Former Franchisee Manager Not Liable for ‘Violating’ Post-term Restrictive Covenant

Mar 26, 2020 - Franchise, Dealer & Antitrust Decisions in One Sentence by |

Another Franchise Decision in One Sentence: Former Franchisee Manager Not Liable for ‘Violating’ Post-term Restrictive Covenant

Pillar to Post, Inc. v. Md. Home Inspectors, Inc., Civil Action No. DKC 18-3761, 2020 U.S. Dist. LEXIS 41327 (D. Md. Mar. 10, 2020)

Where Pillar to Post, Inc. (“Pillar to Post”) a franchisor of home inspection businesses, sued its former franchisee, James Williams (“J. Williams”) and his daughter (Rachel Oslund) for violation of the post-term restrictive covenant, and where the franchisee’s daughter (who had a management role in the franchise before it went out of business) had not herself signed the franchise agreement, and even though the franchise agreement stated that all officers of the franchisee were bound by the franchise agreement, the Court refused to hold the daughter liable for operating an independent business either under the franchise agreement or the “closely related doctrine.”

EXCERPTS OF CASE

Pillar to Post, Inc. v. Md. Home Inspectors, Inc.

United States District Court for the District of Maryland

March 10, 2020, Filed

Civil Action No. DKC 18-3761

Reporter

2020 U.S. Dist. LEXIS 41327 *; 2020 U.S.P.Q.2D (BNA) 10151; 2020 WL 1158583

  1. Background

Unless otherwise noted, the facts outlined here are set forth in the amended complaint, (ECF No. 23), and construed in the light most favorable to Plaintiff.

Pillar to Post, Inc. (“Pillar to Post”) is a Delaware corporation and franchisor of home inspection businesses.2 In 2006, James Williams (“J. Williams”) began operating a Pillar to Post franchise in Maryland called Maryland Home Inspectors (“MHI”). MHI operated under a franchise agreement (the “Franchise Agreement”) with Pillar to Post. In recent years, J. Williams began to transition management of the business to his daughter, Rachel Oslund.

On December 22, 2017 (the “Petition Date”), MHI filed for bankruptcy. From the Petition Date through October 4, 2018, MHI operated as a debtor-in-possession under the Bankruptcy Code. On September 24, 2018, Ms. Oslund announced that she would be leaving MHI to start a [*3]  new home inspection business with Neil Roseman. That business eventually became LodeStar, LLC, and Oslund would eventually bring her previous staff at MHI — Shipe, Johnson, Bennett, White, Vierling, and Richard M. Williams (“R. Williams”) — with her, while her father retired. As a result of Oslund’s departure, MHI announced that it would be closing its business and converting the Bankruptcy Case to Chapter 7.

In a series of e-mail communications and in-person meetings in September and October 2018, Oslund, J. Williams, Roseman, and certain MHI staff members discussed their transition from MHI to LodeStar as a “changeover.” Ms. Oslund retained her old business phone number at MHI explicitly for the purpose of maintaining connections with previous MHI clients at LodeStar. Ms. Oslund also sent an e-mail to a list of customers and referral sources (the “Referral List”) informing them that she and her team would be operating a new business with the “[s]ame great service. Same Passion for radon education. New name.”

On November 30, 2018, the Bankruptcy Court entered an Order Modifying Automatic Stay, which permitted Pillar to Post to try to enforce its termination and non-monetary post-termination [*4]  rights under the Franchise Agreement. On December 4, 2018, Pillar to Post sent MHI a Notice of Termination, which terminated the Franchise Agreement.

On December 6, 2018, Plaintiffs filed this suit. (ECF No. 1). On March 11, 2019, Plaintiffs, without objection from Defendants, filed an amended complaint (the “Amended Complaint”). (ECF No. 23). On March 29, 2019, all Defendants, except MHI, filed their motion to dismiss. (ECF No. 26). Plaintiffs responded in opposition, (ECF No. 31), and Defendants replied, (ECF No. 36).

II. Analysis

Pillar to Post, Inc. also operates as a distinct, Canadian corporation under the same name. The Canadian Pillar to Post, Inc. is also a plaintiff in this action.

  1. Count I: Breach of Contract

Plaintiffs’ first claim is that Ms. Oslund “breache[d]. . . the non-compete provision in the Franchise Agreement.” (ECF No. 23, at 19). Defendants argue that Ms. Oslund is not bound by the Franchise Agreement. (ECF No. 26-1, at 29). Plaintiffs allege that Ms. Oslund was an officer of MHI, (ECF No. 23, ¶¶ 2, 3, 53), and thus bound by Section 17.3 of the Franchise Agreement. That section states:

Franchisee covenants that, except as otherwise approved in writing by Franchisor, Franchisee, or if the Franchisee [*12]  is a corporation or limited liability company, then its officers, directors, shareholders, and members shall not, for a continuous uninterrupted period commencing upon the expiration or termination of this Agreement (regardless of the cause for termination) and continuing for two (2) years thereafter (and in the case of any violation of this covenant, for two (2) years after the violation ceases), either directly or indirectly, for itself, or through, on behalf of, or in conjunction with any person or legal entity, own, maintain, operate, engage in, be employed by, provide assistance to, or have any interest in (as owner or otherwise) any business that offers products or services which are the same as or similar to the products or services offered by the Pillar to Post® home inspection franchise under the Pillar to Post® System within the Non-Exclusive Territory or within 25 miles of the perimeter of the Non-Exclusive Territory.

(ECF No. 26-6, at 30).

Regardless of the language of Section 17.3, Ms. Oslund was not a signatory to the Franchise Agreement, and under Maryland law, “[t]he general rule is that one cannot be held to a contract to which he is not a party.” Mehul’s Inv. Corp. v. ABC Advisors, Inc., 130 F. Supp. 2d 700, 707 (D. Md. 2001). What is more, the Franchise Agreement [*13]  itself implies that an additional step can be required of the franchisee to effectuate extension of the provision to non-signatory officers. Section 17.7 states that:

At Franchisor’s request, Franchisee shall obtain and furnish to Franchisor executed covenants similar in substance to those set forth in this Section 17 (including covenants applicable upon the termination of a person’s relationship with Franchisee) from any or all of the following persons: (a) all managers of Franchisee and any other personnel employed by Franchisee who have received or will receive training from Franchisor; (b) all officers . . . of Franchisee[.]

(ECF No. 26-6, at 31). Plaintiffs do not allege that Pillar to Post, as Franchisor, ever requested such a covenant from Ms. Oslund or anyone else. Ms. Oslund, therefore, is not a party to any agreement with a restrictive covenant and is not bound by any restrictive covenant with Pillar to Post.

Plaintiffs seek to circumvent Ms. Oslund’s non-signatory status through the “closely related doctrine.” (ECF No. 31, at 19-20). The closely related doctrine holds “that a non-signatory to a contract may nonetheless be bound by that contract’s forum-selection clause if the non-signatory is so [*14]  ‘closely related’ to the dispute that it becomes ‘foreseeable’ that it will be bound.” Peterson v. Evapco, Inc., 238 Md.App.1, 33, 188 A.3d 210 (2018) (emphasis added). The closely related doctrine is irrelevant because it has never, to this court’s knowledge, been applied to a non-compete clause. Plaintiffs’ suggestion that the court in Peterson “held under Maryland law that a non-signatory was subject to a confidentiality doctrine,” (ECF No. 31, at 19), is incorrect. Because Ms. Oslund is not bound by the non-compete clause of the Franchise Agreement, Plaintiffs have failed to state a claim as to this count.

Distributor Not Barred from Assigning Antitrust Claims under No-Assignment Provision

Feb 25, 2020 - Franchise, Dealer & Antitrust Decisions in One Sentence by |

Distributor Not Barred from Assigning Antitrust Claims under No-Assignment Provision

In Walgreen Co v. Johnson & Johnson, No. 19-1730, 2020 U.S. App. LEXIS 5336 (3d Cir. Feb. 21, 2020), the United States District Court for the Third Circuit reversed a federal trial court’s decision in favor of the alleged prescription drug manufacturer price-fixer, ruling that an assignment of federal antitrust claims is not barred by a distribution contract provision proscribing the assignment of any “rights or obligations under” that distribution contract; as the Third Circuit determined the antitrust claims are a product of federal statute and thus are extrinsic to, and not rights “under,” a commercial distribution agreement.

 

Excerpts from Opinion

OPINION OF THE COURT

JORDAN, Circuit Judge.

  1. BACKGROUND

Appellants Walgreen Co. and the Kroger Co. (which, for convenience, we refer to collectively and in the singular as “Walgreen”) operate retail pharmacies throughout the United States. One of the many pharmaceuticals that Walgreen dispenses to the public is Remicade, a biologic drug used to treat various autoimmune diseases. Remicade is marketed and manufactured by Appellees Johnson & Johnson and Janssen Biotech, Inc. (which, again, for convenience we refer to collectively and in the singular as “Janssen”). Janssen does not sell Remicade directly to Walgreen. Instead, Walgreen procures Remicade from two wholesale distributors: AmerisourceBergen and Cardinal Health (once more, [*3]  collectively and in the singular “Wholesaler”). Wholesaler acquires Remicade pursuant to a Distribution Agreement with JOM Pharmaceutical Services, Inc. (“JOM”), a Janssen affiliate.1 Only Wholesaler and JOM are identified as parties to the Distribution Agreement. It is undisputed that New Jersey law governs the Distribution Agreement.

This appeal pertains to the scope of the anti-assignment language in Section 4.4 (the “Anti-Assignment Provision”) of the Distribution Agreement. In relevant part, the Anti-Assignment Provision states that “neither party may assign, directly or indirectly, this agreement or any of its rights or obligations under this agreement … without the prior written consent of the other party…. Any purported assignment in violation of this section will be void.” (JA at 102 (emphasis added).)

In January 2018, Wholesaler assigned to Walgreen “all of its rights, title and interest in and to” its claims against Janssen “under the antitrust laws of the United States or of any State arising out of or relating to [Wholesaler]’s purchase of Remicade[.]”2 (JA at 217.) Less than six months later, Walgreen exercised the rights Wholesaler had assigned to it and filed suit against Janssen, asserting various [*4]  federal antitrust claims relating to Remicade. At bottom, Walgreen alleges that Janssen used its size and bargaining power in the broader pharmaceutical market to enter into exclusive contracts and anticompetitive bundling agreements with health insurers that suppressed generic competition to Remicade, which in turn allowed Janssen to sell Remicade at supracompetitive prices.

Janssen moved to dismiss Walgreen’s complaint on the ground that the Anti-Assignment Provision invalidated Wholesaler’s purported assignment of its antitrust claims to Walgreen. It is undisputed that, if the Anti-Assignment Provision prevents the assignment, then, under the Supreme Court’s seminal decision in Illinois Brick Co. v. Illinois, 431 U.S. 720, 97 S. Ct. 2061, 52 L. Ed. 2d 707 (1977), Walgreen, an “indirect” Remicade purchaser, would lack antitrust standing to assert claims against Janssen relating to Remicade.3 To take account of the potentially dispositive Distribution Agreement, the District Court converted Janssen’s motion to dismiss into a motion for summary judgment.

  1. DISCUSSION4

Walgreen presses a number of arguments in opposition to the District Court’s dismissal of its claims, but we need only address one: whether Wholesaler’s assignment to Walgreen of its antitrust claims against Janssen was barred by the Anti-Assignment Provision.5 Because the answer to that question is no, we will reverse and remand for further proceedings.

The facts of this case are in all material respects the same as those of Hartig Drug Company Inc. v. Senju Pharmaceutical Company Ltd., 836 F.3d 261 (3d Cir. 2016). In Hartig, an indirect purchaser of medicated eyedrops asserted antitrust claims against the eyedrops’ manufacturer pursuant to an assignment of antitrust claims from a “direct purchaser” distributor. Id. at 264. The district court granted the defendant manufacturer’s motion to dismiss the indirect-purchaser plaintiff’s claims on the ground that “an anti-assignment clause in a distribution agreement between [*6]  [the manufacturer] and [the distributor] barred any assignment of antitrust claims from [the distributor] to [the indirect purchaser], leaving [the indirect purchaser] without standing to sue and divesting the Court of subject matter jurisdiction.” Id. We vacated and remanded, holding that the district court erred both in concluding that the anti-assignment clause implicated that court’s subject matter jurisdiction and in considering the terms of the distribution agreement, which was neither integral to nor attached to the indirect-purchaser plaintiff’s complaint. Id. at 269, 273-74.

Given that the district court might have occasion to again interpret the distribution agreement on remand, considerations of judicial economy prompted us to note our “doubt about the Court’s interpretation of the [distribution agreement] as barring the assignment of antitrust causes of action[.]” Id. at 274. In that regard, we observed, albeit in dictum, that “[b]ecause [the wholesaler]’s antitrust causes of action arise by statute, there is a serious argument that they do not fall within the [distribution agreement]’s plain language limiting assignment of ‘rights and obligations hereunder’—that is, they arise by operation of an extrinsic [*7]  legal regime rather than by contract.” Id. at 275 n.17.

That observation in Hartig provides the appropriate rule of decision here: the statutory federal antitrust claims asserted in Walgreen’s complaint are extrinsic to, and not “rights under,” the Distribution Agreement. Applied to the Anti-Assignment Provision, the scope of which is limited to Wholesaler’s “rights under” the Distribution Agreement, it becomes evident that the provision has no bearing on Wholesaler’s antitrust claims, which rely only on statutory rights and do not implicate any substantive right under the Distribution Agreement. Accordingly, the Anti-Assignment Provision does not invalidate Wholesaler’s assignment of antitrust claims to Walgreen or otherwise present a bar to Walgreen’s standing to assert those antitrust claims against Janssen. Our holding here is consistent with the substantial weight of decisions on this issue, which do not bind us but nevertheless are persuasive.6

Although JOM entered into a separate Distribution Agreement with each of AmerisourceBergen and Cardinal Health, those agreements are identical in all material respects. Consequently, and for the sake of simplicity, we refer only to a single Distribution Agreement.

Specifically, AmerisourceBergen assigned its rights to Walgreen Co. and Cardinal Health assigned its rights to Kroger Co. Because the assignments are worded slightly differently but are identical in all material respects, for the sake of simplicity, we refer only to a single assignment.

The parties dedicated a significant portion of their briefing to disputing the question of whether federal common law or New Jersey law governs the “validity” of Wholesaler’s assignment to Walgreen. (See, e.g., Opening Br. at 13-26; Answering Br. at 9-14, 17-22). However, that dispute is contingent on the assignment at issue falling within the scope of the Anti-Assignment Provision. As discussed infra, we hold that the assignment does not convey “rights under” the Distribution Agreement, and, thus, is not subject to the Anti-Assignment Provision. Accordingly, we do not reach the parties’ subsidiary choice-of-law arguments pertaining to the assignment’s “validity.”

In Illinois Brick, the Supreme Court created a “direct purchaser” rule for antitrust claims, “providing that only entities that purchase goods directly from alleged antitrust violators have statutory standing to bring a lawsuit for damages[.]” Wallach v. Eaton Corp., 837 F.3d 356, 365 (3d Cir. 2016). “The rule of Illinois Brick was founded on the difficulty of analyzing pricing decisions, the risk of multiple liability for defendants, and the weakening of private antitrust enforcement that might result from splitting damages for overcharges among direct and indirect purchasers.” Gulfstream III Assocs., Inc. v. Gulfstream Aerospace Corp., 995 F.2d 425, 439 (3d Cir. 1993). Because only Wholesaler, and not Walgreen, purchased Remicade directly from Janssen, the alleged antitrust violator, Walgreen is an “indirect purchaser” under Illinois Brick.

The District Court had jurisdiction under 28 U.S.C. §§ 1331 and 1337. We have appellate jurisdiction pursuant to 28 U.S.C. § 1291. “It is well established that we employ a plenary standard in reviewing orders entered on motions for summary judgment, applying the same standard as the district court.” Blunt v. Lower Merion Sch. Dist., 767 F.3d 247, 265 (3d Cir. 2014).

Walgreen disputes whether Janssen, as a matter of law, actually is a party to the Distribution Agreement with concomitant rights to enforce the Anti-Assignment Provision. Because we conclude that the Anti-Assignment Provision does not reach Wholesaler’s assignment of its antitrust claims to Walgreen, we need not, and do not resolve Janssen’s disputed party status.

See, e.g., In re Opana ER Antritrust Litig., No. 14-C-10150, 2016 U.S. Dist. LEXIS 23319, 2016 WL 738596, at *5 (N.D. Ill. Feb. 25, 2016) (“Even under a broad reading of the non-assignment provisions, the prohibition on assigning ‘this Agreement’ or ‘delegat[ing]’ any ‘duties or responsibilities’ would only serve to limit the parties’ ability to assign their rights and obligations under the [agreement]. The Court does not read this language to include statutorily-based antitrust claims, because such claims are not based on any substantive right or duty found in the [agreement]s themselves.”) (alteration in original); United Food & Commercial Workers Local 1776 & Participating Employers Health & Welfare Fund v. Teikoku Pharma USA, Inc., No. 14-MD-02521-WHO, 2015 U.S. Dist. LEXIS 94220, 2015 WL 4397396, at *6 (N.D. Cal. July 17, 2015) (“The [distribution agreements]’ non-assignment clauses are limited to the assignment of duties and obligations under the [distribution agreements] themselves and do not include causes of action sounding in antitrust arising from those agreements.”); In re TFT-LCD (Flat Panel) Antitrust Litig., No. C 11-00711 SI, 2011 U.S. Dist. LEXIS 88723, 2011 WL 3475408, at *4 (N.D. Cal. Aug. 9, 2011), reconsidered in-part on other grounds, No. C 11-00711 SI, 2011 U.S. Dist. LEXIS 88723, 2011 WL 5573930 (N.D. Cal. Nov. 16, 2011) (“Here, the anti-assignment clauses are limited to each party’s rights and obligations under the contracts…. [L]itigation over antitrust claims cannot be seen as a ‘right or duty’ contemplated by the contract. The State has not brought the assigned claims based on any substantive right or duty found in the contract itself.”).

Rent-to-Own Franchisor Operators Settle Charges that They Restrained Competition through Reciprocal Purchase Agreements in Violation of Antitrust Laws

Feb 23, 2020 - Franchise, Dealer & Antitrust Decisions in One Sentence by |

Rent-to-Own Franchisor Operators Settle Charges that They Restrained Competition through Reciprocal Purchase Agreements in Violation of Antitrust Laws

FTC alleges that agreements by Aaron’s Inc., Buddy’s Newco, LLC, and Rent-A-Center, Inc. reduced competition, lowered quality and selection of products

 February 21, 2020 – FOR RELEASE

The FTC antitrust complaints alleged that from June 2015 to May 2018, Aaron’sBuddy’s, and Rent-A-Center each entered into anticompetitive reciprocal agreements with each other and other competitors, and that these agreements swapped customer contracts from rent-to-own, or RTO, stores in various local markets, whereby one party to the agreement closed down stores and exited a local market where the other party continued to maintain a presence, such that these reciprocal agreements likely led to store closures that may not have occurred otherwise, resulting in reduced competition for quality and service in the remaining stores.

These anticompetitive practices, according to the FTC, caused likely caused many travelers to have to travel to the next-closest location to make their in-person payment, which may have significantly increased their travel time and costs. Further, these wrongful agreements also explicitly required the selling party not to compete within a specified territory, typically for a period of three years.

“These agreements affected consumers who already had few options for furnishing a home on a limited budget,” said Ian Conner, Director of the FTC’s Bureau of Competition. “The FTC’s orders get rid of the agreements, reopen affected markets to competition, and bar these companies from doing this again.”

https://www.ftc.gov/news-events/press-releases/2020/02/rent-own-operators-settle-charges-they-restrained-competition

Ohio Federal Court Enforces Restrictive Covenant Against Franchisee & Rejects its FDD Violation Claims

Jan 18, 2020 - Franchise, Dealer & Antitrust Decisions in One Sentence by |

Ohio Federal Court Rejects Former Ice Cream Franchisee’s Arguments to Dissolve Preliminary Injunction and to Maintain Case for Violations of California Franchise Act

In case in which franchisee (Schulenburg) defended (and lost) franchisor’s (Handel’s) bid to enforce post term covenant not to compete, franchisee’s counterclaim that franchisor had violated the CFIL by failing to provide an updated and revised FDD to franchisee was dismissed for franchisee’s failure to show that Handel’s CFIL violations caused any damages or articulate any way in which Handel’s violations damaged him, where the revised FDD differed solely with respect to a franchisee’s ability to obtain SBA financing.

Handel’s Enters. v. Schulenburg, No. 4:18-CV-00508, 2020 U.S. Dist. LEXIS 1185 (N.D. Ohio Jan. 6, 2020)

Excerpts from Case Below:

Handel’s Enters. v. Schulenburg

United States District Court for the Northern District of Ohio, Eastern Division

January 6, 2020, Decided; January 6, 2020, Filed

CASE NO. 4:18-CV-00508; CASE NO. 4:18-CV-02094)

 

For [FRANCHISEE] David Scott Levaton, LEAD ATTORNEY, Franchise Legal Support, Westlake Village, CA; Rares M. Ghilezan, LEAD ATTORNEY, Global Legal Law Firm, Solana Beach, Solana Beach, CA.

For [FRANCHISOR] Andrew Gregory Fiorella, LEAD ATTORNEY, PRO HAC VICE, Benesch, Friedlander, Coplan & Aronoff LLP, Cleveland, OH; Elizabeth A. [*2]  Batts, Warren T. McClurg, II, LEAD ATTORNEYS, PRO HAC VICE, Benesch, Friedlander, Coplan & Aronoff – Cleveland, Cleveland, OH; Philip Jeng-Hung Wang, Stoel Rives, LLP, LEAD ATTORNEY, Three Embarcadero Ctr, San Francisco, CA.

Judges: PAMELA A. BARKER, UNITED STATES DISTRICT JUDGE.

MEMORANDUM OF OPINION AND ORDER

….

The parties have moved for summary judgment with respect to Schulenburg’s first and second causes of action, which allege that Handel’s violated multiple provisions of the CFIL. (Doc. No. 69 at 10-15.) Generally, the intent of the CFIL is “to provide each prospective franchisee with the information necessary to make an intelligent decision regarding franchises being offered . . . to prohibit the sale of franchises where the [*16]  sale would lead to fraud or a likelihood that the franchisor’s promises would not be fulfilled, and to protect the franchisor and franchisee by providing a better understanding of the relationship between the franchisor and franchisee with regard to their business relationship.” Cal. Corp. Code § 31001. In support of this goal, the CFIL requires a franchisor to file an application for registration of an offer of a franchise with the DBO, including a proposed franchise disclosure document, before offering a franchise for sale. Cal. Corp. Code §§ 31110, 31111, 31114. Once approved, the franchise offering is valid for a period of one year from the effective date of the registration. Cal. Corp. Code § 31120.

In Schulenburg’s first cause of action, he asserts that Handel’s violated two CFIL provisions related to the amendment of a franchisor’s franchise disclosure document. (Doc. No. 69 at 10-12.) Pursuant to CFIL § 31123, “[a] franchisor shall promptly notify the commissioner in writing, by an application to amend the registration, of any material change in the information contained in the application as originally submitted, amended or renewed.” Cal. Corp. Code § 31123. Relatedly, CFIL § 31107 provides an exemption from the disclosure requirements for “any offer (but not the sale) by a franchisor of a franchise” made “while an application [*17]  for renewal or amendment is pending” as long as the prospective franchisee receives all of the following:

(a) The franchise disclosure document and its exhibits as filed with the commissioner with the application for renewal or amendment.

(b) A written statement from the franchisor that (1) the filing has been made but is not effective, (2) the information in the franchise disclosure document and exhibits has not been reviewed by the commissioner, and (3) the franchisor will deliver to the prospective franchisee an effective franchise disclosure document and exhibits at least 14 days prior to execution by the prospective franchisee of a binding agreement or payment of any consideration to the franchisor, or any person affiliated with the franchisor, whichever occurs first, showing all material changes from the franchise disclosure document and exhibits received by the prospective franchisee under subdivision (a) of this section.

(c) The franchise disclosure document and exhibits in accordance with paragraph (3) of subdivision (b) of this section.

Cal. Corp. Code § 31107. Schulenburg asserts that Handel’s violated §§ 31123 and 31107 when it continued with the offer and sale of the franchise to Schulenburg in January 2016 while Handel’s application to amend the 2015 [*18]  FDD was pending with the DBO without providing any of the disclosures required by § 31107. (Doc. No. 69 at 10-12; Doc. No. 73 at 10-11.)

In Schulenburg’s second cause of action, he alleges that Handel’s violated CFIL §§ 31119 and 31107. (Doc. No. 69 at 13-15.) Section 31119(a) requires a franchisor to provide a prospective franchisee with a copy of the franchise disclosure document “at least 14 days prior to the execution by the prospective franchisee of any binding franchise or other agreement, or at least 14 days prior to the receipt of any consideration, whichever occurs first.” Cal. Corp. Code § 31119(a). Similarly, § 31107(b) requires delivery of “an effective franchise disclosure document and exhibits at least 14 days prior to execution by the prospective franchisee of a binding agreement or payment of any consideration to the franchisor, or any person affiliated with the franchisor, whichever occurs first, showing all material changes from the franchise disclosure document and exhibits received by the prospective franchisee under subdivision (a) of this section.” Cal. Corp. Code § 31107(b). Schulenburg contends that when the DBO approved the Amended 2015 FDD on January 19, 2016, it became the only effective franchise disclosure document for Handel’s. (Doc. No. 69 at 14; Doc. No. 73 at 12.) [*19]  As a result, Schulenburg claims Handel’s violated both of the above provisions when it failed to provide Schulenburg with a copy of the Amended 2015 FDD prior to executing the Franchise Agreement on January 21, 2016. (Doc. No. 69 at 14; Doc. No. 73 at 12.)

Handel’s largely admits that its actions violated the CFIL. (Doc. No. 79 at 1.) However, in its Motion for Partial Summary Judgment, Handel’s argues that Schulenburg’s claims still fail for several reasons. In particular, as noted above, Handel’s asserts (1) Schulenburg’s CFIL claims are barred by the statute of limitations, (2) Schulenburg has not demonstrated how he has been damaged by the specific CFIL violations at issue, and (3) Schulenburg has not demonstrated reasonable reliance on any of Handel’s alleged misrepresentations or omissions in the 2015 FDD. (Doc. No. 72.) The Court finds that Handel’s is entitled to summary judgment on Schulenburg’s CFIL claims because Schulenburg has failed to demonstrate any damages caused by Handel’s violations.

Handel’s argues that Schulenburg’s claims fail because he has not alleged that any damages resulted from Handel’s violations of the CFIL. (Doc. No. 72-1 at 22-24.) Handel’s asserts a [*20]  showing of damages is a prerequisite to a claim for rescission. (Id.) In response, Schulenburg claims the language of the CFIL does not require a showing of damages in order to obtain rescission and that Schulenburg has shown he is entitled to restitution of certain benefits and compensatory damages. (Doc. No. 80 at 12-14; Doc. No. 81 at 5-7.)

CFIL § 31300 provides that any person who violates certain provisions of the CFIL “shall be liable to the franchisee or subfranchisor, who may sue for damages caused thereby, and if the violation is willful, the franchisee may also sue for rescission.” Cal. Corp. Code § 31300. The parties dispute the meaning of this language. Handel’s argues that this phrasing unambiguously provides that rescission is an additional remedy available for a CFIL violation if the violation is willful, but does not dispense with the requirement to establish that the CFIL violation caused damage. (Doc. No. 82 at 12.) Handel’s asserts use of the word “also” in the statute would be superfluous if the statute was interpreted to mean that a willful violation alone, without a showing of damages, entitled the plaintiff to rescission. (Id.) In response, Schulenburg contends that the language of § 31300 does not require [*21]  a showing of damages in order to obtain rescission. (Doc. No. 81 at 5-6.) Rather, rescission is an additional remedy available upon a showing of “willfulness.” (Id.)

The only case cited by either party that directly addresses this issue is an unpublished California Court of Appeal decision.4 In that case, the plaintiff brought a class action against defendants for violations of the CFIL. DT Woodard, Inc. v. Mail Boxes Etc., Inc., No. B194599, 2007 Cal. App. Unpub. LEXIS 8388, 2007 WL 3018861, at *1, *5 (Cal. Ct. App. Oct. 17, 2007). The plaintiff sought rescission of the class members’ contracts and argued that “section 31300 does not require proof that the franchisee relied on defendants [sic] violations of the CFIL and that such violations caused damages.” 2007 Cal. App. Unpub. LEXIS 8388 [WL] at *7. Interpreting the language of § 31300, the court rejected the plaintiff’s argument. The court noted that the statute’s wording—”shall be liable to the franchisee or subfranchisor, who may sue for damages caused thereby, and if the violation is willful, the franchisee may also sue for rescission”—contains “express causation language.” Id. (quoting Cal. Corp. Code § 31300). According to the court, that language has two consequences. Id. “First, reliance is an element of causation.” Id. More relevant here, however, is the second consequence the Court discussed:

[*22] Second, a franchisee suing for the additional remedy of rescission must also prove that the statutory violation is “willful.” This additional element is necessary to obtain rescission, however, does not dispense with a showing of reliance and causation; to obtain the rescission remedy, the plaintiff must prove that the violation is “willful” in addition to showing that plaintiff relied on the statutory violation in entering the contract and that the violation caused damages. If this were not the case, a “willful” statutory violation would give the plaintiff the opportunity to rescind, even if the franchisee did not rely on the franchisor’s violation and even if the franchisor’s violation caused no harm to plaintiff franchisee. It is illogical to condition the more expansive remedy of rescission (which includes restitution of benefits conferred by the contract, and which is not inconsistent with a claim for damages, according to Civil Code section 1692) on a lesser quantum of proof. To obtain the greater remedy of rescission should require plaintiff to prove everything necessary to obtain the lesser remedy of damages, as well as the “willful” violation of the statute.

2007 Cal. App. Unpub. LEXIS 8388 [WL] at *8.

The Court finds the reasoning [*23]  of DT Woodard persuasive. The language of the statute, which provides that a plaintiff “may sue for damages caused thereby, and if the violation is willful, the franchisee may also sue for rescission,” Cal. Corp. Code § 31300, indicates that rescission is an additional remedy that is available only if the plaintiff first establishes that the violation damaged the plaintiff. In addition, the opposing interpretation advocated for by Schulenburg would give the plaintiff the opportunity to rescind a franchise agreement based on a willful violation without the need to show that the violation ever damaged the plaintiff. This is a perverse result, especially in a situation where a plaintiff seeks to rescind an agreement that has been in place for years based on a statutory violation that did not harm the plaintiff in any way. It is illogical to provide such a drastic remedy without requiring a showing of damages.

Schulenburg argues that Cal. Civil Code § 1692⁠—which applies to rescission claims under the CFIL and provides that “[a] claim for damages is not inconsistent with a claim for relief based upon rescission”⁠—supports his interpretation of the statute because it shows damages are not a required element of a rescission claim, but [*24]  rather a remedy available in addition to rescission. (Doc. No. 81 at 5-6.) Although the principles in Cal. Civil Code § 1692 may apply to a rescission claim under the CFIL, it does not address whether a plaintiff is entitled to rescission under § 31300 of the CFIL in the first place. Thus, the Court finds his argument unpersuasive. Accordingly, the Court finds that § 31300 requires a plaintiff to prove that the defendant’s CFIL violation damaged the plaintiff and that the violation was willful in order to obtain rescission.

In this case, Schulenburg has not demonstrated that Handel’s CFIL violations caused any damages. Schulenburg’s Second Amended Complaint contains only conclusory allegations regarding damages caused by Handel’s violations. (See Doc. No. 69 at ¶¶ 58, 60, 71.) Schulenburg also has not articulated any way in which Handel’s violations damaged him in response to Handel’s Motion for Partial Summary Judgment, as Schulenburg does not claim that Handel’s failure to provide the required disclosures under § 31107 or its failure to provide the Amended 2015 FDD prior to the execution of the Franchise Agreement harmed him in any way. Indeed, Schulenburg offers no evidence that he was prejudiced by the two-month delay between executing the [*25]  2015 FDD and receiving the Amended 2015 FDD, which differed solely with respect to a franchisee’s ability to obtain SBA financing.

Instead, in conclusory fashion, Schulenburg asserts that he is entitled to compensatory damages for attorneys’ fees and lost profits and rent for his Cali Cream store and that he is “entitled to restitution of the following damage amounts, all of which Mr. Schulenburg has incurred as result of Handel’s statutory violations: (a) return of the $50,000 franchise fee paid to Handel’s pursuant to the illegal franchise agreement; (b) return of the $288,320 in royalties paid to Handel’s from 2016 to date pursuant to the illegal franchise agreement; [and] (c) reimbursement for more than $310,758 for the cost and expense of designing, equipping and opening the Encinitas franchise.” (Doc. No. 80 at 13.) These statements provide no explanation, however, as to how any of these damage amounts were caused by, related to, or connected in any way to Handel’s violations of the CFIL as required by § 31300. Accordingly, Schulenburg has failed to establish that he has been damaged by Handel’s statutory violations, and Handel’s is entitled to summary judgment on Schulenburg’s claims [*26]  under the CFIL.

As a result, the Court need not discuss the other arguments contained in Handel’s and Schulenburg’s respective Motions for Partial Summary Judgment. Handel’s Motion for Partial Summary Judgment is granted, and Schulenburg’s Motion for Partial Summary Judgment is denied.

 

The Court is aware that “an unpublished California Court of Appeals case [has] no precedential value.” Farley v. Country Coach, Inc., 550 F. Supp. 2d 689, 695 n.3 (E.D. Mich. 2008); Cal. R. Ct. 8.1115 (“[A]n opinion of a California Court of Appeal or superior court appellate division that is not certified for publication or ordered published must not be cited or relied on by a court or a party in any other action.”). However, federal courts “may cite unpublished California appellate decisions as persuasive authority.” Washington v. Cal. City Corr. Ctr., 871 F. Supp. 2d 1010, 1028 n.3 (E.D. Cal. May 10, 2012).

Liberty Tax Franchisee’s Claim Against Bank Derailed by Pleading Defect

Jan 5, 2020 - Franchise, Dealer & Antitrust Decisions in One Sentence by |

Liberty Tax Franchisee’s Claim Against Bank Derailed by Pleading Defect

In a recent Liberty Tax franchise case the United States District Court for the Western District of Kentucky, Louisville Division found that the franchisee’s tortious interference claim against Republic Bank & Trust Company (“Republic”) should be dismissed based on the franchisee’s lawyer’s failure to properly plead indemnity or contribution required to procedurally assert the claim in federal court; based on this ruling the court did not further consider the other logical problems with the franchisee’s alleged wrongdoing.

JTH Tax, Inc. v. Freedom Tax, Inc., Civil Action No. 3:19-cv-00085-RGJ, 2019 U.S. Dist. LEXIS 218210 (W.D. Ky. Dec. 19, 2019)

 

*****************************************************

Counsel:

For JTH Tax, Inc., doing business as Liberty Tax Service, Siempretax+, L.L.C., Plaintiffs: Denise M. Motta, LEAD ATTORNEY, Gordon Rees Scully Mansukhani LLP – Louisville, Louisville, KY; Julia K. Whitelock, LEAD ATTORNEY, Gordon Rees Scully Mansukhani LLP – Alexandria, Alexandria, VA; Patrick K. Burns, LEAD ATTORNEY, Gordon Rees Scully Mansukhani LLP – DC, Washington, DC; Peter G. Siachos, LEAD ATTORNEY, Gordon Rees Scully Mansukhani LLP – Florham Park, Florham Park, NJ.

For the Franchisees Adisa Selimovic, Freedom Tax., Inc., ThirdParty Plaintiffs: Brett M. Buterick, LEAD ATTORNEY, Hill Wallack LLP, Princeton, NJ; Evan M. Goldman, LEAD ATTORNEY, A. Y. Strauss LLC, Roseland, NJ.

JTH Tax, Inc. v. Freedom Tax, Inc.

United States District Court for the Western District of Kentucky, Louisville Division

December 19, 2019, Filed

Civil Action No. 3:19-cv-00085-RGJ

Excerpts from the Decision:

MEMORANDUM OPINION AND ORDER

Plaintiffs JTH Tax, Inc., d/b/a Liberty Tax Service (“JTH”), and Siempretax+, LLC (“Siempre Tax”) (collectively, “Liberty”) filed a complaint against Defendants Freedom Tax, Inc. (“Freedom”) and Adisa Selimovic (“Selimovic”) seeking relief for alleged violations of the Lanham Act, [*2]  15 U.S.C. §§ 1114, 1125, et seq., and the Defend Trade Secrets Act, 18 U.S.C. § 1836, et seq. [DE 1; DE 33]. Freedom and Selimovic (collectively, “Third-Party Plaintiffs”) filed an Answer and Affirmative Defenses [DE 42], and brought counterclaims against Liberty and a third-party complaint against Republic Bank & Trust Company (“Republic”). In the third-party complaint, Third-Party Plaintiffs allege tortious interference in prospective economic advantage and breach of contract. Id. at 914-915. Republic now moves to dismiss the third-party complaint. [DE 55]. Briefing is complete, and the motion is ripe. [DE 59; DE 62]. For the reasons below, the Court GRANTS Republic’s Motion.

  1. BACKGROUND

Liberty is a franchisor of Liberty Tax Service®. [DE 33 at ¶ 19]. Liberty owns various Liberty Tax Service® trademarks, service marks, logos, and derivations (“the Marks”), which are registered with the United States Patent and Trademark Office. Id. at ¶ 20. Liberty is also a franchisor of the Liberty Tax Service® tax-preparation system, which sells income tax-preparation and filing services and products to the public under the Marks. Id. at ¶ 20. Liberty grants licenses to franchisees to use the Marks and participate in its confidential and proprietary business system [*3]  through written franchise agreements. Id. at ¶ 23.

Freedom is a tax-preparation service with eight locations in Kentucky, Indiana, and California. [DE 31 at 716]. Selimovic incorporated Freedom in 2017 and is president of the company. Id. at 715. Selimovic was also an officer of The Franchise Corp., a now-defunct tax-preparation business incorporated, owned, and operated by Marcus Warren. [DE 26, Tr. PI Hearing at 562:1-4]. The Franchise Corp. and Warren, both non-parties, were signatories to franchise agreements with Liberty (the “Franchise Agreements”). [See DE 33-1]. Neither Freedom nor Selimovic was a signatory to the Franchise Agreements or any other agreements with Liberty. [Id.; DE 22-1 at ¶ 3].

Under the Franchise Agreements, Warren owned several now-defunct Liberty Tax Service® franchises in Kentucky, Indiana, and California. [DE 33 at ¶ 27]. As part of the Franchise Agreements, Liberty provided Warren and The Franchise Corp., among other things, training in franchise operations, marketing, advertising, sales, and business systems, as well as confidential operating, marketing, and advertising materials unavailable to the public. Id. at ¶ 32.

In January, 2018, Freedom entered into a Republic [*4]  Bank Tax Refund Solutions ERO Agreement (the “Agreement”), which “governed the participation of [Freedom], as an electronic return originator . . . in Republic Bank’s ‘Electronic Bank Product Program’ (the ‘Program’) for the 2018-2019 tax season.” [DE 62-1 at 1071]. The Program allowed “a taxpayer, acting with [Freedom] as his or her agent” to “apply for certain banking products offered by Republic Bank, such as tax-refund.” Id.

Because of several violations of the Franchise Agreements, Liberty sent Notices to Cure Default to all Franchise Locations notifying Warren and The Franchise Corp. of various breaches of the Franchise Agreements. [DE 33 at ¶ 35]. After providing the requisite notice and opportunity to cure, Liberty terminated the Franchise Agreements. Id. at ¶ 36.

On January 30, 2018, Liberty sued Warren and The Franchise Corp. in the United District Court for the Eastern District of Virginia, alleging breach of the Franchise Agreements and trademark infringement.

On February 1, 2019, Liberty sued Freedom and Selimovic in this Court, alleging that:

Defendants Selimovic and Freedom Tax have collectively conspired with a former Liberty franchisee, Marcus Warren, to secretly and improperly [*5]  transfer the Franchise Business and assets from Warren to Defendants without Liberty’s knowledge or contractually required consent. Further, Defendants have misappropriated Liberty’s marks, manual and system, in an effort to operate a competing tax preparation business under the name “Freedom Tax” to circumvent and avoid the non-competition, post-termination, and non-solicitation provisions set forth in Warren’s Liberty Tax Service® Franchise Agreements with Liberty.

Id. at 775-776.

On June 6, 2019, Freedom and Selimovic (“Third-Party Plaintiffs”) sued Republic in this Court, alleging that:

On or about February 20, 2019, [Semilovic] received a phone call from a representative of Republic Bank advising that Liberty Tax directed Republic Bank to terminate all of FTI’s services with Republic Bank.

When [Semilovic] inquired why, she was advised Liberty Tax sent Republic Bank a Notice of Breach of Franchise Agreement that alleged breach of a separate agreement with Liberty Tax (which was unrelated to Third-Party Plaintiffs’ agreement with Republic Bank).

In fact, [Semilovic] was never a Liberty Tax franchisee, never signed a franchise agreement, and was not then, nor ever was, contractually obligated to Liberty [*6]  Tax in any way.

On the other hand, Third-Party Plaintiffs had, until unilaterally terminated by Republic Bank, a contractual relationship via Third-Party Plaintiffs’ Republic Bank Account.

Notably, the Liberty Parties and Republic Bank waited until the “peak” of tax season to take action against Third-Party Plaintiffs.

Approximately 70% of Third-Party Plaintiffs’ clients use the bank products Republic Bank provided, and as a result of the Liberty Parties’ interference, and Republic Bank’s improper, unilateral termination, the Third-Party Plaintiffs were seriously harmed during the 2019 tax season.

Specifically, because Third-Party Plaintiffs were unable to offer a substantial number of tax-related products and services, they lost more than sixty thousand dollars ($60,000) in profits.

[DE 42 at ¶ 11-17].

III. DISCUSSION

Third-Party Plaintiffs articulate two causes of action against Republic: tortious interference with prospective economic advantage and breach of contract. [DE 42 at 914-915]. Republic contends that the third-party complaint must be dismissed because Third-Party Plaintiffs have not properly alleged the material elements of either claim. [DE 55 at 994-995]. Third-Party Plaintiffs disagree, arguing they have done so. [DE 59 at 1031].

The Court agrees that the third-party complaint must be dismissed, but for a different reason than that advanced by Republic. The Court finds that it must dismiss the third-party complaint because it improperly seeks to implead Republic for separate causes of action that do not affect Third-Party Plaintiffs’ liability in this case. By failing to satisfy the requirements of Rule 14, the third-complaint fails to state a claim upon which relief may be granted and therefore must be dismissed. See State Auto. Mut. Ins. Co. v. Burrell, No. CV 5:17-300-DCR, 2018 U.S. Dist. LEXIS 72681, 2018 WL 2024617, at *4 (E.D. Ky. May 1, 2018)  [*10] (applying Kentucky law and dismissing third-party complaint under Rule 12(b)(6)); see Porter Casino Resort, Inc. v. Georgia Gaming Inv., LLC, No. 18-2231, 2019 U.S. Dist. LEXIS 126686, 2019 WL 3431746, at *3 (W.D. Tenn. July 30, 2019) (dismissing third-party complaint under Rule 12(b)(6) for failure to state a claim); see Wright & Miller, 6 Fed. Prac. & Proc. Civ. § 1460 (3d ed.) (“Although Rule 14(a) has never expressly provided for a motion to dismiss third-party claims, the federal courts have entertained both motions to dismiss and to strike and have not drawn distinctions between them.”).

First, Rule 14 requires that Third-Party Plaintiffs’ claims be based “upon the original plaintiff’s claim against the defendant.” Here, the third-party complaint is based on Republic’s allegedly improper termination of the Agreement. It is not based on Third-Party Plaintiffs’ alleged conspiracy to “secretly and improperly transfer the Franchise Business and assets” or to misappropriate Liberty’s “marks, manual and system.” The third-party complaint, which states an independent, but related cause of action, is thus not based on the original action. Cooper, 512 F.3d at 805 (“Rule 14(a) does not allow a third-party complaint to be founded on a defendant’s independent cause of action against a third-party defendant, even though arising out of the same occurrence underlying plaintiff’s [*11]  claim, because a third-party complaint must be founded on a third party’s actual or potential liability to the defendant”). Rule 14 further requires that Third-Party Plaintiffs’ claims depend on and be derivative of the claims in the original action. See Gookin v. Altus Capital Partners, Inc., No. CIV.A. 05-179-JBC, 2006 U.S. Dist. LEXIS 12980, 2006 WL 7132020, at *3 (E.D. Ky. Mar. 24, 2006) (“Liability is derivative where it is dependent on the determination of liability in the original action”). The third-party complaint here also fails to satisfy this requirement.

Second, the third-party complaint must also be “in the nature of an indemnity or contribution claim.” Cooper, 512 F.3d at 805. Under Kentucky law, the right to indemnity “is available to one exposed to liability because of the wrongful act of another” but who is not equally at fault with the wrongdoers. Degener v. Hall Contracting Corp., 27 S.W.3d 775, 780 (Ky. 2000). A right to indemnification arises in two scenarios:

(1) Where the party claiming indemnity has not been guilty of any fault, except technically, or constructively, as where an innocent master was held to respond for the tort of his servant acting within the scope of his employment;

or

(2) Where both parties have been in fault, but not in the same fault, towards the party injured, and the fault of the party from whom indemnity is claimed [*12]  was the primary and efficient cause of the injury

Id. (quoting Louisville Ry. Co. v. Louisville Taxicab & Transfer Co., 256 Ky. 827, 77 S.W.2d 36, 39 (1934)). “The right to contribution arises when two or more joint tortfeasors are guilty of concurrent negligence of substantially the same character which converges to cause the plaintiff’s damages.” Id. at 778.

Republic cannot indemnify Third-Party Plaintiffs because they have not been “exposed to liability” because of a wrongful act Republic committed against Liberty. In fact, no party has alleged that Republic has wronged Liberty. Third-Party Plaintiffs have also not pled that they are “an innocent master . . . held to respond” for the tort of Republic, their servant. Nor have they pled that both they and Republic are at fault in the original action, but that Republic is the “primary and efficient cause of the injury.” Third-Party Plaintiffs, likewise, cannot maintain a contribution action against Republic because Liberty alleged intentional, not negligent actions, and Republic played no role in the original action. Based on the allegations in the third-party complaint, Third-Party Plaintiffs have failed to plead that Republic has to indemnify or contribute to them in the original action. They have thus failed to state a claim under Rule 14 [*13]  on which relief can be granted.

Finally, allowing Third-Party Plaintiffs to continue to prosecute its third-party complaint after the underlying action has been dismissed does not further Rule 14’s purpose to prevent a “situation where a defendant has been adjudicated liable and then must bring a totally new action against a third party who may be liable to him for all or part of the original plaintiff’s claim against him.” It is “rare that a court . . . dismisses the underlying action but nonetheless chooses to address a third-party claim.” Cooper, 512 F.3d at 805-806 (6th Cir. 2008) (affirming district court’s dismissal of third-party complaint, stating “[h]owever, once the underlying action was settled, the continuing viability of Cooper Tire’s third-party complaint, as a derivative action, came under question and the district court did not abuse its discretion in dismissing the action . . . It was also Cooper Tire’s choice to agree to the Stipulated Order of Dismissal that dismissed its counterclaim against American Zurich with prejudice”). This is not that “rare” situation: Third-Party Plaintiffs have not sufficiently pled indemnity or contribution and thus not satisfied the requirements of Rule 14(a). As a result, under Rule 12 (b)(6), the third-party [*14]  complaint must be dismissed.

 

Court Dismisses Franchisee’s Racial Discrimination Claim for Termination

Dec 9, 2019 - Franchise, Dealer & Antitrust Decisions in One Sentence by |

Court Dismisses Franchisee’s Racial Discrimination Claim for Termination

In case where plaintiffs-franchisees Nabil Gazaha and NAYAA, LLC (referred to individually and collectively as “Gazaha”) sued defendant KFC Corporation (“KFC”) setting forth claims for common law breach contract resulting from KFC’s termination of a franchise agreement and for race discrimination in violation of 42 U.S.C. § 1981, federal court in Virginia found, inter alia, that Gazaha failed as a matter of law to present evidence sufficient to establish a prima facie case of discrimination, or alternatively, any evidence of pretext necessary to rebut KFC’s asserted non-discriminatory reason for terminating the franchise agreement. KFC’s Motion for Summary Judgment on Defendants’ Counterclaims was GRANTED.

[Excerpt Regarding Racial Discrimination from case]

2016 WL 1245010

United States District Court, E.D. Virginia,

Alexandria Division.

KFC CORPORATION, Plaintiff,

v.

Nabil GAZAHA, et al., Defendants.

Civil Action No. 1:15-cv-1077 (AJT/JFA)

Signed 03/24/2016

With respect to Gazaha’s claim in Count II for intentional race discrimination and unlawful termination in violation of 42 U.S.C. § 1981, the Court finds that he has likewise failed to adduce evidence sufficient to allow a reasonable trier of fact to find in his favor. 42 U.S.C. § 1981(b) forbids racial discrimination in the making and enforcing of contracts. Section 1981 claims are properly analyzed under the Title VII framework. Thompson v. Potomac Elec. Power Co., 312 F.3d 645, 649 n.1 (4th Cir. 2002). Accordingly, the complaining party must come forward with “direct evidence” of racial discrimination or satisfy the McDonnell Douglas burden-shifting scheme. Davis v. Am. Soc. of Civil Eng’rs, 330 F. Supp. 2d 647, 654-55 (E.D. Va. 2004) (citing McDonnell Douglas Corp. v. Green, 411 U.S. 792 (1973)). “Direct evidence” of discrimination under McDonnell Douglas is defined as “conduct or statements that both (1) reflect directly the alleged discriminatory attitude, and (2) bear directly on the contested … decision.” Laing v. Fed. Express Corp., 703 F.3d 713, 717 (4th Cir. 2013) (internal quotations omitted). Such a showing of direct evidence “essentially requires an admission by the decision-maker that his actions were based on the prohibited animus.” Radue v. Kimberly-Clark Corp., 219 F.3d 612, 616 (7th Cir. 2000).

If there is no direct evidence of racial discrimination, then the complaining party must proceed under the McDonnell Douglas framework. First, the complaining party must establish a prima facie case of racial discrimination. In the context of Section 1981 claims concerning franchise terminations, the complaining party under McDonnell Douglas must show:

(1) that [they] are members of a protected class; (2) that the allegedly discriminatory conduct concerned one or more of the activities enumerated in the statute … and (3) that the [franchisor] treated the [franchisee] less favorably with regard to the allegedly discriminatory act than [the franchisor] treated other similarly situated persons who were outside the [franchisor’s] protected class.

Dunkin’ Donuts Franchised Restaurants LLC v. Sandip, Inc., 712 F. Supp. 2d 1325, 1328 (N.D. Ga. 2010); see also Holland v. Washington Homes, Inc., 487 F.3d 208, 214 (4th Cir. 2007) (applying similar test under McDonnell Douglas in context of employment discrimination).

Finally, if the complaining party establishes a prima facie case under McDonnell Douglas, then the defending party may articulate “a legitimate, nondiscriminatory reason for its adverse employment action.” Holland, 487 F.3d at 214 (internal quotations and citations omitted). “This burden … is a burden of production, not persuasion.” Id. If the defending party articulates such a non-discriminatory reason, the burden once again shifts and the claimant must “prove that [the other party]’s proffered reason was mere pretext and that race was the real reason for … termination.” Hawkins v. PepsiCo, Inc., 203 F.3d 274, 278 (4th Cir. 2000) (citing St. Mary’s Honor Ctr. v. Hicks, 509 U.S. 502, 507-08 (1993)).

Gazaha offers only two pieces of evidence with regard to discrimination and neither of them is “direct.” First, Gazaha points to statements by Keilson and an unnamed KFC employee about his neighborhood not being “safe.” Second, he points to statistical evidence purporting to show that KFC terminates African-American-owned franchises at higher rates than Caucasian-owned franchises. [Doc. No. 72 at 14-16]. None of this evidence, separately or collectively, is sufficient to avoid summary judgment.

First, the alleged comments, even when taken in the light most favorable to Gazaha, are largely about the Baltimore neighborhood where the Outlet is located. That is, the allegedly racist comments made by Keilson and the unnamed KFC employee amount to statements that the neighborhood surrounding the restaurant is unsafe, that they did not want to leave a car there for fear of it being targeted for vandalism or robbery, and that did not want to visit the Outlet at night. Gazaha also claims that the offending parties made a reference to “you people,” and a comment that the health inspection issue is “black and white.” [Doc. No. 76 at 2-3]. The probative value of these isolated, casual comments is from zero to exceedingly marginal. More important is that none was made by anyone in a position of authority at KFC with the ability to terminate the Agreement.

Second, the statistical data, even data showing racial disparities, cannot by itself support a Title VII/Section 1981 claim for racial discrimination. Diamond v. T. Rowe Price Assoc., Inc., 852 F. Supp. 372, 408 (D. Md. 1994) (“In the Fourth Circuit … statistical evidence alone is insufficient to raise an inference of discriminatory intent in a disparate treatment case”); see also id. n.172 (citing cases); McKleskey v. Kemp, 481 U.S. 279, 297 (1987). Here, Gazaha has presented nothing other than statistical data as to the termination rates of KFC franchises. Without additional evidence that any of these terminations was racially motivated or evidence demonstrating that Gazaha himself was targeted for franchise termination because of his race, the statistical evidence, standing alone, is insufficient to create a triable issue of fact.

Gazaha further argues that termination of the Agreement was improper because the FSCC inspections were faulty and that the decision to terminate the Agreement was otherwise substantively incorrect. But in order to raise an inference of discrimination, a complaining party must argue something more than that the employment decision at issue was wrongly decided. Indeed, this argument is, as recognized by the Fourth Circuit, wholly “unexceptional.” Laing, 703 F.3d at 713 (“all [the complaining party] has proven is the unexceptional fact that she disagrees with the outcome of [the] investigation. But such disagreement does not prove … the burden shifting framework”).

Finally, even assuming arguendo that Gazaha could make out a prima facie case for race discrimination in violation of Section 1981, KFC offers a legitimate, nondiscriminatory business reason for terminating the Agreement: that Gazaha failed four consecutive health inspections. Although Gazaha disputes that these failed inspections justified the termination of the franchise, he offers no evidence that would raise an inference that KFC’s reasons for termination were a pretext for racial discrimination. Accordingly, Gazaha’s claims are, as a matter of law, insufficient to satisfy the McDonnell Douglas burden-shifting regime.

Court Rules Best Western is not a Franchise and Thus Not Liable for Franchise Act Violations

Dec 4, 2019 - Franchise, Dealer & Antitrust Decisions in One Sentence by |

Court Rules Best Western is not a Franchise and Thus Not Liable for Franchise Act Violations

Best W. Int’l Inc. v. Twin City Lodging LLC, No. CV-18-03374-PHX-SPL, 2019 U.S. Dist. LEXIS 111696 (D. Ariz. July 3, 2019)

In a recent case in which the Plaintiff Best Western International Incorporated (the “Plaintiff”) filed suit against Twin City Lodging LLC, Percy Pooniwala, and Santha Kondatha alleging multiple causes of action related to the termination of a Best Western Membership Agreement (the “Membership Agreement”), and in which the Defendants argued that the Complaint must be dismissed because Best Western failed to comply with the requirements of the Minnesota Franchise Act by failing to abide by the disclosure requirements of the Minnesota Franchise Act when selling the franchise to Twin City Lodging LLC, the Court refused to rule that the  Membership Agreement was unenforceable because the plain terms of the Minnesota Franchise Act denote that the statute only applies to franchisors and franchisees, and the Court found that the Plaintiff was not a franchisor, as the Complaint clearly identified the Plaintiff as a non-profit corporation and never identified the Plaintiff as a franchisor or the Defendants as franchisees, instead describing the Plaintiff as a membership organization.

(Text of Excerpts from the Case Below)

Best Western Int’l Inc. v. Twin City Lodging LLC

United States District Court for the District of Arizona

July 3, 2019, Decided; July 3, 2019, Filed

No. CV-18-03374-PHX-SPL

 

Reporter

2019 U.S. Dist. LEXIS 111696 *

Best Western International Incorporated, Plaintiff, vs. Twin City Lodging LLC, et al., Defendants.

ORDER

Plaintiff Best Western International Incorporated (the “Plaintiff”) filed suit against Twin City Lodging LLC, Percy Pooniwala, and Santha Kondatha alleging multiple causes of action related to the termination of a Best Western Membership Agreement (the “Membership Agreement”). (Doc. 1 at 2) The Defendants moved to dismiss the Plaintiff’s claims against them (the “Motion”). (Doc. 18) The Court’s ruling is as follows.

  1. Background

The Plaintiff is a non-profit corporation that serves its members, who are independent owners and operators of Best Western branded hotels. (Doc. 1 at 3) On September 29, 2016, Twin [*2]  City Lodging LLC and Pooniwala executed the Membership Agreement, by which they joined the community of members operating Best Western branded hotels. (Doc. 1 at 2) On August 31, 2017, Kondatha executed an “Application for Change in Voting Member/Voter Registration Card” through which he agreed to be bound by the Membership Agreement in exchange for designation as a voting member of the organization. (Doc. 1 at 2; Doc. 1-2 at 21)

On July 26, 2018, the Plaintiff notified Twin City Lodging LLC, Percy Pooniwala, and Santha Kondatha that their membership with the Plaintiff had been terminated for failure to abide by the terms and conditions of certain regulatory documents. (Doc. 1 at 12) Following the termination of Twin City Lodging LLC’s membership status, the Plaintiff alleges that Twin City Lodging LLC continued to operate while unlawfully using Best Western exterior signage, internet advertising, and other branded items. (Doc. 1 at 12) The Plaintiff initiated this lawsuit seeking damages for breach of contract and trademark infringement, among other claims. (Doc. 1 at 14-18) The defending parties filed the Motion seeking to dismiss that Plaintiff’s claims pursuant to Federal Rules of Civil Procedure 12(b)(2) and 12(b)(6). (Doc. 18) [*3]

  1. Legal Standard
  2. 12(b)(2)

A plaintiff bears the burden of establishing personal jurisdiction. Repwest Ins. Co. v. Praetorian Ins. Co., 890 F. Supp. 2d 1168, 1184-85 (D. Ariz. 2012). When a defendant moves to dismiss a complaint for lack of personal jurisdiction, “the plaintiff is ‘obligated to come forward with facts, by affidavit or otherwise, supporting personal jurisdiction'” over the defendant. Cummings v. W. Trial Lawyers Assoc., 133 F. Supp. 2d 1144, 1151 (D. Ariz. 2001). In the absence of an evidentiary hearing on the issue of personal jurisdiction, a plaintiff must only make “a prima facie showing of jurisdictional facts through the submitted materials” in order to avoid dismissal for lack of personal jurisdiction. Data Disc, Inc. v. Sys. Tech. Assocs., Inc., 557 F.2d 1280, 1285 (9th Cir. 1977). Because no applicable federal statute governing personal jurisdiction exists, Arizona’s long-arm statute applies. Terracom v. Valley Nat’l Bank, 49 F.3d 555, 559 (9th Cir. 1995). Arizona’s long-arm statute provides for personal jurisdiction to the extent permitted by the Due Process Clause of the United States Constitution. Ariz. R. Civ. P. 4.2(a).

Absent traditional bases for personal jurisdiction (i.e., physical presence, domicile, and consent), the Due Process Clause requires that a nonresident defendant have certain minimum contacts with the forum state such that the exercise of personal jurisdiction does not offend traditional notions of fair play and substantial justice. See Doe v. Am. Nat’l Red Cross, 112 F.3d 1048, 1050 (9th Cir. 1997) (citing International Shoe Co. v. Washington, 326 U.S. 310, 316, 66 S. Ct. 154, 90 L. Ed. 95 (1945)). “In determining whether a defendant had minimum contacts with the forum state such that [*4]  the exercise of jurisdiction over the defendant would not offend the Due Process Clause, courts focus on ‘the relationship among the defendant, the forum, and the litigation.'” Brink v. First Credit Res., 57 F. Supp. 2d 848, 860 (D. Ariz. 1999). If a court determines that a defendant’s contacts with the forum state are sufficient to satisfy the Due Process Clause, then the court must exercise either “general” or “specific” jurisdiction over the defendant. Doe, 112 F.3d at 1050. The nature of the defendant’s contacts with the forum state will determine whether the court exercises general or specific jurisdiction over the defendant. Doe, 112 F.3d at 1050-51.

  1. 12(B)(6)

To survive a motion to dismiss, a complaint must contain “a short and plain statement of the claim showing that the pleader is entitled to relief” such that the defendant is given “fair notice of what the . . . claim is and the grounds upon which it rests.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555, 127 S. Ct. 1955, 167 L. Ed. 2d 929 (2007) (quoting Fed. R. Civ. P. 8(a)(2); Conley v. Gibson, 355 U.S. 41, 47, 78 S. Ct. 99, 2 L. Ed. 2d 80 (1957)). The Court may dismiss a complaint for failure to state a claim under Federal Rule 12(b)(6) for two reasons: (1) lack of a cognizable legal theory, and (2) insufficient facts alleged under a cognizable legal theory. Balistreri v. Pacifica Police Dep’t, 901 F.2d 696, 699 (9th Cir. 1990).

In deciding a motion to dismiss, the Court must “accept as true all well-pleaded allegations of material fact, and construe them in the light most favorable to the non-moving party.” Daniels-Hall v. Nat’l Educ. Ass’n, 629 F.3d 992, 998 (9th Cir. 2010). In comparison, [*5]  “allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable inferences” are not entitled to the assumption of truth, and “are insufficient to defeat a motion to dismiss for failure to state a claim.” Id.; In re Cutera Sec. Litig., 610 F.3d 1103, 1108 (9th Cir. 2010). A plaintiff need not prove the case on the pleadings to survive a motion to dismiss. OSU Student All. v. Ray, 699 F.3d 1053, 1078 (9th Cir. 2012).

III. Analysis

Defendants Pooniwala, Kondatha, and Twin City Lodging LLC move to dismiss all of the Plaintiff’s claims because (i) the Complaint does not state any plausible claim against Defendant Pooniwala, (ii) the Complaint does not state any plausible claim against Defendant Kondatha, (iii) the Plaintiff fails to comply with Minnesota Franchise Act, and (iv) the Court does not have personal jurisdiction over Pooniwala, Kondatha, or Twin City Lodging LLC. (Doc. 18 at 2) The Parties filed a stipulation to dismiss Defendant Pooniwala. (Doc. 24; Doc. 23 at 2) Therefore, the Court will move forward with addressing the remaining issues presented against Defendants Twin City Lodging LLC and Santha Kondatha (together, the “Defendants”).

  1. Claims Against Defendant Kondatha

The Defendants argue that the Complaint fails to state a plausible claim against Kondatha because the [*6]  Complaint does not allege that Kondatha received any consideration for agreeing to the Membership Agreement. (Doc. 18 at 6-7) Specifically, the Defendants argue that in order for the Plaintiff to assert a plausible breach of contract claim, the Plaintiff must allege facts sufficient to demonstrate that there was a valid contract between the parties, which includes alleging a valid offer, acceptance, and exchange of consideration during the formation of the contract. (Doc. 18 at 6-7) In response, the Plaintiff argues that the allegations in the Complaint demonstrate that Kondatha received consideration in the form of Kondatha obtaining the benefits of becoming a voting member after signing the Membership Agreement. (Doc. 23 at 6)

It is well settled under Arizona law that every contract in writing imports consideration. Ariz. Rev. Stat. Ann. § 44-121 (stating “[e]very contract in writing imports a consideration.”). Furthermore, “[i]t is the ordinary rule of pleading that, where a suit is based upon an instrument which as a matter of law imports a consideration, it is not necessary that a consideration be pleaded, nor can a want or failure thereof be offered in defense under a general denial.” Sapp v. Lifrand, 44 Ariz. 321, 36 P.2d 794, 796 (1934); Reel Precision, Inc. v. FedEx Ground Package Sys., Inc., 2016 U.S. Dist. LEXIS 106404, 2016 WL 4194533, at 6 (D. Ariz. Aug. 9, 2016) (stating “a party [*7]  suing on a contract in writing need not plead consideration and a party denying consideration must plead it specially, not by general denial”). It is undisputed that the Membership Agreement and Kondatha’s application to sign onto the Membership Agreement were contracts made in writing. (Doc. 1-2 at 13-20; Doc. 1-2 at 21) Accordingly, the Defendants’ argument must fail, and the Motion cannot be granted on this basis.

  1. Minnesota Franchise Act

Next, the Defendants argue that the Complaint must be dismissed because the Plaintiff has failed to comply with the requirements of the Minnesota Franchise Act. (Doc. 18 at 7-9) Specifically, the Defendants argue that the Plaintiff failed to abide by the disclosure requirements of the Minnesota Franchise Act when selling the franchise to Twin City Lodging LLC, thus rendering the Membership Agreement unenforceable. (Doc. 18 at 9) In response, the Plaintiff argues that it is not a franchisor and is therefore not bound by the Minnesota Franchise Act. (Doc. 23 at 7)

Taking the facts in the light most favorable to the Plaintiff, the Court finds that the Plaintiff is not a franchisor, as the Complaint clearly identifies the Plaintiff as a non-profit corporation [*8]  and never identifies the Plaintiff as a franchisor or the Defendants as franchisees. (Doc. 1 at 1) Furthermore, the terms of the Membership Agreement describe the Plaintiff as a membership organization. (Doc. 1-2 at 13) The plain terms of the Minnesota Franchise Act denote that the statute only applies to franchisors and franchisees. Minn. Stat. Ann. § 80C.01. Accordingly, the Court declines to find that the Plaintiff’s alleged non-compliance with the Minnesota Franchise Act is sufficient to dismiss all of the Plaintiff’s claims against the Defendants, and the Motion to Dismiss on this basis must be denied.

  1. Personal Jurisdiction

Finally, the Defendants argue that the Plaintiff does not have personal jurisdiction over the Defendants. (Doc. 18 at 2, 10) The Court will assume that the Defendants meant to argue that the Court does not have personal jurisdiction over the Defendants. The Defendants argue that the Court does not have personal jurisdiction in this case because (i) the Plaintiff cannot establish that the Defendants maintained “continuous corporate operations” in Arizona, and (ii) the Plaintiff cannot establish that the Defendants “had any business in Arizona or had any purposeful activities within [*9]  the state of Arizona.” (Doc. 18 at 10) In response, the Plaintiff argues that the Membership Agreement contains an “Application of Law and Choice of Forum” provision which states that all disputes arising under the Membership Agreement are to be resolved under Arizona law in Arizona courts. (Doc. 23 at 3; Doc. 1-2 at 18; Doc. 1 at 2)

Under general contract principles, a forum selection clause may give rise to waiver of objections to personal jurisdiction, provided that the defendant agrees to be so bound. Holland Am. Line Inc. v. Wartsila N. Am., Inc., 485 F.3d 450, 458 (9th Cir. 2007); S.E.C. v. Ross, 504 F.3d 1130, 1149 (9th Cir. 2007) (stating that courts “have held that a party has consented to personal jurisdiction when the party took some kind of affirmative act—accepting a forum selection clause, submitting a claim, filing an action—that fairly invited the court to resolve the dispute between the parties.”); Burger King Corp. v. Rudzewicz, 471 U.S. 462, 473, n. 14, 105 S. Ct. 2174, 85 L. Ed. 2d 528 (1985). A forum selection clause “represents the parties’ agreement as to the most proper forum.” Atl. Marine Constr. Co. v. U.S. Dist. Court for W. Dist. of Texas, 571 U.S. 49, 63, 134 S. Ct. 568, 187 L. Ed. 2d 487 (2013). A court should refuse to enforce a forum-selection clause “[o]nly under extraordinary circumstances unrelated to the convenience of the parties.” Adema Techs., Inc. v. Wacker Chem. Corp., 657 F. App’x 661, 662 (9th Cir. 2016). The “enforcement of valid forum-selection clauses, bargained for by the parties, protects their legitimate expectations and furthers vital interests of the justice [*10]  system.” Atl. Marine, 571 U.S. at 63.

Taking the facts in the light most favorable to the Plaintiff for the purpose of rendering a decision on this Motion, the Court finds that the Membership Agreement is a valid contract with a valid forum selection clause. At no point in the Motion do the Defendants dispute the validity of the forum selection clause present in the Membership Agreement. And, at this time, the Court finds that the Defendants have failed to make a persuasive argument for why the forum selection clause present in the Membership Agreement does not submit the Defendants to the jurisdiction of this Court.

 

Franchisor Cannot Require Arbitration of Dispute With New Franchisee Where New Franchisee Failed to Sign a New Franchise Agreement as Part of Franchise Purchase From Prior Franchisee

Sep 15, 2019 - Franchise, Dealer & Antitrust Decisions in One Sentence by |

The United States Circuit Court for the Tenth Circuit ruled that a restaurant franchisor, Dickey’s Barbecue, was not entitled to require arbitration of disputes between it and a new franchisee, who had purchased the restaurant from a prior franchisee, because the new franchisee had never executed a franchise agreement, and because Utah law required that an arbitration agreement be contained in a written document setting forth the scope of the dispute to be arbitrated; without a signed franchise agreement between the new franchisee after its purchase of the franchise from a prior franchisee, the franchisor could not demonstrate—through recourse either to the text of the asset purchase agreement or evidence presented to bolster its “course of dealing” theory—that the new franchisee ever assumed the written obligations of the prior franchisee, including specifically the agreement to arbitrate disputes.

Campbell Invs., LLC v. Dickey’s Barbecue Rests., Inc., No. 18-4055, 2019 U.S. App. LEXIS 26980 (10th Cir. Sep. 6, 2019)

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Campbell Invs._ LLC v. Dickey_s Barbecue Rests._ Inc._

Auto Manufacturer Franchisor Falls Prey to Amended Colorado Car Dealer Act’s New Expanded Relevant Market Definition

Sep 12, 2019 - Franchise, Dealer & Antitrust Decisions in One Sentence by |

 

In a Colorado federal court case interpreting the Amended Colorado Car Dealer Act in which the car dealer agreement “expressly reserved” for the defendant car manufacturer “the unrestricted right to grant others the right to sell Kia products,” and noted also that plaintiffs are “not being granted an exclusive right to sell Kia products in any specified geographic area,” and stated that defendant “may add new dealers to, relocate dealers into or remove dealers from” the geographic area “as permitted by applicable law”, and where the plaintiff franchisee dealers alleged that defendant’s plan to establish the proposed dealership violated Colo. Rev. Stat. § 44-20-125 (“CDA”), a statute which creates a private right of action for “an existing motor vehicle dealer adversely affected by” a distributor’s plan to reopen, relocate, or establish a “same line-make motor vehicle dealer,” and where the CDA requires any manufacturer seeking to “establish an additional motor vehicle dealer, reopen a previously existing motor vehicle dealer, or authorize an existing motor vehicle dealer to relocate” to provide at least sixty days notice to all of its existing dealers “within whose relevant market area the new, reopened, or relocated dealer would be located”, and where the CDA was amended to define the “relevant market area” as the greater of “the geographic area of responsibility defined in the franchise agreement of an existing dealer” and “the geographic area within a radius of ten miles of any existing dealer of the same line-make of vehicle as the proposed additional motor vehicle dealer,” the car manufacturer would be held to the new ten miles benchmark, not the old five miles standard.

DC Auto., Inc. v. Kia Motors Am., Inc., Civil Action No. 19-cv-00318-PAB-MEH, 2019 U.S. Dist. LEXIS 150481 (D. Colo. Sep. 3, 2019)

Please Click on Link Below to Read Full Decision.

DC Auto._ Inc. v. Kia Motors Am._ Inc._ 2019 U.S. Dist

 

Little Caesars Easily Decimates Franchisees’ Anemic Legal Arguments and Obtains Preliminary Injunction Order

Jul 17, 2019 - Franchise, Dealer & Antitrust Decisions in One Sentence by |

In this breach of contract and trademark infringement case, where the pizza restaurant franchisor, Little Caesars Enterprises, Inc., sued the franchisee operators of several pizza restaurants for repeatedly violating the franchise agreement by, inter alia, violating operational standards, failing to pay royalties, and operating with the Little Caesars trademarks after the franchise terminations, the United States District Court for the Eastern District of Michigan granted the franchisor’s request for a preliminary injunction, thereby shutting down the franchisees’ operation of the restaurants pending trial; in so doing, the Court rejected resoundingly the franchisees’ poorly constructed and irrelevant legal and factual defenses to the preliminary injunction.

Little Caesar Enters., United States District Court for the Eastern District of Michigan, Southern Division, July 16, 2019, Decided, 2019 U.S. Dist. LEXIS 117942

Please Click On Link Below to Read Full Decision.

Little Caesar Enters._ 2019 U.S. Dist. LEXIS 117942

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