Estoppel Defense to Allegations of Violations of Minnesota’s Franchise Act

Minnesota’s Franchise Act (“MFA”) was created to protect franchisees due to a perceived lack of bargaining power with a franchisor. Under the MFA, a franchise is defined as “a contract of agreement, either express or implied,” “whether oral or written,” “for a definite or indefinite period, between two or more persons”:

(1) by which a franchisee is granted the right to engage in the business of offering or distributing goods or services using the franchisor’s trade name, trademark, service mark, logotype, advertising, or other commercial symbol or related characteristics;

(2) in which the franchisor and franchisee have a community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement, or otherwise; and

(3) for which the franchisee pays, directly or indirectly, a franchise fee.

Minn. Stat. §§ 80C.01, subd. 4(a). If a transaction or agreement falls under the above definition, then there are many requirements under the MFA that the franchisor must meet, including registering with the Minnesota Department of Commerce and providing prospective franchisees a copy of its offering circular at least seven days prior to the execution of the franchise agreement or the payment of any consideration, whichever occurs first.

The MFA also allows for civil damages and an award of costs, reasonable attorney’s fees, and even criminal penalties of up to $10,000 fine or five years in prison, or both.

Although the penalties under the MFA can be severe, a person or business has defenses that would estop a plaintiff from asserting MFA claims. One Minnesota case highlights when such a defense would be available.

In U-Bake Rochester, LLC v. Utecht, 2014 WL 223439 (D. Minn. Jan. 21, 2014), Charles Baker and his wife, Dianna Baker (the “Bakers”) started to look for business opportunities and ultimately contacted Todd Utecht (“Utecht”) of U-Bake because they were interested in selling U-Bake’s products.

Utecht and the Bakers met and entered into an agreement that the Bakers would be purchasing a license to use U-Bake products and it would not be categorized as a franchise. Mr. Baker’s notes from that meeting confirm that was the decision. The Bakers then worked with Wells Fargo to get a small business loan and in the business plan the Bakers prepared they stated that the deal was “not a franchise.” The Bakers also had an attorney review the license agreement the two parties entered into. The Bakers never objected to the relationship not being a franchise agreement.

When the Bakers opened their store, however, it quickly started losing money. They then sued U-Bake, claiming the deal was really a franchise deal and that U-Bake violated the MFA. The court disagreed and held that the Bakers were estopped from pursuing any claims under the MFA because the Bakers “were aware of the type of business arrangement that constitutes a franchise.” The court further held,

This is not a fact pattern where a putative franchisee was lured into purchasing a franchise and duped into relinquishing unknown rights. Plaintiffs sought out Utecht to pursue this business opportunity. The [license agreement] was the product of an informed and deliberate negotiation process…

The Court dismissed the Bakers’ MFA claims and also dismissed their misrepresentation claims, holding that there was no evidence the Bakers’ solely relied on any representations of U-Bake or Utecht.

This article was written by attorney Maureen A. Carlson.

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