wood, 298
Ark. 195, 766 S.W.2d 424 (1989). Assuming that BYB did in fact violate FTC
regulations because its representations were not set forth on a single
legible document, did not contain a specific disclaimer, and were provided
without a reasonable basis, we nevertheless reject plaintiffs' argument.
Under the exception in Delta, a statement of future events may
constitute fraud if the statement is false and the person making the
representation or prediction knows it to be false at the time it is made.
Delta, 298 Ark. at 199-201, 766 S.W.2d at 426-7. In Delta, a
representative of the Delta School of Commerce advised Wood, a prospective
student, to pursue a career as a nursing assistant rather than a career as
a licensed practical nurse. The representative told Wood that the State
of Arkansas would be eliminating the licensed practical nurse position, and
that nursing assistants would take their place. The Arkansas state Supreme
Court found that the representative knew that his statements regarding the
state's intentions were untrue at the time, and that he made these
statements to induce Wood to enroll in Delta's nursing assistant program.
The exception in Delta does not apply to the present case. Delta
requires actual knowledge of falsity. Delta, 298 Ark. at 200, 766 S.W.2d
at 427. Weiss's alleged projections pertained to
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matters not subject to verification at the time the statements were made.
The statements were opinion based upon accurate data from another market,
and Weiss had no information about the actual market site. Weiss could not
have known that his projections regarding plaintiffs' planned franchise
would eventually prove to be false. Therefore, plaintiffs have failed to
state an actionable claim based on the exception in Delta.
A knowing violation of the FTC regulations does not alter this
conclusion. Violating 19 C.F.R. § 436.1 does not require the party to know
that his or her representations are false at the time they are made. Thus,
a violation of the FTC regulation does not meet the conditions necessary
to qualify under the Delta bad faith exception. Application of the Delta
exception hinges upon the knowledge that statements are false, not upon the
knowledge that one is violating an administrative regulation. Delta, 298
Ark. at 200, 766 S.W.2d at 426.
Our denial of plaintiffs' attempt to support their state fraud claim
with evidence of a knowing violation of 16 C.F.R. § 436.1. is consistent
with other circuit's holdings that there is no private cause of action for
violations of the Federal Trade Commission Act, 15 U.S.C. §§ 41 et seq.
R.T. Vanderbilt Co. v. Occ. Saf. & H. Rev. Com'n, 708 F.2d 570, 574-5 n.
5 (11th Cir. 1983); Fulton v. Hecht, 580 F.2d 1243, 1248-9 n.2 (5th Cir.
1978); Holloway v. Bristol-Myers Corp., 485 F.2d 986, 1002 (D.C. Cir.
1973); Carlson v. Coca-Cola Co., 483 F.2d 279 (9th Cir. 1973). A plaintiff
should not be permitted to plead violation of FTC regulations as part of
a state common law fraud case. A decision to the contrary could be
interpreted as substituting violation of FTC regulations for state law
requirements, thereby effectively extending a private cause of action under
the Federal Trade Commission Act.
Because we hold that plaintiffs fail to satisfy the first element of
common law fraud concerning statements of material fact,
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we do not need to consider whether plaintiffs satisfied the other four
elements of common law fraud.
C. Constructive Fraud
Plaintiffs' final argument is to plead under a theory of
constructive fraud. Constructive fraud is defined "as ``a breach of legal
or equitable duty which, irrespective of the moral guilt of the fraud
feasor, the law declares fraudulent because of its tendency to deceive
others . . . Neither actual dishonesty of purpose nor intent to deceive is
an essential element of constructive fraud.'" Cardiac Thoracic and
Vascular Surgery, P.A. v. Bond, 310 Ark. 798, 805, 840 S.W.2d 188, 192
(1992) (quoting Lane v. Rachel, 239 Ark. 400, 404, 389 S.W.2d 621, 624
(1965)) (emphasis in original). In Bond, a seller defrauded a purchaser
accidently and without moral culpability by making false representations
regarding the number of additional square feet the lessor could lease in
the future. Between the time that the parties entered into the contract
and the time that the buyer attempted to exercise its right to lease more
space, the lessor was reorganized and new management gained control of the
firm. The new management refused to honor the contract. Based on these
facts, the Arkansas state Supreme Court upheld rescission of the contract.
A plea of constructive fraud relieves plaintiffs of the burden of
proving scienter, or fraudulent intent. Plaintiffs must still prove the
other elements of common law fraud, including a false representation of a
material fact and justifiable reliance upon the representation. Bond, 310
Ark. at 806, 840 S.W.2d at 192-3.
Thus, the above analysis regarding false statement of material fact
and the exception enunciated in Delta applies equally here. As discussed
above, Weiss's statements were mere opinion based upon actual data from an
existing market. Plaintiffs therefore fail to satisfy the requirement that
the defendant make a misrepresentation
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of fact to prove constructive fraud. We therefore do not need to consider
whether plaintiffs prove the other elements of constructive fraud.
III. CONCLUSION
For the foregoing reasons, we affirm the grant of summary judgment
by the district court.
A true copy.
Attest:
CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.
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