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PLUM TREE, INC. v. FRASZ

June 10, 1977

THE PLUM TREE, INC., Plaintiff
v.
JOHN M. FRASZ and VIOLET R. FRASZ, Defendants, Counter-claim Plaintiffs and Third-Party Plaintiffs v. THE PLUM TREE, INC.; AAMCO AUTOMATIC TRANSMISSIONS, INC.; AAMCO INDUSTRIES, INC.; ROGER MARQUET DIRECT IMPORTS; and ROBERT MORGAN, Third-Party Defendants



The opinion of the court was delivered by: BRODERICK

 BRODERICK, J.

 The plaintiff, Plum Tree, Inc. *fn1" (Plum Tree), has moved for summary judgment on all six counts of the defendants' counter-claim which allege violations of the antitrust laws, the securities laws and pendent claims for misrepresentation and breach of contract. The defendants, John M. Frasz and Violet Frasz (Fraszes), have filed a cross-motion for summary judgment on Counts I, II and III of their counterclaim. Oral argument was had on these motions. After examining the memoranda, exhibits, depositions and affidavits, we will grant the Plum Tree's motion for summary judgment as to Count IV; on all the other Counts we find that there are genuine issues of material fact which preclude our granting summary judgment in favor of either party.

 Count IV of the Fraszes' counterclaim *fn2" alleges violations of § 17(a) of the Securities Act of 1933, 15 U.S.C. § 77(q) and Rule 10b-5 of the Regulations promulgated by the Securities and Exchange Commission pursuant to the Securities Exchange Act of 1934. In Count IV the Fraszes contend that the Plum Tree made false representations and untrue statements of material fact in connection with the sale to the Fraszes of a Plum Tree franchise and the execution of a Plum Tree Franchise Agreement. In its motion the Plum Tree contends that the Fraszes do not state a cause of action upon which relief can be granted because the Franchise Agreement is not a "security" as defined in the Securities Act of 1933, 15 U.S.C. § 77b(1) or the Securities and Exchange Act of 1934, 15 U.S.C. § 78c(a)(10).

 Both the Securities Act of 1933 and the Securities Exchange Act of 1934 define the term "security" as including, among other things, an "investment contract". The Fraszes contend that the Franchise Agreement constitutes an investment contract and is therefore subject to the structure of the securities laws. The essential elements of an investment contract were definitively set forth in SEC v. W. J. Howey, 328 U.S. 293, 298-99, 90 L. Ed. 1244, 66 S. Ct. 1100 (1946) as:

 
. . . a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party . . ..

 The basic test is

 
whether the scheme involves an investment of money in a common enterprise with profits to come solely from the efforts of others. 328 U.S. at 301.

 See United Housing Foundation, Inc. v. Forman, 421 U.S. 837, 95 S. Ct. 2051, 2060, 44 L. Ed. 2d 621 (1975); Tcherepnin v. Knight, 389 U.S. 332, 19 L. Ed. 2d 564, 88 S. Ct. 548 (1967).

 In Lino v. City Investing Co., 487 F.2d 689 (3d Cir. 1973), in interpreting the Howey test, our Third Circuit stated:

 
an investment contract can exist where the investor is required to perform some duties, as long as they are nominal or limited and would have "little direct effect upon receipt by the participant of the benefits promised by the promoters." *fn3" 487 F.2d at 692.

 The question of whether a Franchise Agreement whose operative provisions appear to be identical to the Franchise Agreement signed by the Fraszes constitutes an investment contract was decided in the negative by Chief Judge Lord of this District. In Plum Tree, Inc. v. Seligson, 383 F. Supp. 307 (E.D. Pa. 1974) Chief Judge Lord said:

 
Turning to the agreement between the Seligsons and Plum Tree, we conclude that the efforts expected of the Seligsons were not nominal or insignificant. Paragraph 4(c) of the agreement provided:
 
"During the period of this agreement LICENSEE shall devote his full time, energy and effort to the management and operation of the store and LICENSEE shall not engage in any other business either at ...

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