A recent court decision explained the circumstances under which a plaintiff may assert a claim for promissory estoppel and whether a private right of action exists for a certain alleged violation of the Michigan Franchise Investment Law (“MFIL”). The decision reinforces the benefit to franchisors of franchise agreements with clear, express terms enforceable against a franchisee and explains how a federal court will grapple with competing decisions between federal and state courts on issues of state law.
Franchisors Benjamin Franklin Franchising, One Hour Air Conditioning Franchising, and Mister Sparky Franchising (“Benjamin Franklin”) were parties to seven separate franchise agreements with franchisee David Michael Plumbing, Inc. (“David Michael”). When the relationship between the two sides soured, Benjamin Franklin terminated the agreements and sued David Michael for breach of the agreements in a case styled as Benjamin Franklin Franchising SPE LLC et al. v. David Michael Plumbing Inc. et al, Case No. 2:24-cv-10286, in U.S. District Court for the Eastern District of Michigan. Benjamin Franklin alleged that David Michael underreported sales and underpaid royalties and advertising fees based on those inaccurate figures. David Michael countersued breach of contract, declaratory judgment, promissory estoppel, and violations of the MFIL.
David Michael alleged that Benjamin Franklin’s brand president, Lance Sinclair, assured David Michael’s executive vice president, Karla Michael, that the parties could end their franchise relationship if David Michael was willing to buy out the remaining time on the agreements. David Michael further alleged that Mr. Sinclair promised that David Michael could operate a competing business and retain its customers. David Michael finally alleged that Mr. Sinclair told Ms. Michael that he would advocate for the price of the buyout being limited to the minimum monthly royalty amounts for the time remaining on the agreements. Benjamin Franklin ignored David Michael’s subsequent requests for confirmation on a buyout price.
Benjamin Franklin moved to dismiss David Michael’s counterclaims for promissory estoppel and violations of the MFIL. The Court observed that promissory estoppel claims were typically only viable when there was doubt as to the existence of an enforceable contract. Here, there were franchise agreements governing the parties’ relationship so David Michael had to argue an exception to the general rule. David Michael tried to draw an analogy to a case involving quantum meruit in which the defendant refused to compensate the plaintiff for work it performed outside of their written agreement.
The Court rejected David Michael’s argument and observed that David Michael did not perform any work outside of the franchise relationship. Moreover, there was no “clear and definite” promise upon which David Michael could reasonably rely. David Michael could not point to any actual agreed upon terms for the buyout to which David Michael alleged it was entitled. Sinclair’s promise he would “go to bat” for David Michael indicated—at most—he would try to get Benjamin Franklin to approve a buy out of the remaining terms of the agreements. Benjamin Franklin’s subsequent refusal to respond to further inquiries further undercuts the allegation of an agreement.
Next, the Court reviewed the viability of David Michael’s claim for violation of the MFIL. The MFIL contains a provision voiding any term of a franchise agreement which allows a franchisor to terminate an agreement for any reason except for good cause. David Michael claimed Benjamin Franklin violated this provision when it terminated the agreements at issue.
The question for the Court was whether the law allowed for a private right of action for such an alleged violation. The Court noted that the U.S. Court of Appeals for the Sixth Circuit precedent held, yes, a private right of action existed. The Michigan Supreme Court also declined the Sixth Circuit’s request for certification. The Court, however, noted that a later ruling from the Michigan Court of Appeals held, no, a private right of action did not exist for such a violation. The Michigan Supreme Court refused to take up the question leaving the state appeals court decision intact.
So, the Court confronted the question of whether to follow the arguably binding decision of the court above it or apply the ruling of a state court. The Court opted to follow the decision of the Michigan Court of Appeals and dismiss David Michael’s claim for violation of the MFIL on the grounds that no private right of action existed. The Court held that federal courts when interpreting state law were obligated to follow the rulings of the applicable state courts. In other words, stare decisis did not apply, and the Sixth Circuit’s decision on the issue was not binding. The overriding obligation was for the Court to get questions of state law correct.
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