Summary
In Hogin v. Barnmaster, Inc., C3-02-1880, 2003 WL 21500044 *4-5 (Minn.Ct.App. 2003) the court held that an 80% markup on a training fee, over the defendant's cost, did not constitute a franchise fee because the right to enter into a business relationship with the defendant was not predicated on the payment of the training fee.
Summary of this case from Coyne's Company, Inc. v. Enesco, LLCOpinion
No. C3-02-1880.
Filed: July 1, 2003.
Appeal from Rice County District Court, File No. C5001115.
Jon J. Arcand, Jon J. Arcand Associates, P.L.L.C., (for appellant)
Adam J. Dowd, Schmitz, Ophaug Dowd, (for respondents)
Considered and decided by Lansing, Presiding Judge, Shumaker, Judge, and Wright, Judge.
This opinion will be unpublished and may not be cited except as provided by Minn. Stat. § 480A.08, subd. 3 (2002).
UNPUBLISHED OPINION
In this appeal from a judgment in favor of respondent, appellant argues that the district court erred in (1) concluding that collateral estoppel does not apply to the Department of Commerce's determination in a cease-and-desist order that the distribution agreement between Hogin and Barnmaster is a franchise under Minn. Stat. § 80C.02 and (2) determining that a franchise was not created because Hogin did not pay a franchise fee to Barnmaster. We affirm.
FACTS
On April 9, 1996, appellant James Hogin entered into a distributorship agreement to sell Barnmaster products with respondent Barnmaster, Inc., a California company that manufactures and sells modular horse barns. Under the distributorship agreement, Hogin was required to purchase and maintain a display barn and stock Barnmaster products with a minimum total value of $1,000. It was Barnmaster's preference to have the display barn located on "the freeway or heavily traveled highway." Under the agreement, Barnmaster was not "responsible to [Hogin] for any business expenses incurred by [Hogin] unless specifically approved and agreed to in advance by Barnmaster." The agreement could be terminated by either party with 30 days' written notice. In the event of litigation arising from the terms of the distributorship agreement, the prevailing party would be awarded reasonable attorney fees.
Barnmaster provided optional training to its distributors on how to erect its barns. Hogin paid $2,996 for two Barnmaster employees to travel from Texas to Minnesota to provide this training. Between 1996 and 1998, Hogin sold three barns. Concerned over Hogin's low sales volume, Barnmaster's vice president of marketing and sales visited Hogin in 1998. The Barnmaster official recommended that Hogin move his display barn to a "high traffic location," which Hogin declined to do. In May 1999, Barnmaster warned Hogin, "without your commitment to re-establish your display I will be forced to do something if a qualified individual comes along." Four months later, Barnmaster terminated the distributorship agreement with Hogin.
Hogin reported Barnmaster's actions to the Minnesota Department of Commerce (DOC). The DOC assigned an investigator to determine whether Barnmaster's actions were lawful. In its March 8, 2000, cease-and-desist order, the DOC determined that (1) the distributorship agreement between Barnmaster and Hogin was a "franchise" within the meaning of Minn. Stat. § 80C.01 and (2) Barnmaster, which was not registered to sell franchises in Minnesota, had violated Minn. Stat. § 80C.02 by selling an unregistered franchise. The DOC ordered Barnmaster to cease and desist from offering or selling any franchises in Minnesota. The order advised Barnmaster of its right to request a hearing and contest the DOC ruling. Barnmaster chose not to do so.
Alleging that the termination of the distribution agreement was an unfair franchise business practice, in violation of Minn. Stat. § 80C.14, Hogin sued Barnmaster to recover costs, disbursements, and attorney fees. Following a two-day bench trial, the district court determined that (1) the distributorship agreement between the parties does not constitute a franchise as defined under Minn. Stat. § 80C.01, subd. 4(a); (2) Hogin is not entitled to money damages because the Minnesota Franchise Act does not apply; and (3) under the distribution agreement, which controls, "Barnmaster acted properly in terminating the contract on thirty (30) days notice."
Hogin moved for a new trial, arguing that the district court erred by not giving collateral-estoppel effect to the DOC's determination that the distributorship agreement created a franchise. The district court denied the motion for a new trial, and this appeal followed.
DECISION I.
The doctrine of collateral estoppel, or issue preclusion, prevents "parties to an action from relitigating in subsequent actions issues that were determined in the prior action." Nelson v. Am. Family Ins. Group, 651 N.W.2d 499, 511 (Minn. 2002) (quoting In re Vill. of Byron, 255 N.W.2d 226, 228 (Minn. 1977)). "As a flexible doctrine, the focus is on whether its application would work an injustice on the party against whom estoppel is urged." Johnson v. Consol. Freightways, Inc., 420 N.W.2d 608, 613-14 (Minn. 1988) (citation omitted). Whether collateral estoppel applies is a mixed question of law and fact, which we review de novo. In re Trusts Created by Hormel, 504 N.W.2d 505, 509 (Minn.App. 1993), review denied (Minn. Oct. 19, 1993).
Collateral estoppel applies to certain administrative decisions when made in a judicial or quasi-judicial capacity. Graham v. Special Sch. Dist. No. 1, 472 N.W.2d 114, 115-16 (Minn. 1991). For collateral estoppel to apply to an administrative decision, the following requirements must be met:
(1) the issue to be precluded must be identical to the issue raised in the prior agency adjudication,
(2) the issue must have been necessary to the agency adjudication and properly before the agency,
(3) the agency determination must be a final adjudication subject to judicial review,
(4) the estopped party must be a party or in privity with a party to the prior agency determination, and
(5) the estopped party must have been given a full and fair opportunity to be heard on the adjudicated issue.
Id. at 116 (citations ommited).
Hogin contends that Barnmaster is estopped from asserting that the distribution agreement is not a franchise because the DOC order determined that the distribution agreement is a franchise governed by the Minnesota Franchise Act. Barnmaster counters that two of the five requirements for collateral estoppel were not satisfied because (1) the DOC's determination was not a final adjudication subject to judicial review and (2) Barnmaster did not have a full and fair opportunity to be heard on the adjudicated issue.
To determine whether the DOC order constitutes a final adjudication subject to judicial review, we must analyze the nature of the proceedings held and determine whether judicial review of the order is authorized. Graham, 472 N.W.2d at 116 (citing United States v. Utah Constr. Mining Co., 384 U.S. 394, 422, 86 S.Ct. 1545, 1560 (1966)); Ellis v. Minneapolis Comm'n on Civil Rights, 319 N.W.2d 702, 704 (Minn. 1982) (analyzing whether judgment filed). For collateral estoppel to apply, the issue sought to be precluded must have been actually litigated in the former proceeding. SMA Servs., Inc. v. Weaver, 632 N.W.2d 770, 773 (Minn.App. 2001). Judicial review also is a precondition to administrative collateral estoppel. Falgren v. State, Bd. of Teaching, 545 N.W.2d 901, 905-06 (Minn. 1996); Graham, 472 N.W.2d at 116; McKee v. Ramsey County, 310 Minn. 192, 194 n. 1, 245 N.W.2d 460, 462 n. 1 (1976).
Administrative decisions may have a preclusive effect when based on adjudicative proceedings. See Falgren, 545 N.W.2d at 905 (listing factors required to apply collateral estoppel to administrative agency decision). But in the absence of a DOC adjudicative proceeding, a prerequisite for collateral estoppel has not been met. The DOC may issue a cease-and-desist order "[w]henever it appears to the commissioner that a person has engaged * * * in an act or practice constituting a violation of a law * * * related to the duties and responsibilities entrusted to the commissioner." Minn. Stat. § 45.027, subd. 5a(a) (2002). Here, the DOC conducted an investigation and made its determination without a hearing that a franchise existed. The DOC's investigation and order do not constitute an adjudication. The order is not founded on testimony or evidence from a contested hearing. The DOC's order gave Barnmaster an opportunity to request a hearing to challenge the decision. See Minn. Stat. § 45.027, subd. 5a(b) (2002). The order also provides that, unless a hearing is requested, the cease-and-desist order "will become permanent and will remain in effect until it is modified or vacated by the Commissioner." Had a hearing been requested, the franchise issue would have been adjudicated after a contested administrative hearing under the Administrative Procedure Act. Minn. Stat. § 45.027, subd. 5a(b). Because Barnmaster did not request a hearing, the order became final without an adjudication. Barnmaster's mere acquiescence in the DOC's determination by not requesting a hearing does not endow the decision on the franchise issue with collateral-estoppel effect. Roseberg v. Steen, 363 N.W.2d 102, 105 (Minn.App. 1985) (stating that "[c]ollateral estoppel * * * operates only as to matters actually litigated, determined by, and essential to a previous judgment" (citation omitted)).
The DOC's final determination also does not qualify for collateral estoppel because it was not subject to judicial review. Minn. Stat. § 45.027, subd. 5a(d) (2002), specifically limits judicial review to agency decisions made after an administrative hearing under the Administrative Procedure Act. Judicial review is only available to a "person aggrieved by a final decision in a contested case." Minn. Stat. § 14.63 (2002). Indeed, the "exclusive remedy" for determining the validity of a cease-and-desist order is through a contested administrative hearing and "subsequent appellate judicial review of that administrative proceeding." Minn. Stat. § 45.027, subd. 5a(d). Accordingly, the DOC's determination that the contract between Barnmaster and Hogin constitutes a franchise also does not meet this requirement for collateral estoppel.
Hogin also argues that Barnmaster's decision to forego an administrative hearing does not preclude the application of collateral estoppel because Barnmaster had a "full and fair opportunity" to litigate the franchise issue. This argument is unpersuasive. Issues are properly precluded from litigation when "the estopped party was given a full and fair opportunity to be heard on the adjudicated issue." Ellis, 319 N.W.2d at 704. Thus, the requisite "full and fair opportunity to be heard" refers to issues that have actually been litigated. See Clapper, 437 N.W.2d at 726; s ee also Popp Telcom v. Am. Sharecom, Inc., 210 F.3d 928, 939 (8th Cir. 2000) (noting that res judicata applies to claims previously litigated as well as those which might be litigated in the previous action, while collateral estoppel applies only to issues actually litigated). Where the issue has not been actually litigated, having had the opportunity to do so is not enough.
Whether a party has an adequate opportunity to litigate is determined by examining the nature of the administrative proceeding. See, e.g., Graham, 472 N.W.2d at 118 (finding adequate procedures in teacher-termination proceeding where impartial judge presided over the hearing, both parties were represented by counsel, record was made, and evidentiary rules were followed); Clapper, 437 N.W.2d at 726 (holding that unemployment proceedings did not constitute full and fair opportunity to be heard because tribunal was not bound to evidentiary and procedural rules, hearsay was admissible, and there were no provisions for juries). But we do not reach that level of inquiry when the issue was not actually litigated. Thus, the absence of a full and fair opportunity to be heard on an adjudicated issue also precludes the DOC's determination on the franchise issue from having collateral-estoppel effect.
II.
Hogin next argues that the district court erred in ruling that the distribution agreement is not a franchise under Minn. Stat. § 80C-01, subd. 4 (2002), because the training fees qualify as a franchise fee under the statute. Statutory construction is a question of law, which we review de novo. Brookfield Trade Ctr., Inc. v. County of Ramsey, 584 N.W.2d 390, 393 (Minn. 1998).
The Minnesota Franchise Act, Minn. Stat. §§ 80C.01-80C.22 (2002), governs the manner in which franchises are established and terminated. Minn. Stat. §§ 80C.01, subd. 4 (establishment), .14, subd. 3 (termination). The provisions are designed to protect potential franchises from unfair contracts and business practices. Martin Investors, Inc. v. Vander Bie, 269 N.W.2d 868, 872 (Minn. 1978). Hogin seeks damages from Barnmaster for alleged violations of the Minnesota Franchise Act.
A "franchise" is a contract or agreement between two or more persons
[(1)] by which a franchisee is granted the right to engage in the business of offering or distributing goods or services using the franchisor's trade name, trademark, service mark, logotype, advertising, or other commercial symbol or related characteristics;
[(2)] in which the franchisor and franchisee have a community of interest in the marketing of goods or services at wholesale, retail, by lease, agreement, or otherwise; and
[(3)] for which the franchisee pays, directly or indirectly, a franchise fee.
Minn. Stat. § 80C.01, subd. 4(a)(1). A "franchise fee" is "any fee or charge that a franchisee * * * or subfranchisor is required to pay or agrees to pay for the right to enter into a business or to continue a business under a franchise agreement, including * * * any training fee or training school fees or charges * * *." Id., subd. 9 (emphasis added).
Hogin maintains that, because the amount he paid as a training fee is more than 80 percent greater than the amount Barnmaster paid its employees who provided the training, the training fee constitutes a franchise fee. This argument fails, however, because the right to enter into a business relationship with Barnmaster was not predicated on the payment of the training fee.
The parties' signed distribution agreement required neither a franchise fee nor an annual fee to maintain the distributorship. After the parties entered into their distribution agreement, Hogin requested training in the construction of the barns. While the training service was highly recommended, it was not mandatory. As an alternative, Barnmaster provided directions for construction in a video and an instruction manual. Moreover, neither party considered the fee necessary for their continued business relationship under the distributorship agreement.
In certain circumstances, required purchases of products at prices exceeding bona fide wholesale prices or requirements to purchase unreasonable amounts of inventory may disguise indirect franchise fees. Upper Midwest Sales Co. v. Ecolab, Inc., 577 N.W.2d 236, 241-43 (Minn.App. 1998). But those circumstances are not present here. Hogin purchased a display barn for $8,850 and, as required by the contract, $1,000 worth of Barnmaster inventory. The display barn was an optional purchase obtained from Barnmaster at the wholesale price. The purchase price for the required inventory did not exceed the wholesale price, and the record does not support any claim that the required quantity was unreasonable . See Am. Parts Sys., Inc. v. T T Auto., Inc., 358 N.W.2d 674, 677 (Minn.App. 1984) (holding that minimum purchase requirement was not an indirect franchise fee because requirement did not exceed reasonable needs of the business). Because the record fails to establish that Hogin paid a franchise fee, either directly or indirectly, for the right to enter into the business or to continue its operation under the distributorship agreement, the district court correctly concluded that the distribution agreement is not a franchise.