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AMERICAN TOP ENGLISH, INC. v. LEXICON MARKETING

June 18, 2004.

AMERICAN TOP ENGLISH, INC., Plaintiff,
v.
LEXICON MARKETING (USA), INC., Defendant.



The opinion of the court was delivered by: SUZANNE CONLON, District Judge

MEMORANDUM OPINION AND ORDER

American Top English ("American") originally sued Golden Gate Capital, L.P. ("Golden Gate") for breach of contract and violations of the Illinois Franchise Disclosure Act ("IFDA"), 815 ILCS 705/1, et seq., and Illinois Consumer Fraud and Deceptive Business Practices Act ("ICFA"), 815 ILCS 505/1, et seq. On February 23, 2004, this court denied Golden Gate's motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(2), 12(b)(3), and 12(b)(5). American Top English, Inc. v. Golden Gate Capital, L.P., No. 03 C 7021, 2004 WL 407031, at *1 (N.D. Ill. Feb. 25, 2004). Thereafter, the parties stipulated to the dismissal of Golden Gate because it was not the proper party defendant. Docket No. 27, 4/16/04. Simultaneously, American filed its first amended complaint, substituting Lexicon Marketing (USA), Inc. ("Lexicon") as defendant and alleging identical causes of actions. Lexicon moves to dismiss pursuant to Fed.R.Civ.P. 12(b)(3) and 12(b)(6).

BACKGROUND

  The following facts are taken from American's amended complaint. American is an Illinois corporation headquartered in Chicago. Am. Compl. at ¶ 3. Lexicon is a Delaware corporation with its principal place of business in Los Angles, California. Id. at ¶ 4. American is in the business of selling a popular videocassette language course called "Ingles Sin Barreras," literally, "English Without Borders" — an instructional video that teaches English to Spanish speakers. Id. at ¶ 3. American does not produce the course itself, nor does it develop the course's content. Instead, it has distribution rights for the video course in parts of Illinois, Indiana, Wisconsin and Arizona, pursuant to a series of distribution agreements. Id. at ¶¶ 7-24. According to American, Lexicon is a party to these contracts under an asset purchase agreement or assignment. This dispute centers on the rights and responsibilities flowing from three contracts.

  The first agreement was executed in 1990 ("1990 agreement"). Id. at ¶¶ 7-12. Alejandro Daniel Itkin, American's principal, negotiated the agreement with Hispanic-American Educational Materials, Inc. ("HAEM"), the original producer of "Ingles Sin Barreras." Id. Itkin subsequently assigned his interest in the agreement to American. Id. The 1990 agreement granted American the exclusive right to distribute the video course within the 312 and 708 area codes of Illinois. Id. The agreement required American to advertise individually. However, HAEM pledged to advertise nationally. The 1990 agreement set forth a schedule for apportioning sales generated by HAEM's national advertising within American's exclusive distribution area. Id. The agreement required American to purchase sales kits and a certain amount of video courses to activate its distribution rights. Id. To retain exclusive distribution rights, American was required to purchase additional video courses each month. Id. HAEM was obligated to ensure timely delivery of American's inventory needs. Sometime prior to May 1, 1994, HAEM's interest in the agreement was assigned to its successor, Hispaem of California, Inc. ("Hispaem"). Id. at Ex. B. According to American, Hispaem's rights in the agreement were eventually assigned to Lexicon. In the amended complaint, American alleges Lexicon breached the 1990 agreement by selling video courses within American's exclusive distribution area in Illinois. Id. at 56.

  In 1994, American entered into a second distribution agreement ("1994 agreement") with Hispaem. Am. Compl., Ex. B. The 1994 agreement granted American exclusive distribution rights in Arizona. Id. Like the 1990 agreement, the 1994 agreement required American to purchase a minimum number of video courses each month, as well as an initial purchase of sales kits and video courses. Id. The 1994 agreement included a forum selection clause, which required the parties to file suit in California to enforce the agreement. Id. According to American, Hispaem's interest in the 1994 agreement has been assigned to Lexicon. American alleges Lexicon breached the agreement by competing with American in Arizona.

  In 1997, American and Hispaem executed a handwritten letter agreement ("1997 agreement") that modified the 1990 and 1994 agreements. Am. Compl. at ¶¶ 18-27. The 1997 agreement gave American distribution rights in Wisconsin and Indiana. Id. Like the previous agreements, the 1997 agreement required American to purchase video courses and sales kits, as well as maintain certain sales levels to retain distribution rights. Id. According to American, Hispaem's rights and obligations under this agreement were assigned to Lexicon. In the amended complaint, American alleges Lexicon breached the 1997 agreement in two ways; Lexicon improperly terminated the 1997 agreement on October 8, 2001; and, Lexicon sold video courses in Indiana and Wisconsin in violation of American's distribution rights.

  In April 2002, Lexicon notified American that the cost of each video course would be increased from $253 to $380 as an exclusive distributor. At that time, Lexicon's justification for the increase was that "the company could no longer continue to absorb increases in product development and manufacturing costs." Id. at ¶ 43. American later discovered that "other Lexicon franchisees and/or licensees" were paying less than $380 per video course. Id. at ¶ 46. Lexicon advised American that they considered "the actual costs to manufacture the product, product development expenses, and the conditions of the market" when setting the price of the video course. Id. at ¶ 49. Lexicon also explained that the price to "smaller distributors in Latin America and Mexico" might be less due to the "market conditions" in those countries, and that the price to "smaller US distributors" might be less due to the "growth mode" of those businesses. Id. The amended complaint alleges Lexicon engaged in price discrimination and made material misrepresentations to American about the price increase in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act.

  DISCUSSION

  I. LEGAL STANDARD

  For purposes of a motion to dismiss, the court accepts all well-pleaded allegations in the complaint as true and draws all reasonable inferences in favor of American. Travel All Over the World, Inc. v. Kingdom of Saudi Arabia, 73 F.3d 1423, 1429 (7th Cir. 1996). In ruling, the court considers "whether relief is possible under any set of facts that could be established consistent with the allegations." Pokuta v. Trans World Airlines, Inc., 191 F.3d 834, 839 (7th Cir. 1999), citing Conley v. Gibson, 355 U.S. 41, 45-46 (1957). American's claims may be dismissed only if there are no sets of facts that would entitle it to relief based on the allegations in the amended complaint. Conley, 355 U.S. at 45-46. However, American can plead itself out of court by pleading facts that undermine the allegations set forth in the amended complaint. McCormick v. City of Chicago, 230 F.3d 319, 325 (7th Cir. 2000). II. ILLINOIS FRANCHISE DISCLOSURE ACT

  American claims Lexicon violated Section 5 of the IFDA by selling unregistered franchises under the 1990, 1994 and 1997 agreements and by failing to provide required disclosure documents. American further claims Lexicon violated Section 19 of the IFDA by terminating the 1997 franchise agreement. Lexicon moves to dismiss the IFDA claims (Count 1) pursuant to Rule 12(b)(6).

  A. Statute of Limitations

  The amended complaint alleges Lexicon (and/or its predecessors) violated the IFDA by selling American (and/or its predecessors) three franchises pursuant to the 1990, 1994, and 1997 agreements without complying with pre-sale registration and disclosure requirements. 815 ILCS 705/5. ...


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