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Howell v. Advantage Payroll Services, Inc.

United States District Court, D. Maine

February 28, 2017

JAMES HOWELL et al. Plaintiffs,


          Nancy Torresen United States Chief District Judge

         Before me is the Defendants' motion to dismiss Counts Four through Nine of the Plaintiffs' Complaint under Federal Rule of Civil Procedure 12(b)(6) and the Plaintiffs' motion to strike the Defendants' counterclaims under Federal Rule of Civil Procedure 12(f). Defs.' Mot. to Dismiss (ECF No. 6); Pl.'s Mot. to Strike (ECF No. 17). For the following reasons, the motion to dismiss is GRANTED IN PART and DENIED IN PART. The motion to strike is DENIED.


         A Rule 12(b)(6) motion to dismiss presents the question of whether the complaint states a sufficient claim for which relief may be granted. Carrero-Ojeda v. Autoridad de Energia Electrica, 755 F.3d 711, 717 (1st Cir. 2014). To make this determination, courts in the First Circuit follow a two-step analysis. First, the court must “isolate and ignore statements in the complaint that simply offer legal labels and conclusions or merely rehash cause-of-action elements.” Id. Then, taking all well- plead facts as true and “drawing all reasonable inferences in [plaintiff's] favor, ” the court must determine whether the complaint “plausibly narrate[s] a claim for relief.” Id. “Plausible” means “more than a sheer possibility” but does not require all facts necessary to establish a prima facie case. Rodríguez-Reyes v. Molina-Rodríguez, 711 F.3d 49, 54 (1st Cir. 2013).

         Generally, if the defendant introduces documents outside the pleadings, the court may only consider that material by converting the motion to dismiss into a motion for summary judgment. Fed.R.Civ.P. 12(d). However, a court may consider a document not attached to the complaint if it is “incorporated by reference in the complaint” or “integral to or explicitly relied upon in a complaint.” Jorge v. Rumsfeld, 404 F.3d 556, 559 (1st Cir. 2005). “When the factual allegations of a complaint revolve around a document whose authenticity is unchallenged, ‘that document effectively merges into the pleadings and the trial court can review it in deciding a motion to dismiss under Rule 12(b)(6).' ” Young v. Lepone, 305 F.3d 1, 11 (1st Cir. 2002) (quoting Beddall v. State St. Bank & Trust Co., 137 F.3d 12, 17 (1st Cir. 1998)).


         The Plaintiffs in this case are four payroll service companies (“the Associates”)[1] that are franchisees of Defendant Advantage Payroll Services, Inc. (“Advantage”). Compl. ¶ 1 (ECF No. 1). Over approximately two decades, the Associates have developed into multimillion dollar businesses. Compl. ¶ 1.

         Advantage provides its franchisees with access to the Advantage System, a method for delivering computerized payroll and tax-payment services. Compl. ¶ 1. The general process is that the franchisees input their clients' data, Advantage processes it, and then the franchisees provide their clients with payroll checks or similar services. Compl. ¶ 18. Advantage led the Associates to believe that the Advantage System would be regularly updated and improved. Compl. ¶ 19.

         Between 1986 and 1999, each of the Associates signed the standard Advantage Business Services, Inc. Associate License Agreement (“Agreement”) to become Advantage franchisees. Agreements (ECF Nos. 6-1, 6-2, 6-3, 6-4, 6-5, 6-10). Each Agreement includes a provision regarding the “protected territory” in which the Associate's business is located. Agreement § I.C. This provision limits Advantage's ability to license additional payroll franchisees or to “directly process” new payroll clients in those territories. Agreement § I.C. The Agreement also bars the Associates from diverting business to competitors while the Agreement is in effect and from competing with Advantage for four years after the Agreement terminates. Compl. ¶ 26.

         Each Agreement states that “this Agreement does not create a fiduciary relationship” between Advantage and the Associates. Agreement § XVII(A). However, the Associates trust Advantage to hold their funds in escrow and maintain confidential data about the Associates and their clients for the sole benefit of the Associates and their clients. Compl. ¶¶ 21, 23. The Associates also trust Advantage to hold the proceeds of sales to the Associates' clients and remit net receipts to the Associates periodically. Compl. ¶ 24.

         Each Agreement ran for a term of ten years and granted the Associate an option to renew for one additional ten-year term. Agreement § II.B. Each of the Associates has renewed its license and signed a Renewal Addendum to Advantage Business Services, Inc. Associate License Agreement (“the Renewal Addenda”), which extended each Associate's license for an additional ten-year term. Compl. ¶¶ 46-47; Renewal Addenda (ECF Nos. 6-6, 6-7, 6-8, 6-9, 6-11). The Renewal Addenda do not contain any language about additional renewals, but the Associates “understood and believed” that the Renewal Addenda included an additional ten year renewal option. Compl. ¶ 47.

         In the past two decades, Advantage has gone through some notable changes. In 1998, Advantage shifted its focus away from franchising and toward a direct sales model. Compl. ¶ 23. Franchisees became a smaller relative source of revenue, but remained “an integral part of its overall business.” Compl. ¶ 23. Then, in 2002, Defendant Paychex, Inc. (“Paychex”), a primary competitor, bought Advantage outright. Compl. ¶¶ 2, 29.

         Following the sale, on October 9, 2002, Charles Lathrop, “who had been Advantage's Chairman and CEO and eventually became a Paychex employee, ” sent an email (“the Lathrop Memo”) to all the Advantage franchisees to reassure them about their position. Compl. ¶ 32; ECF No. 6-12. The Lathrop Memo stated that: Paychex sales representatives had been told not to solicit the Associates' clients; they would receive no commission or credit if Associates' clients became Paychex clients; and Paychex would “not tolerate any malicious representation regarding the nature of the Associate relationship or the future of the Advantage name and/or system.” Lathrop Memo; Compl. ¶ 33. In addition, the Lathrop Memo came with an attached letter from Paychex Chairman Thomas Golisano, which the Memo stated would “explain[] Paychex'[s] ongoing support for the Associate channel.” Lathrop Memo; Compl. ¶ 32. The Lathrop Memo further stated that the Memo and attached letter together “articulate[d] our continued commitment to our obligations under the License Agreements.” Lathrop Memo.

         Relying on the Lathrop Memo's assurances, the Associates renewed their Agreements between 2004 and 2009 and continued to invest in their businesses. Compl. ¶ 35. However, the Associates have discovered that since the 2002 purchase, Paychex has “engaged in a long-term strategy to put the Associates out of business, and to capture for itself all Advantage- and Associate-owned client relationships supported by the Advantage System.” Compl. ¶ 3. The number of Advantage franchises has dropped from fifteen in 2002 to six. Compl. ¶ 36.

         The remaining Associates want to continue to operate their franchises but face what they characterize as various forms of pressure from Paychex to close. Compl. ¶ 57. First, the Paychex takeover has harmed the Advantage brand. Compl ¶ 43. Senior officers at the Paychex headquarters in New York are now also the senior officers for Advantage. Compl. ¶¶ 37, 38. Advantage sales, technical support, and payroll processing are now handled by Paychex personnel. Compl. ¶ 36. In addition, Advantage is converting its non-franchise clients to the Paychex platform, and, recently, when Paychex employees have emailed Associates' clients on behalf of Advantage, they have used their email address. Compl. ¶¶ 43, 44. These practices create the impression among the Associates' clients and others that Paychex and Advantage are one company. Compl ¶ 43.

         Second, the Associates believe that Paychex/Advantage sales representatives have been “actively soliciting” the Associates' clients in the Associates' protected territories. Compl. ¶ 42. The 2002 sale granted Paychex access to the Associates' confidential client information and the “tools of their craft.” Compl. ¶¶ 2, 30. And “in most cases” the Associates have had “no practical way” to determine whether their clients who moved to Paychex received improper solicitations. Compl. ¶ 41.

         Third, despite the reduction in investment in the Advantage System, “Paychex has increased the wholesale price charged by Advantage to the Associates by 4% almost every year.” Compl. ¶ 40.

         Fourth, Paychex has indicated it will not renew the Associates' contracts going forward. Compl. ¶¶ 3, 47. In 2014, Howell attempted to renew his twenty-year-old franchise for a third ten-year term, but Advantage only agreed to a series of short term renewals. Compl. ¶ 48. In 2016, Payroll Etc. also attempted to renew its franchise for an additional ten-year term, but Advantage agreed only to a six-month renewal. Compl. ¶¶ 53, 54. The remaining Associates assert that they have renewal options and want to exercise them. Compl. ¶ 57. The Associates believe that the purpose of the short term renewal strategy is to “promote uncertainty and bring maximum pressure on the Associates to abandon their franchises or sell their business to Paychex for less than fair value.” Compl. ¶ 55.

         Finally, Advantage's efforts to update and improve the Advantage System and remain competitive have effectively ceased. Compl. ¶ 39. The Associates have been forced to engage outside vendors for supplemental products and services, which do not integrate fully with the Advantage System. Compl. ¶ 40. Paychex told the Associates that it intends to shut down the Advantage System in approximately three years, which coincides with the expiration of the remaining Agreements. Compl. ¶¶ 3, 50. Because the Associates rely on the Advantage System, they believe this would force them out of business and allow Paychex to take over their accounts. Compl. ¶ 3. Paychex also has indicated to the Associates that, in the alternative, it may continue to operate the Advantage System, but only for the purpose of moving all of the Associates' clients over to the Paychex system. Compl. ¶¶ 3, 51.

         The Complaint references and relies upon the Agreements, the Renewal Addenda, and the Lathrop Memo. The Defendants attached these documents to their motion to dismiss. Because the Plaintiffs do not challenge the authenticity of the Defendants' attachments, I will consider them in my analysis of the motion to dismiss. See Young v. Lepone, 305 F.3d 1, 11 (1st Cir. 2002).


         The Defendants move to dismiss Counts Four through Nine.[2] The unaddressed Counts One through Three seek declaratory judgment regarding the scope and enforceability of the contractual right to renewal, the restrictive covenants, and the assignment of franchisee clients back to Advantage upon termination of the franchise. Compl. ¶¶ 61-80.

         Before reaching the substantive analysis, I must address the choice of law. The Defendants claim that Maine law governs. They note that the Agreements contain a choice of Maine law clause and that matters before this Court under diversity jurisdiction are subject to Maine choice of law rules, which favor enforcing contractual choice of law provisions where the parties regularly conduct business in Maine. Defs.' Mot. to Dismiss 6. The Plaintiffs “do not concede” that Maine law applies, but “assume arguendo” that Maine law applies for the purposes of this motion. Accordingly, I will apply Maine law.

         I. Counts Four, Six, Seven, Eight, and Nine

          The Defendants move to dismiss counts four, six, eight, and nine-asserting breaches of contract, breaches of fiduciary duty, tortious interference, and false representations, respectively-on the grounds that they ...

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