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MON-SHORE MGMT. v. FAMILY MEDIA

March 29, 1984

MON-SHORE MANAGEMENT, INC. and JAMES P. RICHIE, Plaintiffs, against FAMILY MEDIA, INC., et al., Defendants; CHARANDON COMMUNICATIONS, INC. and DONALD L. NAGLE, Plaintiffs, against FAMILY MEDIA, INC., et al., Defendants; ERIN PUBLISHING COMPANY, INC. and ALAN BERG, Plaintiffs, against FAMILY MEDIA, INC., et al., Defendants; JOHN E. McGRANE, Plaintiff against FAMILY MEDIA, INC., et al., Defendants.


The opinion of the court was delivered by: BRIEANT

MEMORANDUM AND ORDER

Brieant, Judge

 Plaintiffs in these related cases, residents of four states, including New York, were franchisees of one or more of the defendants, who allegedly entered into business relationships with them between 1980 and 1982. The lawsuits arise under a variety of federal and state statutes, and also present common law claims. Jurisdiction is based on federal questions, diversity of citizenship and the doctrine of pendent jurisdiction. This memorandum will address the defendants' motions, pursuant to Rule 12(b)(6), F.R.Civ.P., to dismiss portions of the complaints.

 Defendants Family Media, Inc. and 1001 Home/Decorating Ideas, Inc. publish a home improvement and decorating magazine entitled "1001 Home Ideas." Both defendant corporations are organized and have their principal place of business in New York. In 1980, these defendants, through their president, defendant James Riordan, entered into an agreement with defendant 1001 Home/Decorating Ideas Agency, Inc., pursuant to which the 1001 Agency was to market franchises to provide regional inserts for the magazine. Essentially, the franchises sold permitted the franchisee to develop a local insert for the national magazine and to sell advertising for the insert from which, it was anticipated, a profit would be earned. The terms of each franchise agreement gave the franchisee a non-exclusive license to use the name 1001 Home/Decorating Ideas in the promotion and sale of the magazine. Ostensibly in order to maintain quality control over regional inserts, defendants retained responsibility for supervising most aspects of production of each insert.

 The plaintiffs in this case were all franchisees of the defendants for various regions throughout the United States who entered into their franchise agreements between October 1980 and August of 1982. Plaintiffs Mon-Shore Management, Inc. ("Mon-Shore") and James P. Richie, the principal officer and owner of Mon-Shore, were the franchisees for the Pittsburgh region who, on July 13, 1981, entered into a franchise agreement with defendant Emmett, on behalf of 1001 Agency. Plaintiffs Charandon Communications, Inc. ("Charandon") and Donald L. Nagle, its owner and principal officer, entered into a similar arrangement with the defendants for the San Francisco area. It is alleged that this was done through a franchise agreement executed in New York in December 1981. The Philadelphia area franchise, which included territories in both Pennsylvania and New Jersey, was offered to plaintiff John E. McGrane, a New Jersey resident. After discussion with defendants Emmett and Stiefling which took place in New York, concerning the nature and terms of the prospective franchise, McGrane was authorized, by agreement, to prepare the insert for the Philadelphia area in August 1982. Plaintiffs Erin Publishing Company ("Erin"), a New York corporation, and Alan Berg, a New York resident and owner of Erin, were awarded the franchise for the New York region in May, 1982.

 Each of the complaints in this consolidated action enumerates the various disclosure documents defendants supplied to plaintiffs before they entered into the franchise agreements, including those prepared pursuant to the Federal Trade Commission Rules and the disclosure laws of California, as well as accountants' reports, promotional literature and various internal projections.

 The complaints in these actions are based upon breach of contract, fraud and the defendants' failure to comply with state and federal disclosure requirements in extending franchise offers. Plaintiffs seek compensatory and punitive damages, as well as rescission of the franchise agreements.

 All four complaints allege claims based on the defendants' failure to register a franchise prospectus under the registration and disclosure requirements of the New York Franchise Sales Act (GBL § 681, et seq.). In addition, claims are pleaded in each action based on one or more of the following: (1) violations of Federal Trade Commission Rules; (2) violations of the ubiquitous Federal Racketeer Influenced and Corrupt Organization Act, 18 U.S.C. §§ 1961, et seq. ("RICO"); (3) breach of contract; (4) fraud; and (5) violations of United States antitrust laws.

 All of the defendants move, pursuant to rule 12(b)(6), F.R.Civ.P. to dismiss the claims based on the New York Franchise Sales Act, and the RICO claims in the Mon-Shore and Charandon actions. In addition, several of the defendants move to dismiss the fraud and antitrust claims.

 The constitutionality of the New York Franchise Sales Act

 During the past decade, increasing attention has been focused on franchise sales abuse, with the result that some 29 states have enacted laws dealing with the problem. Many of these statutes provide for franchise registration and disclosure requirements. Kaufmann, Practice Commentary to Article 33, p. 231 (McKinney's Supp. 1982). Pursuant to the Federal Trade Commission's authority, federal regulations have been adopted as well, which provide for mandatory disclosure by franchise sellers of all important aspects, financial and otherwise, of a proposed franchise, when making offerings to prospective franchisees. 16 C.F.R. § 436. The Federal Trade Commission Rule explicitly does not preempt state regulations which provide for more stringent disclosure requirements than those set forth in the Rule.Id. at note 2. *fn1"

 New York has adopted a Franchise Sales Act, which went into effect on January 1, 1981. It endorses a full disclosure approach to the regulation of franchises and is virtually identical to the FTC Rule in terms of the type of information that must be afforded prospective franchisees. It is more demanding than its federal counterpart, however, in that franchise prospectuses proposed for use must be submitted to and approved in advance by the Department of Law. (§ 683). The Act empowers the Department of Law to refuse to register a prospectus if a franchisor fails to comply with the provisions of the Act, if it determines that the offer or sale would be fraudulent, or if the franchisor's past activities or criminal record make it likely that his participation in the franchise would present an unreasonable risk to prospective franchisees. [§ 683(7)].

 While the primary thrust of the Act is full disclosure, it does, as one commentator has noted, "forge . . . a comprehensive legal structure to thwart, combat and rectify franchise sales abuse. . . ." Kaufmann, Practice Commentary at 233. Thus, among other things, it provides for a private cause of action for rescission, damages and attorneys' fees for franchisees who, as in this case assert that they were injured by violations of the Act. (§ 691).

 The Act purports to govern franchise offers made to out-of-state franchisees, in circumstances where, as in this case, an offer to sell originates, is extended, or is accepted in New York:

 "(a) An offer or sale of a franchise is made in this state when an offer to sell is made in this state, or an offer to buy is accepted in this state, or, if the franchisee is domiciled in this state, the franchised business is or will be operated in this state.

 (b) An offer to sell is made in this state when the offer either originated from this state or is directed by the offeror to this state and received at the place to which it is directed. An offer to sell is accepted in this state when acceptance is communicated to the offeror from this state." G.B.L. § 681(12)(a)(b).

 Maintaining that because of this extraterritorial application the New York Franchise Sales Act directly and excessively burdens interstate commerce, defendants challenge its validity under the ...


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