                           ILLINOIS OFFICIAL REPORTS
                                         Appellate Court




            Avon Hardware Co. v. Ace Hardware Corp., 2013 IL App (1st) 130750




Appellate Court            AVON HARDWARE COMPANY, d/b/a Avon Ace Hardware,
Caption                    MICHAEL A. CLARK, BEVERLY A. CLARK, YIDO, INC., d/b/a Mr.
                           Mike’s Ace Hardware, DEBBIE PASCIAK, and MICHAEL PASCIAK,
                           Plaintiffs-Appellants, v. ACE HARDWARE CORPORATION,
                           Defendant-Appellee.



District & No.             First District, First Division
                           Docket No. 1-13-0750


Filed                      October 28, 2013


Held                       Plaintiffs’ complaint alleging common-law and statutory fraud arising
(Note: This syllabus       from the statements defendant made relating to the franchise agreement
constitutes no part of     the parties entered into under which plaintiffs opened a hardware store
the opinion of the court   was properly dismissed, since the agreements contained antireliance
but has been prepared      statements in which plaintiffs agreed that they had not received or relied
by the Reporter of         on any guarantee of sales, revenues or profits of the stores defendant
Decisions for the          franchised and plaintiff’s fraud claims did not allege the elements of
convenience of the         materiality and reasonable reliance.
reader.)


Decision Under             Appeal from the Circuit Court of Cook County, No. 12-L-362; the Hon.
Review                     John C. Griffin, Judge, presiding.



Judgment                   Affirmed.
Counsel on                 Kenneth A. Wexler, Kara A. Elgersma, and Amy E. Keller, all of Wexler
Appeal                     Wallace LLP, of Chicago, and Patrick R. Burns, of Lindquist & Vennum
                           PLLP, and Gordon Rudd and David M. Cialkowski, both of Zimmerman
                           Reed PLLP, both of Minneapolis, Minnesota, for appellants.

                           Norman M. Leon and John A. Hughes, both of DLA Piper LLP, of
                           Chicago, for appellee.

                           Gary W. Leydig, of Riordan, Fulkerson, Hupert & Coleman, of Chicago,
                           and Dady & Gardner PA (Ronald K. Gardner, John D. Holland, and
                           Kristy L. Zastro, of counsel), of Minneapolis, Minnesota, for amicus
                           curiae Coalition of Franchisee Associations, Inc.

                           Marc N. Blumenthal, of Law Offices of Marc N. Blumenthal, of Chicago,
                           for amicus curiae American Franchise Association.


Panel                      JUSTICE HOFFMAN delivered the judgment of the court, with opinion.
                           Presiding Justice Connors and Justice Cunningham concurred in the
                           judgment and opinion.



                                             OPINION

¶1          The plaintiffs, Avon Hardware Company, doing business as Avon Ace Hardware,
        Michael A. Clark, Beverly A. Clark, Yido, Inc. (Yido), doing business as Mr. Mike’s Ace
        Hardware, Debbie Pasciak, and Michael Pasciak, appeal from the circuit court order which
        dismissed their complaint alleging various claims of common-law and statutory fraud based
        on statements made by the defendant, Ace Hardware Corporation (Ace), in connection with
        the parties’ franchise agreement.1 We affirm.
¶2          On September 28, 2012, the plaintiffs filed an amended complaint, alleging the following
        facts and claims. In 2000, Ace created a concept store plan, known as “Vision 21,” which
        consisted of large Ace stores aimed at competing with “big box” retailers, such as Home
        Depot and Lowe’s. In 2006, the Pasciaks, through their corporation, Yido, entered into a
        franchise agreement with Ace to operate a Vision 21 store in Indianapolis. On September 15,
        2006, Ace provided the Pasciaks a “pro forma” document, dated June 1, 2006, containing
        sales and cash flow forecasts. The Pasciaks allege that the pro forma document led them to


               1
                 The Coalition of Franchisee Associations, Inc., and the American Franchise Association
        filed amici curiae briefs in support of the plaintiffs.

                                                  -2-
     believe their store would be successful. Ace also provided them, as regulated but not required
     by federal law, a “Uniform Franchise Offering Circular” (UFOC).2 See 16 C.F.R. § 436.1 et
     seq. (2006). According to the complaint, this document contained misleading historical
     financial data regarding the performance of existing Ace hardware stores. The complaint
     alleges that Ace sent the pro forma document to Wells Fargo in order to assist the Pasciaks
     in obtaining a loan to close the deal with Ace. After the pro forma document was submitted,
     Wells Fargo did not approve the loan. The complaint alleges that, following the initial loan
     denial and without input from the Pasciaks, Ace manipulated the numbers in the pro forma
     document in order to satisfy Wells Fargo’s financing requirements.
¶3        The Pasciaks’ store, Mr. Mike’s Ace Hardware, opened in February 2007 and never
     approached the forecasted sales and revenue provided in the pro forma document. The
     complaint alleges that Ace stated that Mr. Mike’s would make $1,875,000 in sales in its first
     year and increasingly more in the following years; in fact, the store made $1,421,998 in its
     first year and eventually failed. The complaint also alleges that Ace knew the store would
     never make the $1,875,000 and used fraudulent and misleading historical sales and projected
     figures to entice the Pasciaks to open the store. Following the store’s failure, the Pasciaks
     learned that Ace had manipulated the numbers contained in the pro forma and UFOC
     documents, and they filed suit.
¶4        In 2007, the Clarks, through their corporation, Avon Hardware Company, similarly
     entered into a franchise agreement with Act to operate a Vision 21 store in Avon, Indiana.
     Like the Pasciaks, the Clarks allege that Ace provided pro forma and UFOC documents
     which contained false and misleading financial information. They also allege that Ace
     manipulated its pro forma numbers to satisfy Wells Fargo’s financing requirements, allowing
     the Clarks to obtain the necessary loan to open their store in September 2008. Ace had
     projected that the Avon Ace store would make $1,445,000 in sales in its first year; the store,
     however, made only $731,994 and eventually failed in November 2009. According to the
     complaint, Ace used its fraudulent and misleading projected and historical sales figures to
     entice the Clarks into opening their store. After the store’s failure, the Clarks became aware
     that Ace manipulated the pro forma and UFOC figures and filed suit.
¶5        The pro forma documents provided to the Pasciaks and the Clarks were attached to the
     plaintiffs’ amended complaint and contain largely similar language. The pro forma
     documents state, in relevant part, that the projections contained therein “including, sales,
     profits or earnings,” are “merely estimates and should not be considered as the actual or
     potential sales, profits or earnings that will be realized by any specific store operator.” Each
     document contains numerous estimates specific to each store, including estimated costs to


             2
               This document has been renamed by the Federal Trade Commission and is now known as
     the “Franchise Disclosure Document.” See 16 C.F.R. § 436.1 et seq. (2012). The amicus curiae
     briefs predominantly focus on Ace’s violation of the federal regulations governing this document;
     however, there is no private right of action under the federal statutory scheme (Freedman v. Meldy’s,
     Inc., 587 F. Supp. 658, 659 (E.D. Pa. 1984)), and the plaintiffs’ claims are not based on any violation
     of a federal regulation. Accordingly, we do not address the amici curiae argument that Ace violated
     the federal rules governing its UFOC.

                                                  -3-
       open the stores, projected annual sales, estimated annual sales for the first year of business
       and several years thereafter, and an estimate as to the year the parties could expect to earn
       a profit.
¶6         The UFOC documents provided to the plaintiffs were also attached to the complaint and
       contain similar language. The Pasciaks’ UFOC states, in relevant part, that as of December
       31, 2005, there were 4,585 franchised Ace stores and 17 corporately owned Ace stores. Item
       19 states that the average store performance numbers contained therein for fiscal years 2004
       and 2003 were “based on information submitted to [Ace] by reporting member stores.” The
       document discloses that the financial information from its stores “has not been independently
       verified by [Ace].” The average store performance numbers for 2004 were computed based
       on 1,477 stores which reported their financial data to Ace; the averages for 2003 were based
       on financial data from 1,504 stores. The footnotes to item 19 warn that the 2003 and 2004
       performance data represent only about 37% of “all member Ace stores,” and that “[b]ecause
       we do not receive detailed financial data in a consistent format from all Members, the
       Statements reflect average store performance only for reporting stores.” The footnotes further
       warn that, out of the 1,477 reporting stores, 76 stores had annual sales below $500,000, 245
       stores had sales between $500,000 and $1 million, and one store had sales of only about
       $42,000. Additionally, the UFOC contained a list of all franchised outlets that had closed in
       the three years preceding the plaintiffs’ acquisitions of their Ace stores. The document, in
       item 20, noted that 355 Ace stores closed in 2005; over 800 stores closed between 2003 and
       2005.
¶7         The UFOC further states that the data presented or the data contained in any pro forma
       document “should not be relied upon solely or considered as the probable results that will
       be realized by any Member.” The final paragraph of the average performance section states:
               “THE DATA PRESENTED IN THIS ITEM 19 SHOULD NOT BE CONSIDERED
           AS THE ACTUAL, POTENTIAL OR PROBABLE RESULTS THAT WILL BE
           REALIZED BY YOU. WE DO NOT REPRESENT THAT YOU CAN EXPECT TO
           ATTAIN THESE RESULTS. A NEW MEMBER’S FINANCIAL RESULTS ARE
           LIKELY TO DIFFER FROM THOSE DESCRIBED IN THIS ITEM 19. SOME
           STORES HAVE ACHIEVED THESE RESULTS, BUT THERE IS NO ASSURANCE
           THAT YOU WILL DO AS WELL.”
¶8         The Clarks received similarly worded UFOC documents with 2004 and 2005 financial
       data. The data from those years represented 37% of all stores for 2004 and 41% for 2005; the
       language contained therein was otherwise unchanged from the documents provided to the
       Pasciaks.
¶9         The plaintiffs also signed the “Ace Hardware Membership Agreement,” after having
       received the pro forma and UFOC documents. Article V, section 11, of the “Ace Hardware
       Membership Agreement” provides that the “Member further represents and warrants” that
       “the Member has not received or relied upon any guarantee, whether express or implied, of
       the sales, revenues, profits or success of the business venture contemplated by this
       Agreement.”
¶ 10       Counts I and II of the amended complaint allege that Ace violated the Indiana Franchise


                                                -4-
       Disclosure Act (Ind. Code Ann. § 23-2-2.5-1 et seq. (West 2006)) by providing pro forma
       and UFOC documents which did not comply with the guidelines for such documents. The
       complaint alleges that Ace purposely reported inflated historical store performance data by
       “fail[ing] to account for failed or failing stores” and misrepresented store averages to entice
       the plaintiffs into investing. It alleges that the plaintiffs reasonably relied upon the false and
       misleading information contained in the documents when they decided to invest with Ace.
       Counts III and IV are based on violations of the Illinois Consumer Fraud and Deceptive
       Business Practices Act (815 ILCS 505/1 et seq. (West 2006)), and counts V through X allege
       fraudulent inducement, fraud, and negligent misrepresentation; these claims are based on the
       same conduct as alleged against Ace in counts I and II.
¶ 11       Ace moved to dismiss the plaintiffs’ amended complaint under sections 2-615 and 2-619
       of the Code of Civil Procedure (Code) (735 ILCS 5/2-615, 2-619 (West 2012)). Ace argued
       that the franchise agreements contained antireliance statements in which the plaintiffs
       affirmatively represented that they had not received or relied upon any guarantee, express or
       implied, of sales, revenues, profits or success of Ace stores. According to Ace, the
       antireliance provision of its franchise agreement barred the plaintiffs’ claims. Additionally,
       Ace argued that the financial statements in the documents are financial projections, which
       are considered statements of opinion and not actionable. Further, Ace argued that, contrary
       to the plaintiffs’ allegations, the documents did not contain false statements because they
       contained information regarding the closures of Ace stores and warned that the financial data
       was based only upon a small percentage of Ace stores. According to Ace, as a matter of law,
       the plaintiffs’ fraud claims fail to state the necessary elements; namely, that Ace made false
       statements of material fact and that the plaintiffs reasonably relied on the information
       provided to them.
¶ 12       On February 4, 2013, the circuit court entered an order dismissing the plaintiffs’
       complaint. The court stated that, under the “bespeaks caution” doctrine, cautionary language,
       if sufficiently substantive and specifically tailored to the projections, estimates of future
       performance, and opinions contained in an offering document, may render the alleged
       misrepresentation and omissions immaterial as a matter of law. The court determined that
       this doctrine applied in this case and that the cautionary language in the pro forma and UFOC
       documents rendered reliance on the statements contained therein immaterial as a matter of
       law. Thus, the court dismissed, with prejudice, counts V through X of the plaintiffs’ amended
       complaint pursuant to section 2-619(a)(9) of the Code. Because the court determined that the
       plaintiffs could not plead reliance, it also dismissed, with prejudice, counts I through IV
       pursuant to section 2-615 of the Code. Thereafter, the plaintiffs timely appealed.
¶ 13       A dismissal under section 2-619 of the Code is proper where the plaintiff’s claim against
       the defendant is barred by an affirmative matter which avoids the legal effect of or defeats
       the claim. Schrager v. Bailey, 2012 IL App (1st) 111943, ¶ 18 (stating an affirmative matter
       is akin to a defense, negating the cause of action). “[I]t is recognized that a section 2-
       619(a)(9) motion to dismiss admits the legal sufficiency of the plaintiff’s cause of action
       ***.” Kedzie & 103rd Currency Exchange, Inc. v. Hodge, 156 Ill. 2d 112, 115 (1993). We
       review a dismissal under section 2-619 de novo. Schrager, 2012 IL App (1st) 111943, ¶ 16.
¶ 14       A section 2-615 motion admits all well-pleaded facts as true, and dismissal is proper

                                                  -5-
       when it clearly appears that no set of facts could be proved under the pleadings which would
       entitle the plaintiff to relief. Lagen v. Balchor Co., 274 Ill. App. 3d 11, 16 (1995). In ruling
       on a section 2-615 motion, the complaint’s factual allegations are to be interpreted in the
       light most favorable to the plaintiff. Id. We review a dismissal under section 2-615 de novo.
       Performance Electric, Inc. v. CIB Bank, 371 Ill. App. 3d 1037, 1039 (2007).
¶ 15       We first consider the court’s dismissal of counts V through X, which allege fraudulent
       inducement, fraud, and negligent misrepresentation. “Fraudulent inducement is a form of
       common-law fraud.” Lagen, 274 Ill. App. 3d at 17. To state a cause of action for common-
       law fraud, a plaintiff must plead: (1) a false statement of material fact; (2) knowledge or
       belief by the defendant that the statement was false; (3) an intention to induce the plaintiff
       to act; (4) reasonable reliance upon the truth of the statement by the plaintiff; and (5) damage
       to the plaintiff resulting from this reliance. Id. Fraud claims must be pleaded with sufficient
       specificity, particularity, and certainty to apprise the opposing party of what he is called upon
       to answer. Illinois Non-Profit Risk Management Ass’n v. Human Service Center of Southern
       Metro-East, 378 Ill. App. 3d 713, 722 (2008). Therefore, a plaintiff must at least plead with
       sufficient particularity facts which establish the elements of fraud, including what
       misrepresentations were made, when they were made, who made the misrepresentations, and
       to whom they were made. Id. Negligent misrepresentation has essentially the same elements,
       except that the defendant need not know that the statement is false; rather his own
       carelessness or negligence in ascertaining the truth of the statement will suffice. Board of
       Education of the City of Chicago v. A, C & S, Inc., 131 Ill. 2d 428, 452 (1989). Further, to
       plead a negligent misrepresentation claim, a plaintiff must also allege that the defendant
       owes a duty to the plaintiff to communicate accurate information. Id.
¶ 16       The parties dispute whether the plaintiffs’ allegations relating to Ace’s manipulation of
       the financial data contained in the pro forma and UFOC documents constitute false
       statements of fact. Ace contends the plaintiffs’ allegations relate to future projections, which
       do not constitute facts; the plaintiffs contend that their allegations relate to historical
       financial facts, which are actionable. In part, both parties are correct.
¶ 17       The basis of a fraud or negligent misrepresentation claim must be a statement of fact, not
       an expression of opinion. Lagen, 274 Ill. App. 3d at 17. “Generally, financial projections are
       considered to be statements of opinion, not fact.” Id.; see also Illinois Non-Profit Risk
       Management Ass’n, 378 Ill. App. 3d at 723. However, “although representations of future
       income are not actionable, representations as to past income of a business constitute
       statements of fact.” Mother Earth, Ltd. v. Strawberry Camel, Ltd., 72 Ill. App. 3d 37, 48
       (1979). “Even a statement that a business is profitable may be actionable” as a statement of
       past income is factual in nature. Id. at 48-49. We agree with Ace that the plaintiffs’
       allegations related to projected sales figures or other projected financial data, such as those
       contained in the pro forma document, are not actionable. Thus, the circuit court properly
       dismissed the plaintiffs’ complaint as to the claims involving statements of future
       performance. However, some of the plaintiffs’ allegations were based on false
       representations of historical financial data of Ace stores. Historical financial data, such as the
       past store performance averages included in the UFOC, is factual in nature and actionable,
       and we continue our analysis of those claims.

                                                  -6-
¶ 18        The plaintiffs argue that the circuit court improperly applied the “bespeaks caution”
       doctrine to bar them from establishing reasonable reliance as a matter of law. The “bespeaks
       caution” doctrine provides that cautionary language in a securities offering document can
       negate the materiality of any alleged misrepresentation or omission. Lagen, 274 Ill. App. 3d
       at 18. While commonly invoked in federal securities fraud claims, the “bespeaks caution”
       doctrine has been applied to common-law fraud claims as the doctrine “merely represents the
       pragmatic application of two fundamental concepts [of fraud claim]: materiality and
       reliance.” Id. Under the doctrine, statements must be analyzed in context, and “cautionary
       language, if sufficiently substantive and tailored to the projections, estimates, and opinions
       contained in an offering document, can render alleged misrepresentations and omissions
       immaterial as a matter of law.” Id. at 18-19.
¶ 19        The plaintiffs argue that Ace cannot shield its statements from liability under the
       bespeaks caution doctrine where it knew it had misrepresented material facts regarding its
       stores’ past performance in order to entice new investors, relying on Olczyk v. Cerion
       Technologies, Inc., 308 Ill. App. 3d 905 (1999).3 We agree with the plaintiffs that the
       bespeaks caution doctrine applies to cautionary statements in financial offering documents
       relating to future projections, not present facts or current conditions. See id. at 913. However,
       we still analyze statements in context and consider whether all elements of the plaintiffs’
       claims have been properly pleaded. See Lagen, 274 Ill. App. 3d at 18 (stating that the
       bespeaks caution doctrine merely represents the pragmatic approach to analyzing the
       elements of materiality and reliance of a fraud claim). In doing so, we agree with Ace that
       its documents did not contain the alleged false statements of material fact and any reliance
       upon the historical data as evidence of the performance of all Ace stores or future Ace stores
       was unreasonable. Therefore, we find that dismissal of the plaintiffs’ fraud claims based on
       false historical data was proper under section 2-615 for failing to allege the elements of
       materiality and reasonable reliance.
¶ 20        In this case, the language in the UFOC sufficiently demonstrates that Ace neither made
       false statements of material fact nor concealed material facts regarding the historical financial
       data of its stores. The plaintiffs allege that Ace “cherry-picked” the financial data to report
       in order to inflate its numbers and failed to include data regarding failed stores. However, the
       UFOC clearly states that its financial data was based only on a small fraction of all Ace
       stores–37% of all member Ace stores for 2004 and 41% for 2005. The form states that the
       data came only from stores that reported their numbers to Ace and warned that Ace did not
       independently verify any of the financial information submitted to it by its stores.
       Additionally, the UFOC contained information regarding the number of Ace stores which
       closed in the preceding three years, listing the numbers by state. Thus, contrary to the
       plaintiffs’ allegations, the documents provided to them did not conceal the fact that the
       historical financial data was not representative of the performance of all Ace stores and did
       not fail to account for failed Ace stores.

               3
                Ace argues that the plaintiffs forfeited its argument pertaining to the bespeaks caution
       doctrine by failing to raise the issue in the circuit court. Our review of the record discloses that the
       doctrine was raised in the court below by the parties albeit not by its technical name.

                                                     -7-
¶ 21       Moreover, to the extent that the plaintiffs allege they relied upon the historical data as a
       representation of the performance of all Ace stores, the cautionary language contained in the
       documents renders any reliance on the alleged misrepresentations by plaintiffs unreasonable.
       As stated earlier, the UFOC sufficiently apprised the plaintiffs that the data did not represent
       the past performance of all Ace stores, but only a small fraction thereof. The UFOC, along
       with the other documents provided to the plaintiffs, was replete with warnings to not rely
       upon any of the projections or past performance data to predict future performance by any
       store. Therefore, because the plaintiffs, as a matter of law, failed to state the necessary
       elements of reasonable reliance and materiality of their common-law fraud claims, the circuit
       court properly dismissed counts V through X. However, we find that the dismissal was
       proper under section 2-615 of the Code, rather than section 2-619(a)(9) as the circuit court
       ordered.
¶ 22       For similar reasons, the circuit court properly dismissed the plaintiffs’ statutory fraud
       claims. The Indiana Franchise Disclosure Act creates a private right of action only for acts
       which constitute fraud, deceit or misrepresentation (Continental Basketball Ass’n v.
       Ellenstein Enterprises, Inc., 669 N.E.2d 134, 137 (Ind. 1996)) and such claims require
       reasonable reliance and materiality (Hardee’s of Maumelle, Arkansas, Inc. v. Hardee’s Food
       Systems, Inc., 31 F.3d 573, 578 (7th Cir. 1994)). As we concluded in our common-law fraud
       analysis, the plaintiffs failed to state these elements as a matter of law. Therefore, the circuit
       court properly dismissed counts I and II of the amended complaint under section 2-615 of the
       Code.
¶ 23       Although the Illinois Consumer Fraud and Deceptive Business Practices Act (Act) does
       not require reliance, it does require materiality. See White v. DaimlerChrysler Corp., 368 Ill.
       App. 3d 278, 283 (2006) (“plaintiff’s reliance is not an element of statutory consumer
       fraud”). To state a claim under the Act, a plaintiff must show (1) a deceptive act or practice
       by the defendant; (2) the defendant’s intent that the plaintiff rely on the deception; (3) the
       deception occurred in the course of trade or commerce; and (4) the consumer fraud
       proximately caused the plaintiff’s injury. Id. As we concluded in our analysis of the
       plaintiffs’ common-law fraud claims, the documents provided to them did not make any false
       statements of material fact or conceal any material facts.4 Thus, on this basis, the circuit court
       properly dismissed counts III and IV under section 2-615 of the Code.
¶ 24       Based on the foregoing reasons, the circuit court properly dismissed the plaintiffs’
       amended complaint for failing to state claims upon which relief might be granted.

¶ 25       Affirmed.


               4
                Ace contends that the plaintiffs lack standing to raise a claim under the Act because they
       are nonresidents and the franchise sale took place in Indiana. See Avery v. State Farm Mutual
       Automobile Insurance Co., 216 Ill. 2d 100, 187 (2005) (finding that a nonresident may have standing
       under the Act “if the circumstances that relate to the disputed transaction occur primarily and
       substantially in Illinois”). Because we resolve the claim on other grounds, we need not address the
       standing issue.

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