Reasonable Reliance Under The Minnesota Franchise Act

When a failing or disgruntled franchisee in Minnesota decides to bite the bullet and file a lawsuit against a franchisor, the lawsuit will often include some sort of misrepresentation/fraud claim under the Minnesota Franchise Act (MFA). In fact, it is a good bet that most franchisors that reside in Minnesota have faced, or will at some point face, a fraud/misrepresentation claim under the MFA. However, a franchisor who takes appropriate steps to protect itself at the time the franchise agreement is entered into can often obtain dismissal of those fraud claims before a trial.

One of the key legal issues that arises in those cases is whether or not a fraud claim under the MFA requires a plaintiff to establish reasonable reliance. Most Minnesota courts have held that reasonable reliance is an essential element of a common law fraud claim. The majority of the courts that have addressed this issue in a franchise context have reached a similar conclusion: to succeed on a fraud claim under the MFA a plaintiff must establish that it reasonably relied on the alleged fraudulent statement. Moua v. Jani-King of Minnesota, Inc., 810 F. Supp. 2d 882, 891 (D. Minn. 2011); U-Bake Rochester, LLC v. Utecht, No. Civ. 12-1738 (ADM/SER), 2014 WL 223439, at *8 (D. Minn. Jan. 21, 2014); Ellering v. Sellstate Realty Sys. Network, Inc., 801 F. Supp. 2d 834, 845 n. 12 (D. Minn. 2011). The only published case which appears to suggest a contrary conclusion is Randall v. Lady of Am. Franchise Corp., 532 F. Supp. 2d 1071, 1086 (D. Minn. 2007).

In Randall, Judge Schiltz recognized that some level of reliance is required to prevail on a fraud claim under the MFA. Id. However, Judge Schiltz stated "[T]he Court is not convinced that justifiable or reasonable reliance is an element of a claim for misrepresentation under the Minnesota Franchise Act." Id. Randall was one of the first decisions by a Minnesota court addressing the reasonable reliance issue under the MFA. At the time, courts in several other states had concluded, contrary to Judge Schiltz, that reasonable reliance was an essential element for a fraud claim under their state's franchise act. Bonfield v. AAMCO Transmissions, Inc., 708 F. Supp. 867, 876-78 (N.D. Ill. 1989) (fraud claim under Illinois franchise act requires showing of reasonable reliance); Cook v. Little Caesar Enters., Inc., 210 F.3d 653, 659 (6th Cir. 2000) (reasonable reliance required for misrepresentation claim under Michigan franchise law); Hardee's of Maumelle, Ark, Inc. v. Hardee's Food Sys., Inc., 31 F.3d 573, 579 (7th Cir. 1994) (recognizing that Indiana courts have required a showing of reasonable reliance for fraud claims under the Indiana franchise act).

Following the trend in other states, every Minnesota court that has addressed the issue since Randall has concluded that reasonable reliance is an essential element of a fraud/misrepresentation claim under the MFA. In the most recent published case to address the issue, Judge Montgomery left little doubt that reasonable reliance is an essential and necessary element of a fraud/misrepresentation claim under the MFA. U-Bake Rochester, LLC, 2014 WL 223439, at *8 ("To prevail on a misrepresentation claim under the MFA, a plaintiff must prove it reasonably relied on the misrepresentation"). Judge Montgomery had previously reached this same definitive conclusion in her decision in the Moua case when she stated: "the Court is convinced that reasonable reliance is an element of a claim under the MFA." Moua, 810 F. Supp. at 891-92.

In Moua, Judge Montgomery also addressed Judge Schiltz's opinion in Randall. Judge Montgomery noted that Judge Schiltz did not actually hold, but merely suggested, that unreasonable reliance could satisfy the requirements of a fraud claim under the MFA. Moua, 810 F. Supp. at 891-92. Judge Schiltz made this suggestion, according to Judge Montgomery, based on the concept that the MFA is a remedial statute and requires broad construction. Id. Judge Montgomery noted that two prior cases that actually addressed the issue of reasonable reliance as an essential part of the case had held that the MFA does require reasonable reliance to state a fraud claim. Id.

In the Ellering case, Judge Kyle, similarly noted that the Randall decision was based primarily on the "anti-waiver" provision of the MFA and the conclusion by Judge Schiltz that the anti-waiver provision should be applied broadly and precluded dismissal of a misrepresentation claim based on a "general disclaimer." Ellering, 801 F. Supp. 2d at 845. Judge Kyle further noted that even in the Randall decision Judge Schiltz recognized that a plaintiff must show some level of reliance to state a viable misrepresentation claim under the MFA. Id. Judge Kyle concluded by stating:

To the extent Randall suggests that a plaintiff may succeed on an MFA claim with evidence that he unreasonably relied upon the franchisor's representations, the Court declines to follow it.

Ellering, 801 F. Supp. 2d at 845 n. 13.

Based on the recent decisions by U.S. District Courts in Minnesota, as discussed above, it seems likely that Minnesota courts in the future will similarly conclude that reasonable reliance is an essential element to any fraud claim brought under the MFA. See also Kieland v. Rocky Mountain Chocolate Factory, Inc., No. Civ. 05-150, 2006 WL 2990336, at *8 (D. Minn. Oct. 18, 2006) (dismissing misrepresentation claim under the MFA based on a contractual disclaimer); Long John Silver's Inc. v. Nickleson, 923 F. Supp. 2d 1004, 1016-17 (W.D. Ky. 2013) (Court held that reasonable reliance was required for fraud claim under the MFA, but concluded that it could not determine as a matter of law whether or not reliance was unreasonable); but see Hanley v. Doctor's Exp. Franchising, LLC, No. Civ. A. ELH-12-795, 2013 WL 690521 (D. Md. Feb. 25, 2013) (In analyzing a fraud claim under the Maryland franchise law, the Court suggested that approach in Randall was the proper analysis.) However, it is important to note that this issue has not yet been addressed by a Minnesota state court in a published opinion and, as such, the final determination on this issue may still be forthcoming.

Knowing that under Minnesota law a franchisee must prove reasonable reliance to prevail on a fraud claim (common law or statutory), a franchisor can take certain steps at the beginning of the relationship to try to eliminate the argument of reasonable reliance. The most effective manner in which to do so is to require the franchisee to execute a specific disclaimer, either as part of the franchise agreement, the franchise disclosure document (FDD) or in a separate certification/disclaimer type document. Minnesota courts have held that "[r]eliance is unreasonable as a matter of law where an oral representation is 'plainly contradicted by the terms of [a] written contract.'" U-Bake Rochester, , 2014 WL 223439, at *8, quoting Crowell v. Campbell Soup Co., 264 F.3d 756, 762 (8th Cir. 2001). By inserting the proper language in the relevant documents (the FDD and/or the franchise agreement), including specific disclaimer language, a franchisor can help protect itself from liability on alleged fraud/misrepresentations claims.

Many fraud/misrepresentation claims asserted by disgruntled franchisees involve alleged misrepresentations regarding potential or future earnings. A specific disclaimer stating that no representations regarding future or potential earnings were provided by the franchisor other than those set forth in the FDD and that the franchisee is not relying on any future or potential earnings representations other than those set forth in the FDD, will provide strong evidence of lack of reasonable reliance to help defeat a fraud/misrepresentation claim. Alternatively, some franchisors will actually have a separate document which is executed by the franchisee at the same time as the franchise agreement. This separate document will contain several statements, each of which must be initialed by the franchisee, indicating that the franchisee has not received and is not relying on any representations as to success, potential earnings or future profits, other than those set forth in the FDD.

In Moua, Judge Montgomery granted summary judgment for the franchisor, concluding that there was no reasonable reliance to support a fraud/misrepresentation claim as a matter of law because the alleged misrepresentation...