United States District Court, D. Maine
JAMES HOWELL et al. Plaintiffs,
ADVANTAGE PAYROLL SERVICES, INC. et al., Defendants.
ORDER ON DEFENDANTS' MOTION TO DISMISS AND
PLAINTIFFS' MOTION TO STRIKE
Torresen United States Chief District Judge
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.
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).
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)).
Plaintiffs in this case are four payroll service companies
(“the Associates”) 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.
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. ¶
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.
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.
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.
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.
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
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.
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 @paychex.com
email address. Compl. ¶¶ 43, 44. These practices
create the impression among the Associates' clients and
others that Paychex and Advantage are one company. Compl
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.
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.
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.
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.
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).
Defendants move to dismiss Counts Four through
Nine. 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.
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.
Counts Four, Six, Seven, Eight, and Nine
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 ...