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Bartolotta v. Dunkin' Brands Group, Inc.

United States District Court, N.D. Illinois, Eastern Division

December 6, 2016

MICHAEL BARTOLOTTA, individually and on behalf of all others similarly situated, Plaintiff,
DUNKIN' BRANDS GROUP, INC., a Massachusetts corporation, and ORLAND PARK DONUTS, INC., d/b/a DUNKIN' DONUTS STORE #339462, an Illinois corporation, Defendants.


          Thomas M. Durkin United States District Judge

         Plaintiff Michael Bartolotta has brought a class action against Dunkin' Brands Group, Inc. (“the Corporate Defendant”) and Orland Park Donuts, Inc. (“the Store”) alleging that Defendants charged an excessive amount of sales tax on his purchase of bulk coffee beans. Both the Corporate Defendant and the Store have filed motions to dismiss, and, alternatively, motions for summary judgment. Oral argument was heard on September 12, 2016. The Court has reviewed the briefs filed by the parties and considered the arguments made at the oral argument. For the reasons set forth below, both Defendants' motions to dismiss are granted. Defendants' alternative motions for summary judgment are dismissed as moot.

         Legal Standard

         A Rule 12(b)(6) motion challenges the sufficiency of the complaint. See, e.g., Hallinan v. Fraternal Order of Police of Chi. Lodge No. 7, 570 F.3d 811, 820 (7th Cir. 2009). A complaint must provide “a short and plain statement of the claim showing that the pleader is entitled to relief, ” Fed.R.Civ.P. 8(a)(2), sufficient to provide defendant with “fair notice” of the claim and the basis for it. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). This standard “demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). While “detailed factual allegations” are not required, “labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555. The complaint must “contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.'” Iqbal, 556 U.S. at 678 (quoting Twombly, 550 U.S. at 570). “‘A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.'” Mann v. Vogel, 707 F.3d 872, 877 (7th Cir. 2013) (quoting Iqbal, 556 U.S. at 678). In applying this standard, the Court accepts all well-pleaded facts as true and draws all reasonable inferences in favor of the non-moving party. Mann, 707 F.3d at 877.


         The State of Illinois taxes commercial food sales under the Retailers' Occupation Tax Act (“ROTA”), 35 ILCS 120/2-10 (tax imposed on retailer based on “gross receipts from sales of tangible personal property made in the course of business”), and the corresponding Use Tax Act (“UTA”), 35 ILCS 105/3-10 (tax imposed on consumer based on selling price of tangible property purchased at retail).[1] In relevant part, both statutes provide that the rate of the tax is 6.25% (“the high tax rate”), unless the sale is for food “that is to be consumed off the premises where it is sold (other than alcoholic beverages, soft drinks, and food that has been prepared for immediate consumption), ” in which case “the tax is imposed at the rate of 1%” (“the low tax rate”).[2] Plaintiff alleges that in March 2016 he purchased coffee beans from the Store and that he was charged the high tax rate on that purchase, notwithstanding that the plain language of the ROTA and the UTA provides that the low tax rate should have applied because coffee beans, by their very nature, must be consumed off-premises. Plaintiff alleges that the Store knowingly overcharged him the high tax rate, causing him actual damages in the amount of the overcharges. Plaintiff seeks recovery on behalf of himself and a class of plaintiffs for monetary losses from the tax overcharges, as well as injunctive relief, attorneys' fees, and costs.


         A. The Corporate Defendant

         As an initial matter, the Court will address the Corporate Defendant's argument that, apart from the merits issues regarding Plaintiff's underlying claims, it is not a proper defendant in this case. The Store, not the Corporate Defendant, is the party who allegedly sold the coffee beans to Plaintiff and over-charged him for the taxes on the sale. Moreover, the Corporate Defendant contends (and Plaintiff does not dispute) that the Store is a privately owned and independently operated franchise of the Dunkin' Donuts franchise system.[3] Plaintiff seeks to hold the Corporate Defendant liable for the Store's allegedly improper tax overcharges based on the allegation that the Corporate Defendant “directs” or “controls” the Store's collection of state taxes.[4] The Corporate Defendant argues that Plaintiff's allegations of control are conclusory and do not survive the plausibility standard of Twombly and Iqbal. Plaintiff counters that he has alleged that not only the Store but numerous other independently owned Dunkin' Donuts franchises are charging the higher tax rate on bulk coffee sales, while virtually all of their competitors are charging a low rate. See R. 1 at 8 (¶¶ 52-58). Plaintiff argues that these facts suggest that the Corporate Defendant played a role in the Store's decision to charge the higher rate.[5]

         The majority rule is that a franchisor can be held vicariously liable for the torts or other wrongdoing of a franchisee when “the franchisor controls or has a right to control the specific policy or practice resulting in harm to the plaintiff.” Depianti v. Jan-Pro Franchising Int'l, Inc., 990 N.E.2d 1054, 1064 (Mass. 2013) (citing case law); see, e.g., Courtland v. GCEP-Surprise, LLC, 2013 WL 3894981, at *6 (D. Ariz. July 29, 2013) (no franchisor liability where “[f]ranchisor supervision does not extend [ ] to control over an instrumentality of franchisee harm”); People v. JTH Tax, Inc., 151 Cal.Rptr.3d 728, 747-48 (Cal.App. 2013) (franchisor can be found liable for misleading advertising and unfair business practices of its franchisee “under normal agency theory”). A franchisor also can be held liable when it participated in the alleged wrongs. See State v. Cottman Transmissions Sys., Inc., 587 A.2d 1190, 1196 (Md. Ct. Spec. App. 1991) (holding that even where the facts do not support a finding of an agency relationship between the franchisor and franchisee, the “franchisor equally commits a deceptive practice” when it “directs [the] deceptive practices by using its economic and contractual clout to force its franchisees to commit deception”). Illinois law appears to be consistent with these principles. See, e.g., Slates v. Int'l House of Pancakes, Inc., 413 N.E.2d 457, 464 (Ill.App. 4th Dist. 1980) (while the “[t]he mere licensing of a trade name does not create an agency relationship, either ostensible or actual, ” nonetheless, “[w]here a sufficient degree of control and direction is manifested by the parent franchisor, an agency relationship may be created”).

         There are literally thousands of Dunkin' Donuts franchises privately owned around the world, and the Corporate Defendant makes a compelling argument that it should not be subject to liability every time one of those franchisees gets sued. See Depianti v. Jan-Pro Franchising Int'l, Inc., 39 F.Supp.3d 112, 131 (D. Mass. 2014) (“JPI is not vicariously liable for the conduct of its regional master franchises . . . merely because of the general degree of influence inherent in a typical franchisor-franchisee relationship.”); Patterson v. Domino's Pizza, LLC, 333 P.3d at 723, 726 (Cal. 2014) (“The imposition and enforcement of a uniform marketing and operational plan cannot automatically saddle the franchisor with responsibility for employees of the franchisee who injure each other on the job.”); Cottman Transmissions Sys., Inc., 587 A.2d at 1198 n.13 (expressing reluctance to impose liability on a franchisor for unfair or deceptive trade practices committed by a franchisee “completely independent of any coercion or actions of the franchisor” because the imposition of such liability would constitute “a vast [ ] judicial expansion of the scope of the [unfair trade practices statute's] provisions”). But just as the existence of a franchise agreement does not automatically trigger liability on the franchisor's part, neither does it insulate the franchisor from such liability. Drexel v. Union Prescription Ctrs., Inc., 582 F.2d 781, 786 (3d Cir. 1978).

         The Court concludes that Plaintiff has alleged control over the specific policy or practice of the Store that allegedly caused Plaintiff's harm. Further, while Plaintiff alleges control in mostly conclusory terms, those allegations are rendered plausible by the complaint's additional allegations concerning uniformity in the manner in which Dunkin' Donuts franchises have interpreted and applied the tax law at issue, [6] versus their competitors who for the most part allegedly apply the low tax rate to the sale of bulk coffee beans.[7] The Court is not making any legal determinations regarding the exact circumstances required for the Corporate Defendant to be held liable under Illinois law for the Store's conduct, as that issue has not been explored or developed by the parties in the current briefing. Rather, in declining to rule in the Corporate Defendant's favor on this issue, the Court is merely noting that the law may impose liability under some circumstances relative to the control issue, and that the conclusory control allegations Plaintiff makes in the complaint are supported by a reasonable inference drawn from the additional allegations regarding uniformity among Dunkin' Donuts franchisees. See Nat'l Gear & Piston, Inc. v. Cummins Power Sys., LLC, 975 F.Supp.2d 392, 408-10 (S.D.N.Y. 2013) (discussing types of allegations that would be needed to plausibly allege a factual basis for a control theory of liability). Additional factual support for Plaintiff's control allegations is likely to be in the exclusive possession of Defendants, and it therefore would be unreasonable to require Plaintiff to provide further factual evidence of such control at the pleading stage when he has not yet had the opportunity to discover those facts.[8]

         In the alternative to arguing that Plaintiff's allegations of control lack plausibility, the Corporate Defendant also argues that the Court can take notice of the franchise agreement, which agreement, the Corporate Defendant contends, proves that it does not have control over the Store's decision to charge the higher tax rate. One problem with this argument is that the franchise agreement between the Corporate Defendant and the Store is outside of the complaint and thus not part of the current record before the Court. Moreover, while the Corporate Defendant argues the Court can take judicial notice of the franchise agreement because it is a public record, in fact the only public document to which the Corporate Defendant refers is a copy of a sample franchise agreement found on a website apparently operated by an organization that promotes services and interests of franchisees and potential franchisees.[9] But the sample franchise agreement found on that website is not the actual franchise agreement between the Corporate Defendant and the Store, and no party has produced any evidence from which the Court can conclude that the pages from the sample document referenced by the Corporate Defendant in its brief are identical to the actual agreement between the Corporate Defendant and the Store.[10] Nor has the Corporate Defendant established that all terms material to the control issue have been disclosed to the Court through the one or two pages from the sample franchise agreement to which the Corporate Defendant cites. Plaintiff generally denies the Corporate Defendant's assertion that the actual franchise agreement is publicly available, but admits that he now has possession of it through discovery in this case. Nevertheless, since neither party has submitted the agreement to the Court for review in connection with the pending motions to dismiss, the Court does not believe it is proper to base its decision on that document.

         Moreover, if the Court were to consider the sample franchise agreement (and assume it is identical to the actual franchise agreement between the Store and the Corporate Defendant), that agreement, while supportive of the Corporate Defendant's argument that it does not control the Store's actions regarding the collection of taxes, does not definitively resolve the control issue. The Corporate Defendant cites to Section 7.1, which states that the franchisee has a contractual duty to comply with all local laws, including tax laws. See http://www. sites/default/files/DD FDD%208.pdf (at page 260). A contractual duty to comply with the tax laws, however, does not necessarily negate the possibility that the franchisor can dictate what the Store should do in order to comply. The Corporate Defendant also cites to Section 7.3 of the agreement, which states that the franchisee has the discretion to determine the prices it charges for products it sells. Id. But the “price” may not include the taxes, and, even if it did, the provision is qualified with the language “[e]xcept as [the Franchisor] may be permitted by law to require a particular price.”[11]

         In any event, even if the terms of the franchise agreement clearly provided that the Corporate Defendant did not have contractual control over the Store's determination of what tax to collect, that would not be the end of the matter. “‘Whether the relationship between a franchisor and a franchisee is that of principal and agent, at least insofar as this relationship affects a stranger to the franchise agreement, is dependent upon the intention of the parties as determined from the written agreement and the accompanying circumstances.'” Salisbury v. Chapman Realty, 465 N.E.2d 127, 131 (Ill.App. 3rd Dist. 1984) (quoting Slates, 413 N.E.2d at 464) (emphasis added). The question, therefore, is not just whether the Corporate Defendant had the right to control under the franchise agreement, but whether it in fact did control the Store in connection with the Store's conduct challenged in the complaint. See Dipianti, 990 N.E.2d at 1064 n.11 (“Jan-Pro's vicarious liability would then turn on whether Jan-Pro controlled or had a right to control Bradley in connection with such representations and conduct.”). In short, while the nature and extent of control as defined in the franchise agreement is relevant, so too is the parties' actual conduct and practice. See Drexel, 582 F.2d at 786 (“The fact that the franchise agreement expressly denies the existence of an agency relationship is not in itself determinative of the matter.”); Patterson, 333 P.3d at 741 (“Of course, the parties' characterization of their relationship in the franchise contract is not dispositive.”). In light of the potential relevancy of facts beyond or in addition to the terms of the franchise agreement, the Court declines to dismiss the Corporate Defendant on this basis, even if the terms of the franchise agreement are taken into account and interpreted in the manner in which the Corporate Defendant argues they should be interpreted.

         B. The Store

         Plaintiff alleges two causes of action: (1) a claim for violation of the Illinois Consumer Fraud and Deceptive Business Practices Act (“ICFA”), and (2) negligent misrepresentation.

         1. ICFA

         “To prevail under the ICFA, a party must ultimately show (1) an unfair or deceptive act or practice by defendant, (2) defendant's intent that plaintiff rely on or be treated unfairly by the act or practice, and (3) that the deception occurred in the course of conduct involving trade and commerce.” R. Rudnick & Co. v. G.F. Protection, Inc., 2009 WL 112380, at *1 (N.D. Ill. Jan. 15, 2009). Citing to People v. Stianos, 475 N.E.2d 1024 (Ill.App.2d Dist. 1985), Plaintiff contends that a retailer's practice of overcharging for sales tax constitutes both a deceptive and an unfair trade practice within the meaning of the ICFA. The Store contends that it did not overcharge Plaintiff for sales tax, and that, even if it did, its mistake was an honest one that cannot form the basis of an unfair or deceptive trade practices claim.

         The Store sells both food consumed on-premises and food intended to be consumed off-premises such as the pre-packaged coffee beans at issue here. Pursuant to regulation issued by the IDOR, which rate under the Illinois tax scheme should be applied to the Store's sales of coffee beans depends on several factors. Moreover, both Plaintiff and Defendants have presented reasonable arguments in support of their conflicting interpretations of the applicable regulation. But the Court concludes that the better of the arguments is for the high tax rate to be applied.

         The statute states that the tax rate applicable to food to be consumed off-premises is 1%. The bulk coffee beans fall within the category of foods to which the low rate would seem to apply because, by its nature, it is intended to be consumed off-premises. However, the IDOR regulation establishes a rebuttable presumption for a retailer that has seating or other facilities for on-premise consumption of food. The presumption is that the high tax rate applies for all food sales by that retailer. The regulation expressly states that, “[a]s a result of this presumption, even bulk food could potentially be taxable at the high rate.” 86 Ill. Admin. Code, Section 130.310(b)(1). The retailer may challenge the presumption that the high tax rate applies by proving that it can satisfy a two-part test set out in the regulations. The Store contends that it never challenged the presumption because it cannot satisfy the two-part test, which requires the retailer to show (1) that the area for on-premises consumption is physically separated or otherwise distinguishable from the area where food not for immediate consumption is sold; and ...

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