UNITED STATES DISTRICT COURT

NORTHERN DISTRICT OF INDIANA

HAMMOND DIVISION

SEDAKER GROUP OF SOUTHERN )

CALIFORNIA INC., ANCJ, LLC, )

CAPIRE, LLC, and TAYDEN )

ENTERPRISES LP, )

)

Plaintiffs, )

)

vs. ) Cause No. 2:15CV198-PPS

)

DIRECTBUY INC. and DOES 1 through 100, )

)

Defendants. )

OPINION AND ORDER

Four California franchises have brought this suit against the franchisor, DirectBuy Inc.,

alleging breach of the franchise agreement. The case was transferred here from the Central

District of California because it is related to a similar case before this court brought by

DirectBuy Inc. against the same four franchises plus three others (see Cause No. 2:14CV91-

PPS/JEM). Presently before me is a motion brought by DirectBuy seeking dismissal of the first

amended complaint in the case transferred here from California. To survive a motion to dismiss,

a complaint must “state a claim to relief that is plausible on its face,” which in turn requires

factual allegations sufficient to permit a reasonable inference that the defendant is liable for the

misconduct alleged. Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 556 (2007). See also Ashcroft

v. Iqbal, 556 U.S. 662 (2009). 

The first amended complaint contains three counts, all alleging that DirectBuy breached

the franchise agreement by charging its franchisees fees that were not authorized by the

agreement. Counts 1 and 2 are brought by plaintiffs Sedaker Group (the former franchise of

West Riverside), ANCJ (the former franchise of East Bay), and Tayden Enterprises (the former
franchise of San Diego North). Both counts challenge DirectBuy’s imposition of excessive

“media expenses” – in Count 1 on the ground that the fees were unreasonable and in Count 2 on

the ground that the media expenses exceeded a 3% limitation applicable under §3.03 of the

agreement. Count 3 is the claim of plaintiff Capire (the former franchise of Sacramento),

similarly alleging that the media expenses violated its franchise agreement (a later version than

those executed by the three other plaintiffs) because the fees were unreasonable and exceeded

the 3% cap.1

The gist of the disagreement between the parties is which provision of the franchise

agreement authorizes and governs the imposition of the fees that DirectBuy calls “sales-lead

charges.” There are a number of provisions of the franchise agreement potentially at issue in this

case. The parties dispute which provision, if any, of the franchise agreement applies to these

fees. The potentially relevant provisions are somewhat ambiguous and at times seemingly

contradictory. The first provision of the franchise agreement that is potentially relevant is §3.03.

Here is what it says: 

3.03 Marketing and Legislative Fund Contributions. You agree to contribute

(at such times as we may designate from time to time) to the Marketing and

Legislative Fund $1,000 during each of our fiscal years, except that you are not

required to make any contributions during the first 12 months in which you

operate your Center. We have the right from time to time to increase the amount

you are required to contribute to the Marketing and Legislative Fund, provided

we may not increase the amount of your contributions to more than 3% of the

gross amounts you charge for new memberships (including renewal option fees,

but excluding renewal fees). 

[DE 30-1 at 10.] 

1

 Capire’s Franchise agreement differs from the other plaintiffs’ agreements in some

respects, but is essentially the same with respect to §3.03, titled “Marketing and Legislative Fund

Contributions.” 

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Relatedly, Section 7 of the agreement also deals with the concepts of “Marketing and

Advertising.” Here’s what it says, in pertinent part: “[DirectBuy] may, in our sole discretion,

establish and administer a fund (“the Marketing and Legislative Fund”) for the creation and

development of marketing, advertising, and related programs and/or legislative, legal and

regulatory defense programs relating to buyer clubs and other laws and regulations that affect

DirectBuy centers.” [Id. at 19.] Section 7.01 goes on to explain that DirectBuy “will have sole

discretion over all aspects of programs financed by the Marketing and Legislative Fund,

including creative concepts, media, materials and endorsements of marketing and advertising

programs,” and that DirectBuy cannot assure franchisees “that any particular DirectBuy center

will benefit directly or pro-rata from the placement of advertising.” [Id.] The Fund “may be used

to pay for the cost of preparing and producing marketing and advertising materials and programs

we select, including television and Internet media (such as Websites), video, audio and written

advertising materials,” and DirectBuy “may furnish [franchisees] with marketing, advertising

and promotional materials at cost, plus any related administrative, shipping, handling and storage

charges.” [Id. at 19-20.] 

There is yet another section of the franchise agreement which deals with marketing

materials – that is §4.04. This case deals with two different versions of §4.04. As it appears in

the earlier version of the DirectBuy Franchise agreement – the one signed by plaintiffs Sedaker

Group, ANCJ and Tayden in 2004 and 2005 – §4.04 “grant[s] [franchisees] the right to use

Marketing Materials, subject to such terms and conditions as we may impose from time to time.” 

[DE 30-1 at 13.] The section further provides that the franchisees “agree to execute such

agreements as we may require to protect our interests in connection with any Marketing

Materials and to pay such reasonable charges for Marketing Materials as we may assess from

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time to time.” [Id. at 13.] Section 4.04 defines “Marketing Materials” as “sales and marketing

tools and materials as [DirectBuy], from time to time, develop[s] and use[s] for DirectBuy

Centers, such as infomercials, Internet marketing tools (e.g., member marketing websites), sales

videotapes and sales materials.” The scope of §4.04 and §7.01 appear to overlap in that both

sections refer, for example, to marketing and advertising materials in similar areas such as

websites and internet marketing.

The fundamental question to be answered in this case is whether the charges that the

franchises complain of were assessed as contributions to the Marketing and Legislative Fund

(under §3.03 and §7.01) or whether they were assessed as charges for Marketing Materials (under

§4.04)? Or were they imposed as fees of some other kind altogether? What the franchises

characterize as “media expenses” subject to the 3% cap, DirectBuy characterizes as charges for

“sales leads” that are governed by §4.04 and not subject to any cap. To get to the bottom of the

disagreement about the disputed charges, a number of subsidiary questions need to be resolved.

These involve factual determinations that cannot be made at this time. 

In arguing that Counts 1 and 2 should be dismissed because the charges plaintiffs

complain of were authorized by §4.04, DirectBuy relies on the determination of a Pennsylvania

bankruptcy court. See In re Trinity Innovative Enterprises, LLC, Case No. 09-20579-REF

(Bankr.E.D.Penn. 2009). [DE 35-1 and 35-2.] Of course, Trinity has no preclusive effect

because the plaintiffs in this case were not parties to that proceeding. But more importantly, the

bankruptcy judge’s determinations in Trinity involved factual findings based on an evidentiary

hearing and record that included evidence concerning the history of the Marketing and

Legislative Fund, the practices and methods for DirectBuy’s assessment of fees to its franchisees

generally and its history with the franchisee in that case. [DE 35-1 at 8-11.] 

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The procedural posture of the Trinity case demonstrates why I must deny DirectBuy’s

motion to dismiss. The bankruptcy judge in Pennsylvania had the benefit of full factual record

before him; I have no such factual record before me at this point. When and if this case reaches a

similar stage, I will give Judge Fehling’s analysis the respectful consideration that is appropriate

to such non-controlling authority. DirectBuy’s argument presumes that I can somehow

determine at this point in the litigation what the complained-of charges were for and what

provision of the franchise agreement permitted them. But it’s not that simple. The franchise

agreement is at best confusing and at worse downright ambiguous. In order to sort this matter

out, in other words, to determine which provision of the franchise agreement applies (if any), I

will need the benefit of a full factual and evidentiary record, just as Judge Fehling had before

him. At the present, I am not in a position to engage in contract construction and make

determinations about the meaning and application of potentially ambiguous provisions of the

franchise agreement. 

The Capire franchise executed a slightly different agreement than the ones executed in

prior years by the three other franchisee plaintiffs. In Capire’s franchise agreement, §4.04 has

been amended and refers repeatedly not to “Marketing Materials” but instead to “lead generation

and marketing programs.” [DE 30-3 at 47.] The word “reasonable” has been deleted from the

provision expressing the franchisee’s agreement “to pay such charges as [DirectBuy] may assess

from time to time.” [Id.] With respect to the Capire franchise’s claim in Count 3, DirectBuy

argues that the agreement’s language “makes even more clear that §4.04 applies to sales-lead

charges, rather than §§3.03 and 7.01" and that DirectBuy was not prohibited from charging

Capire for sales leads relating to adjoining marketing territory. [DE 35 at 7.] This argument

does not support a motion to dismiss. As with Counts 1 and 2, determinations about the scope

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and application of the various sections of the franchise agreement cannot be made at this

juncture, without the factual record that could be presented in the context of a motion for

summary judgment. 

DirectBuy makes another argument related to the agreement that Capire signed which is

not contained in the franchise agreements signed by the other three franchisees. DirectBuy

points out that Section 4.04 in Capire’s agreement contains the following new paragraph:

YOU ACKNOWLEDGE AND AGREE THAT WE WILL HAVE NO

LIABILITY TO YOU, WHETHER BASED IN CONTRACT, TORT, STRICT

LIABILITY OR OTHERWISE, FOR ANY DIRECT, INDIRECT, GENERAL,

INCIDENTAL, CONSEQUENTIAL, EXEMPLARY, PUNITIVE OR SPECIAL

DAMAGES ARISING OUT OF OR IN ANY WAY CONNECTED WITH ANY

LEAD GENERATION OR MARKETING PROGRAMS OR OUR

MODIFICATION OR DISCONTINUANCE OF ANY OR ALL LEAD

GENERATION AND MARKETING PROGRAMS.

[DE 30-3 at 47](all-capitals in the original). DirectBuy contends that the revised version of the

franchise agreement “explicitly waives all claims relating to DirectBuy’s lead-generation and

marketing programs.” [DE 35 at 7.] DirectBuy invokes this exculpatory clause as a basis for

dismissal of Capire’s claims in Count 3, citing Indiana cases holding that such clauses are not

against public policy and are enforceable where they are free from fraud and entered into

knowingly and willingly. [DE 35 at 16.] 

Again, the ambiguity of the various terms used in related provisions of the franchise

agreement precludes construction of the agreement’s language in the absence of a fuller record. 

Although I have had several DirectBuy cases presenting similar challenges by franchisees

concerning the same DirectBuy program, I still don’t know (because I have had no evidence on)

what the program was, how it worked, what purpose it was supposed to serve, what was

provided, what was charged, or what was done with the money. This makes it impossible for me

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to determine that what Capire calls “media charges” fall within the exculpatory clause, even

assuming it is enforceable, which Capire argues it is not. At this stage of the litigation, I am not

persuaded to apply the exculpatory clause to dismiss Count 3, when I am unable to interpret the

terminology in the agreement that defines the scope of the clause.

DirectBuy also argues that the first amended complaint doesn’t sufficiently allege facts

plausibly supporting Count 1's claim that the media expenses were unreasonable. The pleading

alleges that DirectBuy initiated a National Advertising and Marketing Program in 2007,

mandated plaintiffs’ participation including their payment of marketing expenses attributed to

their sales territories, in amounts unilaterally determined by DirectBuy. [DE 30 at 5.] Further,

plaintiffs allege that the marketing expenses were increased even as the franchises’ membership

sales and revenues declined in the great recession. [Id. at 5-6.] The specific impact of the

allegedly unreasonable costs imposed by DirectBuy on each of the four franchisee plaintiffs is

spelled out in the facts and figures alleged in ¶¶27 to 51 of the amended complaint. This

pleading of the circumstances and context of the decline of each franchise as a result of the

DirectBuys’s allegedly illegal fees is adequate under the standards of Twombly to constitute a

factually plausible basis for an ultimate determination that DirectBuy’s charges were not

authorized under the franchise agreement.

Finally, DirectBuy argues that in each of their Franchise agreements, the plaintiffs

waived recovery of any “consequential damages.” [DE 35 at 22-23.] The first amended

complaint alleges that the franchises suffered “out of pocket losses attributable to media

expenses” and other fees, as well as “damages due to Defendant’s seizure/redirection of revenues

earned by Plaintiffs,” lost profits and ultimately the loss of their businesses. [DE 30 at 21, 22,

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23, 24, 27.] The prayer for relief seeks “general and special damages.” [Id. at 27.] In response

to DirectBuy’s motion, the franchises contend that their claimed damages are “direct, rather than

consequential” and so are unaffected by the language of the agreements. [DE 36 at 20.] 

DirectBuy has done an inadequate job of analyzing both the nature of the damages the

franchises seek and the law on what constitutes “consequential damages.” Even if I were to

grant this portion of DirectBuy’s motion, it is not clear what I would be striking from the first

amended complaint. And at this juncture, I am unable to identify with accuracy what species of

damages would be properly characterized as “consequential.” DirectBuy specifically challenges

lost profits, but “lost profits are sometimes treated properly as direct damages and sometimes as

consequential damages.” ViaStar Energy, LLC v. Motorola, Inc., No. 5-1095, 2006 WL

3075864, at *2 (S.D.Ind. Oct. 26, 2006) (Hamilton, J.). “The key to determining which

classification is proper in a specific case is the degree to which the breaching party could foresee

that the other party’s lost profits would be a result of its breach.” Id. This is clearly a

determination that cannot be made at the motion to dismiss stage. But given the

franchisor/franchisee relationship of the parties, the test distilled from the varied caselaw by

Judge Hamilton certainly does not preclude a conclusion that the franchisees’ lost profits were

foreseeable to DirectBuy and therefore recoverable as direct damages.

ACCORDINGLY:

Defendant DirectBuy Inc.’s motion to dismiss plaintiffs’ first amended complaint [DE

35] is DENIED.

SO ORDERED.

ENTERED: October 29, 2015

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/s/ Philip P. Simon 

PHILIP P. SIMON, CHIEF JUDGE

UNITED STATES DISTRICT COURT

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