United States District Court, N.D. Illinois, Eastern Division
June 18, 2004.
AMERICAN TOP ENGLISH, INC., Plaintiff,
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
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
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
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
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. Lexicon asserts these claims are
barred by the applicable statute of limitations.
Under the IFDA, "[n]o action shall be maintained . . . to
enforce any liability created by this Act unless brought before
the expiration of 3 years after the act or transaction
constituting the violation upon which it is based." 815 ILCS
705/27. See also Dudley Enterprises, Inc. v. Palmer Corp.,
822 F. Supp. 496, 504 (N.D. Ill. 1993) (Section 27 barred claims
arising from franchise agreement entered into more than three
years prior). American's Section 5 claims are based on the
franchise agreements entered into by the parties in 1990, 1994
and 1997. Undoubtedly then, the statute of limitations has run
in 1993, 1996 and 2000, respectively. American concedes as much.
Instead, American advances new claims under the post-sale
registration and disclosure requirements of Section 10 and 11 of the IFDA. Pl. Opp. Mem. at 3-6.*fn1
However, American cannot use its response brief to amend the
amended complaint. Neal v. City of Chicago, No. 03 C 1945, 2003
WL 22389309 at * 1 (N.D. Ill. Oct. 21, 2003).
Nor would these amendments save the day. Section 10 requires
franchisors to file annual reports annually "but not later than
one business day before the anniversary date of the
registration." 815 ILCS 705/10. Section 11 requires
registered franchisors to amend their disclosure statements and
deliver the amended disclosure statement to any prospective
franchisees within 90 days of certain material changes. 815 ILCS
705/11. Thus, Section 10 and 11 expressly apply only to
franchisors who registered their franchises. Because American
alleges Lexicon never registered the franchises in the first
place, the requirements of Section 10 and 11 cannot come into
play. Indiana Funeral Directors Ins. Trust v. Trustmark Ins.
Corp., 347 F.3d 652, 654 (7th Cir. 2003) (leave to amend may
be denied due to futility of amendment).
B. Extraterritorial Application
The amended complaint alleges that Lexicon violated Section 19
of the IFDA by terminating the 1997 franchise agreement. Lexicon
argues that American's termination of franchise claim is
defective as a matter of law because it improperly seeks to apply
the IFDA extraterritorially to video course sales in Wisconsin
and Indiana. Lexicon's argument is persuasive. This court has previously examined the extraterritorial
application of the IFDA. H.R.R. Zimmerman Co. v. Tecumseh
Products Co., No. 99 C 5437, 2002 WL 31018302 (N.D. Ill. Sept.
9, 2002). In that case, plaintiff sued defendant when its
franchise agreement was terminated. Plaintiff's territory under
the franchise agreement included Illinois, Indiana, Iowa,
Wisconsin and Michigan. Before trial, defendant moved to amend
its pleadings to include an additional affirmative defense,
"namely, that the IFDA cannot encompass damages incurred from
lost sales activity outside of Illinois." Id. at *3. The court
refused extraterritorial application of the IFDA, relying on the
fact that the statute was silent on the point and that
extraterritorial application "would pose a constitutional issue."
Id. at *3-5. As a result, the court granted defendant's motion
because it was undisputed that plaintiff sought recovery under
the IFDA for out-of-state activities. Id. Contrary to
American's position, H.R.R. Zimmerman bars recovery under the
IFDA for the termination of a franchise agreement governing sales
in Indiana and Wisconsin.
As Lexicon points out, American's attempt to distinguish
H.R.R. Zimmerman is belied by the amended complaint. Am. Compl.
at ¶ 20 ("[American] was granted the right to promote, market,
sell and distribute INGLES SIN BARRERAS in Wisconsin and
Indiana"); ¶ 22 ("On October 8, 2001, Lexicon terminated
[American's] right[s] . . . in Wisconsin and Indiana"); ¶ 35
(same). American has not alleged that its termination claim
"arises solely within Illinois." Pl. Opp. Mem. at 7. Instead,
American merely alleges that it is an Illinois corporation with
its principal place of business in Chicago. Id. at ¶ 3.
American's response brief cannot serve to amend its IFDA claim.
Neal v. City of Chicago, 2003 WL 22389309 at * 1. Nor is the
proposed amendment of any consequence. It is irrelevant whether
Indiana and Wisconsin consumers purchased the video courses by
contacting American's telemarketers in Illinois. As in H.R.R.
Zimmerman, this court will not impose "[t]he public policy choices of the Illinois legislature
. . . [on] the consumers of Indiana . . . and Wisconsin." Id.
at * 4. The IFDA does not apply to sales to out-of-state
consumers. In the absence of any contrary authority, American's
franchise termination claim must be dismissed.*fn2
III. ILLINOIS CONSUMER FRAUD ACT
American claims that Lexicon violated the Illinois Consumer
Fraud Act by engaging in price discrimination and making material
misrepresentations to justify the video course price increase. In
response, Lexicon argues that the ICFA claim must be dismissed on
two bases: (1) American fails to sufficiently allege a material
misrepresentation; and (2) price discrimination claims are not
actionable under the ICFA. Lexicon is correct.
The amended complaint fails to plead Lexicon's alleged
misrepresentations with particularity. American fails to identify
with specificity how Lexicon's statements constitute
misrepresentations. Indeed, American merely alleges that Lexicon
stated that the video course price would be raised as to
exclusive distributors, and that it subsequently learned that
other distributors, namely smaller distributors in Mexico, Latin
America, and the United States, were not paying the increased
price. Significantly, American does not allege that these smaller
distributors were exclusive distributors. Absent that allegation,
American's misrepresentation claim under the ICFA cannot survive
dismissal. Miller v. Showcase Homes, Inc., No. 98 C 2009, 1999
WL 199605 at * 2 (N.D. Ill. 1999) (plaintiff must allege "the
identity of the person making the misrepresentation, the time,
place, and content of the misrepresentation, and the method by
which the misrepresentation was communicated") (internal quotation marks and citations
omitted). Contrary to American's argument, the materiality of
Lexicon's purported statement is not yet at issue. Pl. Opp. Mem.
at 10 ("[w]ith respect to materiality, there are genuine issues
of material fact") (internal quotation marks and citations
omitted). American must first allege a misrepresentation with
In addition, American attempts to avoid dismissal by arguing
that it need not plead a misrepresentation in order to allege an
ICFA claim. American misses the mark. In the amended complaint,
American explicitly identified its claim as one of material
misrepresentation. Am. Compl. at ¶ 50 ("Lexicon has engaged in
unfair and deceptive acts or practices in violation of the
Consumer Fraud Act by . . . Misrepresenting to [American] that
increase in price for the purchase of Video Courses to $380 was
as a result of [American] being an `exclusive distributor' and
Lexicon's inability to `absorb increases in product development
and manufacturing costs'") (emphasis added). Having voluntarily
done so, American cannot now avoid the requirements of Rule 9(b).
De Leon v. Beneficial Const. Co., 55 F. Supp.2d 819, 825 (N.D.
Ill. 1999) (misrepresentation claims under the Illinois Consumer
Fraud Act must comply with Federal Rule of Civil Procedure 9(b)).
Accordingly, Count II is dismissed without prejudice to the
extent it alleges a claim for material misrepresentation under
American's price discrimination claim also fails. As Lexicon
correctly pointed out, price discrimination is not actionable
under the ICFA. Laughlin, et al. v. Evanston Hosp., et al.,
550 N.E.2d 986, 993 (Ill. 1990). Contrary to American's position, the
Illinois Supreme Court's holding was not limited to those cases
in which plaintiff attempts to disguise an antitrust claim:
As discussed above, the legislature in the Antitrust
Act declined to include provisions against price
discrimination because the legislature found that
inclusion of such prohibitions would be undesirable.
To construe the Consumer Fraud Act to give a cause of action for discriminatory pricing that the
legislature refused to give under the Antitrust Act
would be incongruous. Legislation is designed to be
consistent. It would be inconsistent to provide that
the very conduct which is not sufficient to state a
cause of action under the Antitrust Act is sufficient
to state a cause of action under the Consumer Fraud
Id. Nor is this court persuaded by American's single citation
to the non-binding, vacated decision of Nichols Motorcycle
Supply, Inc. v. Dunlop Tire Corp., 913 F. Supp. 1088
, 1139 (N.D.
Ill. 1995) (vacated pursuant to settlement). Laughlin
undisputedly bars this claim. Compare Falls City Indus., Inc. v.
Vanco Beverage, Inc., 460 U.S. 428
, 444 n. 10 (1983) ("Economic
price discrimination consists in selling a product to different
customers at prices that bear different ratios to the marginal
costs of sales to those customers") with Am. Compl. at ¶ 50(a)
("Lexicon has engaged in unfair and deceptive acts or practices
in violation of the Consumer Fraud Act by . . . engaging in
economic price discrimination by selling the Video Courses to
different franchisees and/or licensees at prices that bear
different ratios to the marginal costs of sales to [American]").
Count II is dismissed with prejudice to the extent it alleges a
claim for economic price discrimination under the ICFA.
IV. BREACH OF CONTRACT
Count III of the amended complaint alleges that Lexicon
breached the 1990, 1994 and 1997 franchise agreements by making
unauthorized sales in American's distribution territories. The
amended complaint further alleges that Lexicon breached the 1997
agreement by improperly terminating American's distribution
rights in Indiana and Wisconsin on October 8, 2001.
Lexicon moves to dismiss American's contract claim for improper
venue to the extent it alleges a breach of the 1994 agreement
because that agreement contains a forum selection clause. Lexicon further moves for dismissal of American's breach of
contract claims under the 1990 and 1997 agreements, arguing that
the claims are necessarily interrelated.
Under the 1994 agreement, "[t]he parties agree[d] to bring any
actions involving the interpretation or enforcement of th[e]
agreement in a court having jurisdiction in California, with a
venue in Los Angeles County, California." Am. Compl., Ex. B at ¶
16. Pursuant to Fed.R.Civ.P. 12(b)(3), courts generally enforce a
forum selection clause and dismiss an action when a contract
dispute arises over an agreement containing a forum selection
clause with sufficiently mandatory language. See Penn, L.L.C. v.
New Edge Network, Inc., No. 03 C 5496, 2003 WL 22284207 (N.D.
Ill. Oct. 3, 2003). However, Illinois law contains an exception.
The Illinois Franchise Disclosure Act voids forum selection
clauses in franchise agreements covered by the Act. 815 ILCS
705/4 ("Any provision in a franchise agreement that designates
jurisdiction or venue outside of this State is void, provided
that a franchise agreement may provide for arbitration in a forum
outside of this State"). As explained above, the IFDA cannot
apply because the 1994 agreement only governs out-of-state sales
in Arizona. See supra Part II, B at n. 2. Accordingly, the IFDA
cannot invalidate the forum selection clause in the 1994
agreement. Contrary to American's position, this court's prior
decision in American Top English, Inc., 2004 WL 407031, at *1
does not foreclose this result. During briefing, the parties did
not individually address the 1990, 1994, and 1997 agreements with
respect to the anti-forum selection provision of the IFDA.
Instead, the parties' briefs casually lumped the agreements
together. American's breach of contract claim must be dismissed
pursuant to Rule 12(b)(3) to the extent it alleges a breach of
the 1994 agreement.
Lexicon also argues American's breach of contract claims
arising under the 1990 and 1997 agreements should be dismissed
because the agreements are interrelated. Lexicon's argument is fatally flawed. Unlike the 1994 agreement, the 1990 and 1997
agreements do not contain forum selection clauses. Nor can the
forum selection clause of the 1994 agreement be read into either
agreement. The plain language provides otherwise. See Am.
Compl., Ex. B (1994 agreement expressly states that "none of
[its] terms and provisions . . . shall amend, supplement, or
superseded in any way any of the terms of the [1990 agreement]");
Id., Ex. C (1997 agreement explicitly states that the 1990 and
1994 agreements "remain in full force and effect, subject to
modification by the terms of this Letter Agreement only" and
"[t]o the extent the terms of this Letter Agreement conflict with
the terms of the [1990 and 1994 agreements], the terms of this
Letter Agreement shall be controlling"). Lexicon's Rule 12(b)(3)
motion to dismiss American's claims regarding the breaches of the
1990 and 1997 agreements must be denied. This court's dismissal
of American's breach of contract claim regarding the 1994
agreement does not change this result. See CQL Original
Products, Inc. v. Nat'l Hockey League Players' Ass'n,
39 Cal.App.4th 1347, 1354 (1995) (inconvenience and additional
expense are not relevant to the determination of whether to
enforce a forum selection clause).
B. Breach of Contract: 1990 and 1994 Agreements
Lexicon argues that American's breach of contract claims under
the 1990 and 1994 agreements are limited by subsequent agreement
of the parties.*fn3 This court need not consider Lexicon's argument as it pertains to the 1994 agreement.
American's breach of contract claim is dismissed to the extent it
alleges breach of the 1994 agreement. See supra Part IV.A. In
any event, Lexicon's argument fails under Rule 12(b)(6).
Lexicon argues the parties entered into an agreement on July
25, 1997 that modified the 1990 and 1994 agreements.
Specifically, Lexicon claims that American may not seek to
recover for any sale unauthorized by the 1990 and 1994 agreements
more than 90 days after the sale. In so arguing, Lexicon attaches
an additional agreement between the parties to its motion to
dismiss. Def. Mem., Ex. 3 at ¶ 11 ("[i]n no event shall
[American] seek compensation from [Lexicon] for unauthorized
sales more than 90 days after any such sale by [Lexicon]"). On a
Rule 12(b)(6) motion, documents attached by Lexicon may only be
considered part of the pleadings when they are (1) referred to in
American's amended complaint; and (2) are central to American's
claims. Albany Bank & Trust Co. v. Exxon Mobil Corp.,
310 F.3d 969, 971 (7th Cir. 2002). American's amended complaint does
not refer to the July 25, 1997 typed agreement that Lexicon
attaches to its motion. American alleges breaches of the 1990,
1994, and July 26, 1997 agreements without reference to the
existence of, or limitations included in, the July 25, 1997
agreement. Thus, the agreement is not central to American's
claim. The July 25, 1997 agreement is central to Lexicon's
defense of American's claims and may not be considered under
Rule 12(b)(6). Id. Nor will Lexicon's motion be converted into one
for summary judgment. Batteast Construction Co. v. Public
Building Commission of Chicago, 195 F. Supp.2d 1045, 1051 (N.D.
Ill. 2001). Accordingly, the motion to dismiss American's breach
of contract claims to the extent recovery is sought for sales
unauthorized by the 1990 and 1994 agreements and made ninety days
prior to American's filing of its amended complaint is denied. C. Breach of Contract: 1997 Agreement*fn4
Lexicon claims that American's breach of contract claim
regarding the 1997 agreement must be dismissed because the
agreement did not provide American with exclusive distribution
rights in Wisconsin and Indiana. In response, American argues
that the question of exclusivity is a question of fact that may
not be resolved by Lexicon's Rule 12(b)(6) motion.
Lexicon points out that the amended complaint does not
explicitly allege that the 1997 agreement, like the 1990 and 1994
agreements, granted American exclusive distribution rights.
Compare Am. Compl. ¶¶ 20, 62, 64 ("[u]nder the terms of the
1997 Agreement, inter alia, [American] was granted the right to
promote, market, sell and distribute in Wisconsin and Indiana")
with ¶ 8(b) ("[u]nder the terms of the 1990 Agreement, . . .
[American] was the exclusive Distributor within . . . Illinois");
¶ 14(a) ("[u]nder the terms of the 1994 Agreement, . . .
[American] was granted the exclusive right to promote, market,
sell and distribute . . . in Arizona"). In the absence of an
allegation as to the exclusivity of distributorships in Wisconsin
and Indiana, American's breach of contract claim cannot survive
dismissal. American effectively concedes this point and argues,
inter alia, that the exclusivity of its distributorships in
Wisconsin and Indiana may arise out of another agreement between
the parties. Pl. Opp. Mem. at 13. In this regard, the court notes
that the 1997 agreement itself refers to another agreement
governing American's distribution rights in Wisconsin and
Indiana. Am. Compl., Ex. C ("the following is hereby added to
the Distribution Agreement for the states of Illinois, Wisconsin
and Indiana"); ("[i]t is expressly understood by the parties
hereto that the Distributor Agreements remain in full force and effect")
(emphasis added). Accordingly, the dismissal of American's breach
of contract claim regarding the 1997 agreement is without