### *THE HONORABLE RICHARD W. GOLD BERG, Judge, United States

Court of International Trade, sitting by designation. -1- ____________ No. 95-3903

____________ Jerry Morrison and * Helen Morrison, * *

Appellants, * * v. * Appeal from the United States * District Court for the Eastern Back Yard Burgers, Inc., * District of Arkansas. * Appellee. *

____________ Submitted: April 12, 1996 Filed: August 8, 1996

____________ Before MAGILL and LOKEN, Circuit Judges, and GOLDBERG, Judge. *

____________ GOLDBERG, Judge.

This cas e involves plaintiffs' attempt to prove a common law frau d cla imand a constructive fraud claim arising from a franchise agreemen t with e vidence of a violation of administrative regulations. Plaintiff s Jer ryand Helen Morrison filed suit against defendant Back Yard Burger s ("BYB") seeking damages and attorney's fees for, among other things, commo n law fraud arising from alleged misrepresentations concerning projecte d profits

. In response, BYB filed a counterclaim seeking a preliminar y injunc tion to prohibit plaintiffs from continuing to use its trademark

. BYB

### -2-

also s ought money damages for unpaid franchise fees and advertisin g contributions pursuant to the franchise agreement, and prejudgmen t inter est. BYB then sought summary judgment with respect to all claim s asserted a gainst it, as well as its counterclaim. The district cour t granted defendant's cross motion for summary judgment and awarded defendan t monetary damages.
Plaintiffs appeal to this Court, making the following arguments : (1) the dis trict court improperly held that evidence of violations of th e Federal Trade Commission Act, 15 U.S.C. §§ 41 et. seq. (1994), regarding projections of future earnings do not qualify under the "bad faith " exception to the common law rule that speculativ e business projections can not form the basis of a fraud claim; and (2) the district court erred in granting summary judgment because the false statements are actionable unde r a constructive fraud theory because of their tendency to deceive others. For the reasons set forth below, we affirm the district court's grant of defendant's motion for summary judgment.

I. BACKGROUND
On January 18, 1993, plaintiffs Jerry and Helen Morrison entere d into a franchise agreement with Back Yard Burgers, a Delaware corporation with its principal place of business in Memphis, Tennessee. The plaintiffs ' purpose in entering the agreement was to build and operate a fast foo d restaurant in Russell ville, Arkansas. Before plaintiffs entered into the franchise agreement, they met with BYB personnel. They also met with two BYB franchisees, Joe Weiss and Tommy Hilburn. Weiss provided plaintiffs withfinancial statements from his franchises in the Memphis area, an d Hilburn provided financial information from his Little Rock franchises

. Plaintiffs allege that Weiss assured them that they could expect to make $750,000 in annual sales at their Russellville franchise. The actual gros s sales for

### FTC Rule 16 CFR § 436.1 (1995) provides in part: 1 

### In connection with the advertising, offering, licensing , contracting, sale, or other promotion . . . of any franchise, . .

. it is an unfair or deceptive act or practice . . . for an y franchisor or franchise broker: *** (b) To make any oral, written, or visual representation to a prospective franchisee which states a specific level of potential sales, income, gross or net profit for that prospective fran chisee, or which states other facts which suggest such a specific level , unless: (1) At the time such representation is made, such representa tion is relevant to the geographic market in which the franchise is to be located; (2) At the time such representation is made, a reasonable basi s exists for such representation and the franchisor has in it s possession material which constitutes a reasonable basis for such re presentation, and such material is made available to an y prospective franchisee . . . ; (3) Such representation is set forth in detail along with th e material bases and assumptions therefor in a single legible written docu ment whose text accurately, clearly and concisely disclose s suchinformation, and none other than that provided for by thi s part or by State law not preempted by this part. . .; (4) The following statement is clearly and conspicuously di sclosed in the document described by paragraph (b)(3) of this section i n immediate conjunction with such representation and in not le ss than twelve point upper and lower-case boldface type: CAUTION These figures are only estimates of what we think you ma y earn. There is no assurance you'll do as well. If you rely upon our figures, you must accept the risk of not doing as well. -3- pl aintiffs' Russellville Back Yard Burgers amounted to approximatel y $235,000 per year. At the time of Weiss' representation, Federal Trade Commissio n ("FTC ") regulations prohibited a franchisor from making representation s about future sales to a potential franchisee, un less they are supported by demographic research, set forth in a legible document, and accompanied by
a dis claimer. BYB failed to comply with these requirements. There ha s 1
never been a BYB site in Russellville previous to plaintiffs' franchise, and BYB had not condu cted a marketing survey of that area. Joe Weiss did not set forth his representations in a single legible document, and did no t

### -4-

make a specific disclaimer when presenting sales information. However , prio r to meeting with Weiss, BYB sent plaintiffs a Uniform Franchis e Offer ing Circular, which is required by the FTC, and which contained a general disclaimer as to earnings projections.

Both Bar ry Pitts, Director of Franchise Development for BYB at th e time, and Lattimore Michael, BYB's President, knew that Joe Weiss presente d pote ntial franchisees with financial projections or specific financia l statements of franchisees in violation of the FTC regulations. At the tim e of the meeting with plaintiffs, Joe Weiss not only owned two franchises, but he was also the Secretary-Treasurer of BYB and a member of its board of directors.

II. DISCUSSION

In review ing a district court's grant of summary judgment, we apply the same standards as the district court. McLau ghlin v. Esselte Pendaflex Corp. , 50 F.3d 507, 5 10 (8th Cir. 1995). The Court will affirm the grant of a summary judgment motion if the evidence, viewed in the light mos t favorable to the non-moving party, demonstrates that there is no genuine issue as to any material fact and that the moving party is entitled t o judgment as a matter of law. Id .; Fed. R. Civ. P. 56(c).

A. Profit Projections under Common Law Fraud

Under Arkansas law, the tort of fraud, misrepresentation or decei t consists of five elements: (1) a false represen tation of a material fact; (2) knowledge that the representation is false, or an assertion of fac t whichhe or she does not know to be true; (3) intent to induce action or inactionin reliance upon the representations; (4) justifiable reliance
on the representation; and (5) damages suffered as a result of th e relian ce. Grendell v. Kiehl , 291 Ark. 228, 230, 723 S.W.2d 830, 83 2 (1987).

### -5- In applying the first prong of this test, ascertaining whethe r defen dant made a false statement of material fact, the general rule i n Arkansas is that "an action for fraud or deceit may not be predicated on repres entations relating solely to future events." Delta School o f Commerce, Inc. v. Wood , 298 Ark. 195, 200, 766 S.W.2d 424, 427 (1989)
. Representations relat ed solely to future events are considered to be mere opinion under Arkansa s law, rather than a matter of accurate knowledge as would be a statement of fact. Delta , 298 Ark. at 199, 766 S.W.2d at 426 ("In general, an expression of opinion, i.e., a statement concerning a matter not susceptible of accurate knowledge, ca nnot furnish the basis for a cause of action for deceit or fraud."); see also , Grendell , 291 Ark. at 231, 723 S.W.2d at 832 (statement in sales presentation that an oil well would pump "fifty barrels a day" was mere puffery and not actionable).

This i s also the rule adopted by other circuits and one distric t court in this circuit. See , e.g. , Hardee's of M aumelle, Arkansas, Inc. v. Hardee's F ood Sys., Inc. , 31 F.3d 573, 579 (7th Cir. 1994) (rejectin g plaintiff's assertionthat the projected financial statements can support a claim of fraud because they are predictions or opinions regarding future profitability, not representations of pre-existi ng material fact); Hengel, Inc. v. Hot 'N Now, Inc. , 825 F. Supp. 1311, 1321 (N.D. Ill. 1993); Carloc k
v. Pillsbury Co. , 719 F. Supp. 791, 829 (D. Minn. 1989) (representations
as to franchise start-up and operating costs "were predictions as to the future, not statements of past or present fact"); Brill v. Catfish Shaks of America, Inc. , 727 F. Supp. 1035, 1045 (E.D. La. 1989) (franchisor' s profit projections were not actionable where they were reasonable, based upon earnings of existing franchised restaurants).
Projections related to franchise pro fits are representations related to future events. Without more, this suggests t hat plaintiffs have failed to state a claim under Arkansas common law

### -6-

fraud th eories and that summary judgment in favor of defendant wa s appropriate.

B. Violation of FTC Regulations as evidence of Bad Faith Exception t o Common Law Fraud Rule

Plaintiffs argue that BYB's knowing violation of FTC regulation s shows bad faith inten t under an exception to the general state common law rule that mere opinion cannot support a fraud claim. This "bad faith " exception was enunciated in Delta School of Commerce, Inc. v. Wood , 29 8 Ark. 195, 766 S.W.2d 424 (1989). Assuming that BYB did in fact violate FT C regulations because its representations were not set forth on a singl e legible document, did not contain a specific dis claimer, and were provided without a reasonable basis, we nevertheless reject plaintiffs' argument.

Under the exception in Delta , a statement of future events ma y cons titute fraud if the statement is false and the person making th e representation or pre diction knows it to be false at the time it is made. Del ta , 298 Ark. at 199-201, 766 S.W.2d at 426-7. In Delta , a representative of the Delta School of Commerce a dvised Wood, a prospective student, to pursue a career as a nursing assista nt rather than a career as
a licensed practical nurse. The representative told Wood that the State of Arkansas would be eliminating the licensed practical nurse position, an d that nursing assistants would take their place. The Arkansas state Suprem e Court found that the representative knew that hi s statements regarding the sta te's intentions were untrue at the time, and that he made thes e statements to induce Wood to enroll in Delta's nursing assistant program.

The excep tion in Delta does not apply to the present case. Delt a requires actual knowl edge of falsity. Delta , 298 Ark. at 200, 766 S.W.2d at 427. Weiss's alleged projections pertained to

### -7-

matters not subject t o verification at the time the statements were made. The statements were o pinion based upon accurate data from another market, and Weiss had no information about the actual market site. Weiss could no t have known that his projections regarding plaintiffs' planned franchis e would eventually prov e to be false. Therefore, plaintiffs have failed to state an actionable claim based on the exception in Delta
.

Aknow ing violation of the FTC regulations does not alter thi s conclusion. Violating 19 C.F.R. § 436.1 does not require the party to kno w that his or her representations are false at the time they are made. Thus , a violation of the FTC regulation does not meet the conditions necessary to qualify under the Delta bad faith exception. Application of the Delta exception hinges upon the knowledge that statements are false, not upon th e knowledge that one is violating an administrative regulation. Delta , 298 Ark. at 200, 766 S.W.2d at 426.
Our denial of plaintiffs' attempt to support their state fraud claim withevidence of a knowing violation of 16 C.F.R. § 436.1. is consistent with other circuit's holdings that there is no p rivate cause of action for violation s of the Federal Trade Commission Act, 15 U.S.C. §§ 41 et seq

. R.T. Vanderbilt Co. v. Occ. Saf. & H. Rev. Com'n , 708 F.2d 570, 574-5 n. 5 (11th Cir. 1983); Fulton v. Hecht , 580 F.2d 1243, 1248-9 n.2 (5th Cir. 1978); Holloway v. Bristol-Myers Corp. , 485 F.2d 986, 1002 (D.C. Cir

. 1973); Carlson v. Coca-Cola Co. , 483 F.2d 279 (9th Cir. 1973). A plaintif f should not be permitted to plead violation of FTC regulations as part of
a state common law fraud case. A decision to the contrary could b e interp reted as substituting violation of FTC regulations for state la w requirements, thereby effectively extending a private cause of action unde r the Federal Trade Commission Act. Because we hold that plaintiffs fail to satisfy the first element of common law fraud concerning statements of material fact,

### -8-

we do not need to consider whether plaintiffs satisfied the other fou r elements of common law fraud.

C. Constructive Fraud

Plaintiffs' final argument is to plead under a theory o f constructive fraud. Constructive fraud is defined "as `a breach of legal
or equitab le duty which, irrespective of the moral guilt of the frau d feasor, the law declares fraudulent because of its tendency to deceiv e others . . . Neither actual dishonesty of purpos e nor intent to deceive is
an ess ential element of constructive fraud.'" Cardiac Thoracic an d Vascular Surgery, P.A. v. Bond , 310 Ark. 798, 805, 840 S.W.2d 188, 19 2 (1992) (quoting Lane v. Rachel , 239 Ark. 400, 404, 389 S.W.2d 621, 62 4 (1965)) (emphasis in original). In Bond , a seller defrauded a purchaser accidentlyand without moral culpability by making false representations regarding the number of additional square feet the lessor could lease in the future. Between the time that the parties entered into the contract and the time that the buyer attempted to exercise its right to lease more space, the lessor was reorganized and new manage ment gained control of the firm. The new management refused to honor the contract. Based on these facts, the Arkansas state Supreme Court upheld r escission of the contract.

Aple a of constructive fraud relieves plaintiffs of the burden o f proving scienter, or fraudulent intent. Plaintiffs must still prove the other elements of com mon law fraud, including a false representation of a material fact and justifiable reliance upon the representation. Bond , 310 Ark. at 806, 840 S.W.2d at 192-3.
Thus, the above analysis regarding false statement of material fact and the exception enu nciated in Delta applies equally here. As discussed above, Weiss's statements were mere opinion base d upon actual data from an existing market. Plaintiffs therefore fail to satisfy the requirement tha t the defendant make a misrepresentation

### -9-

of fact to prove constructive fraud. We therefo re do not need to consider whether plaintiffs prove the other elements of constructive fraud.

III. CONCLUSION

For the foregoing reasons, we affirm the grant of summary judgmen t by the district court.

A true copy.

Attest:

CLERK, U.S. COURT OF APPEALS, EIGHTH CIRCUIT.