Tim Hortons Franchisee Association Hits Brick Wall on Case Against Franchisor

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

Tim Hortons Franchisee Association Hits Brick Wall on Case Against Franchisor

In a scathing rejection of a complex case filed by an international franchise association, the US District Court for the Southern District of Florida refused to recognize that the franchisee association of Tim Hortons members had associational standing to sue for myriad alleged unfair acts and practices including supply price-gouging, franchisee equity-stripping, and misuse of the franchise advertising fund; similarly, the court rejected the viability of those same claims on substantive grounds as well.

Great White N. Franchisee Ass’n-USA v. Tim Hortons USA, Inc., No. 20-cv-20878, 2020 U.S. Dist. LEXIS 239160 (S.D. Fla. Dec. 18, 2020)

 

Excerpts of the Case:

Franchisee Counsel:  

For Great White North Franchisee Association-USA, Inc., Plaintiff: Natalie Marlena Restivo, LEAD ATTORNEY, Adam Gruder Wasch, Wasch Raines, LLP, Boca Raton, FL; Gerald A. Marks, PRO HAC VICE, Marks & Klein, LLP, Red Bank, NJ.

Franchisor Counsel:

For Tim Hortons USA, Inc., Defendant: Michael D Joblove, LEAD ATTORNEY, Aaron Seth Blynn, Genovese Joblove & Battista, Miami, FL; Adam Acosta, John Mark Gidley, PRO HAC VICE, White & Case LLP, Washington, DC.
For Jose E. Cil, Defendant: Aaron Seth Blynn, Genovese Joblove & Battista, Miami, FL.

Judges: BETH BLOOM, UNITED STATES DISTRICT JUDGE.
Opinion by: BETH BLOOM
Opinion

  1. BACKGROUND

This case involves an allegedly illegal and predatory business scheme implemented by THUSA’s holding company to convert the Tim Hortons franchise system into a supply chain business resulting in large profits at the expense of Plaintiff’s franchisee members.

Tim Hortons restaurants are quick service restaurants with a convenience store element that includes, coffee, tea, espresso-based hot and cold drinks, baked goods, and items typically found at a convenience store. See Second Amended Complaint (“SAC”), ECF No. [62] ¶ 12. Plaintiff is a not-for-profit franchisee association that was formed as a direct result of its members’ common grievances with respect to certain practices and operations of Defendants. Id. ¶¶ 8-9. Plaintiff was organized and exists for the purpose of protecting and preserving the rights of Tim Hortons U.S. franchisees and was created to serve as an official voice of the Tim Hortons U.S. franchisee community. Id. ¶ 10. As stated in the Association’s [*3]  Articles of Incorporation, the Association’s purpose is “[t]o provide a common interest organization for Tim Hortons franchisees, creating a forum for discussion, education and advocacy for franchise owners.” Id. ¶ 74.

In the SAC, Plaintiff alleges that non-party Restaurant Brand International, Inc. (“RBI”), THUSA’s holding company, was formed upon purchasing the Tim Hortons franchise system in 2014. Id. ¶¶ 1-2. In an apparent attempt to off-set the brand growth in the U.S. and stagnant sales in both the U.S. and Canada, RBI commenced its predatory strategy to convert the Tim Hortons franchise system into a supply chain business disguised as a franchise system and reaped outrageous profits through its supply chain. Id. ¶ 3 This was done by price-gouging U.S. franchisees on all essential goods necessary to operate their Tim Hortons restaurants. Id. Cil operated and managed RBI, THUSA, and its affiliates in the implementation of the business practices at issue in this case and had substantial operational control over THUSA operations. Id. ¶¶ 54, 84.

Plaintiff alleges that RBI set up a vertically integrated supply chain for its Tim Hortons business, through which RBI manufactures, warehouses, [*4]  and distributes most of the food and restaurant supplies to Plaintiff’s franchisee members. Id. ¶ 25. For example, TDL Group Corp. (“TDL”), THUSA’s Canadian affiliate and primary supplier under RBI, imports and sells certain essentials (“Selected Goods”) for everyday operations to THUSA, which in turn either directly or through a distributor re-sells those items to a U.S. franchisee for a profit. Id. ¶¶ 31-32, 34. Since RBI’s takeover, Tim Hortons franchisees have been forced to purchase more items from THUSA, or a newly designated sole supplier, at substantial mark-up from market rate. Id. ¶ 37. THUSA engages in a similar practice with respect to equipment, which results in sales of equipment to U.S. franchisees at double mark-up. Id. ¶ 39. Similarly, THD, the affiliate utilized by RBI to serve as master coffee supplier to THUSA franchisees, sells coffee to THUSA franchisees for approximately 50% more for the same quality coffee than close competitors. Id. ¶¶ 46, 50.

Plaintiff alleges that RBI has implemented an “equity stripping” strategy that occurs upon franchise renewal, in that THUSA’s franchise agreements contain a right of first refusal requiring existing franchisees to offer [*5]  their store(s) to THUSA for the five-year declining depreciated value of furniture, fixtures, and equipment. Id. ¶ 57.

Plaintiff further alleges that all THUSA franchisees are required to contribute a portion of monthly sales into an “Advertising Fund” referred to in the franchise agreements. Id. ¶ 60. The contributions to the Advertising Fund and any earnings are to be used by THUSA exclusively for costs of maintaining, administering, directing, conducting and developing advertising, marketing, public relations, and/or promotional programs and materials, and any other activities and related investments and/or initiatives. Id. ¶ 62. Since acquisition by RBI, the Advertising Fund has been used in ways not historically or contractually permitted. Id. ¶ 63. For example, Plaintiff alleges that monies from the Advertising Fund were used to improperly pay employees, hire RBI analysts to analyze operational data points, for costs of THUSA franchisee training, for research and development by RBI, for customer service functions and evaluating THUSA franchisees, to private label products and for grocery store listings to allow RBI to sell through non-franchised channels and compete directly with [*6]  THUSA franchisees, and for expenses related to pre-loaded debit cards known as “TimCards.” Id. ¶ 69.

As a result, Plaintiff asserts two claims for declaratory and injunctive relief based upon violations of Florida’s Deceptive and Unfair Trade Practices Act (“FDUTPA”), Florida Statutes §§ 501.201, et seq. In Count 1, Plaintiff asserts per se violations of FDUTPA premised upon violations of the FTC Franchise Rule regarding certain disclosures or omissions in the franchise documents, and in Count 2, Plaintiff’s FDUTPA claim is premised upon THUSA’s and Cil’s alleged predatory business schemes. THUSA and Cil request dismissal with prejudice of the SAC, claiming that Plaintiff lacks standing and fails to state a claim pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure.

  1. Standing

One element of the case-or-controversy requirement under Article III of the United States Constitution is that plaintiffs “must establish that they have standing to sue.” Raines v. Byrd, 521 U.S. 811, 818, 117 S. Ct. 2312, 138 L. Ed. 2d 849 (1997). It is a threshold question of “whether the litigant is entitled to have the court decide the merits of the dispute or of particular issues.” Sims v. Fla. Dep’t of Highway Safety & Motor Vehicles, 862 F.2d 1449, 1458 (11th Cir. 1989) (en banc). “‘The law of Article III standing . . . serves to prevent the judicial process from being used to usurp the powers of the political branches,’ and confines the federal courts to a properly judicial [*7]  role.” Spokeo, Inc. v. Robins, 136 S. Ct. 1540, 1547, 194 L. Ed. 2d 635 (2016) (citing Clapper v. Amnesty Int’l USA, 568 U.S. 398, 408, 133 S. Ct. 1138, 185 L. Ed. 2d 264 (2013); Warth v. Seldin, 422 U.S. 490, 498, 95 S. Ct. 2197, 45 L. Ed. 2d 343 (1975)). Further, “standing requirements ‘are not mere pleading requirements but rather [are] an indispensable part of the plaintiff’s case.'” Church v. City of Huntsville, 30 F.3d 1332, 1336 (11th Cir. 1994) (quoting Lujan v. Defs. of Wildlife, 504 U.S. 555, 561, 112 S. Ct. 2130, 119 L. Ed. 2d 351 (1992)). “Indeed, standing is a threshold question that must be explored at the outset of any case.” Corbett v. Transp. Sec. Admin., 930 F.3d 1225, 1232 (11th Cir. 2019) (citing Bochese v. Town of Ponce Inlet, 405 F.3d 964, 974 (11th Cir. 2005)), cert. denied, 140 S. Ct. 900, 205 L. Ed. 2d 467 (2020). “In its absence, ‘a court is not free to opine in an advisory capacity about the merits of a plaintiff’s claim.'” Id. (quoting Bochese, 405 F.3d at 974). “In fact, standing is ‘perhaps the most important jurisdictional’ requirement, and without it, [federal courts] have no power to judge the merits.” Id. (footnote omitted) (quoting Bochese, 405 F.3d at 974).

[A]t an irreducible minimum, Art. III requires the party who invokes the court’s authority to “show that he personally has suffered some actual or threatened injury as a result of the putatively illegal conduct of the defendant,” and that the injury “fairly can be traced to the challenged action” and “is likely to be redressed by a favorable decision.”

Valley Forge Christian Coll. v. Ams. United for Separation of Church & State, 454 U.S. 464, 472, 102 S. Ct. 752, 70 L. Ed. 2d 700 (1982) (quoting Gladstone, Realtors v. Vill. of Bellwood, 441 U.S. 91, 99, 99 S. Ct. 1601, 60 L. Ed. 2d 66 (1979)). In other words, to establish standing, a plaintiff must allege that: (1) it “suffered an injury in fact that is (a) concrete and particularized, and (b) actual or imminent, not conjectural or hypothetical;” (2) “the injury is fairly traceable [*8]  to conduct of the defendant;” and (3) “it is likely, not just merely speculative, that the injury will be redressed by a favorable decision.” Kelly v. Harris, 331 F.3d 817, 819-20 (11th Cir. 2003).

“The party invoking federal jurisdiction bears the burden of proving standing.” Fla. Pub. Int. Rsch. Grp. Citizen Lobby, Inc. v. E.P.A., 386 F.3d 1070, 1083 (11th Cir. 2004) (quoting Bischoff v. Osceola Cnty., 222 F.3d 874, 878 (11th Cir. 2000)). “Because standing is jurisdictional, a dismissal for lack of standing has the same effect as a dismissal for lack of subject matter jurisdiction under Fed. R. Civ. P. 12(b)(1).” Cone Corp. v. Fla. Dep’t of Transp., 921 F.2d 1190, 1203 n.42 (11th Cir.1991). “If at any point in the litigation the plaintiff ceases to meet all three requirements for constitutional standing, the case no longer presents a live case or controversy, and the federal court must dismiss the case for lack of subject matter jurisdiction.” Fla. Wildlife Fed’n, Inc. v. S. Fla. Water Mgmt. Dist., 647 F.3d 1296, 1302 (11th Cir. 2011) (citing CAMP Legal Def. Fund, Inc. v. City of Atlanta, 451 F.3d 1257, 1277 (11th Cir. 2006)). “In assessing the propriety of a motion for dismissal under Fed. R. Civ. P. 12(b)(1), a district court is not limited to an inquiry into undisputed facts; it may hear conflicting evidence and decide for itself the factual issues that determine jurisdiction.” Colonial Pipeline Co. v. Collins, 921 F.2d 1237, 1243 (11th Cir. 1991). “When a defendant properly challenges subject matter jurisdiction under Rule 12(b)(1) the district court is free to independently weigh facts, and ‘may proceed as it never could under Rule 12(b)(6) or Fed. R. Civ. P. 56.'” Turcios v. Delicias Hispanas Corp., 275 F. App’x 879, 880 (11th Cir. 2008) (quoting Morrison v. Amway Corp., 323 F.3d 920, 925 (11th Cir. 2003)).

III. DISCUSSION

In the Motions, Defendants mount a facial attack on the Court’s subject matter jurisdiction, arguing that Plaintiff lacks associational standing to assert claims on behalf of its members, a group of THUSA franchisees.

  1. Associational Standing

“[A]n association has standing to bring suit on behalf of its members when: (a) its members would otherwise have standing to sue in their own right; (b) the interests it seeks to protect are germane to the organization’s purpose; and (c) neither the claim asserted nor the relief requested requires the participation of individual members in the lawsuit.” Hunt v. Wash. State Apple Advert. Comm’n, 432 U.S. 333, 343, 97 S. Ct. 2434, 53 L. Ed. 2d 383 (1977); see also Arcia v. Fla. Sec’y of State, 772 F.3d 1335, 1342 (11th Cir. 2014). “The possibility of such representational standing, however, does not eliminate or attenuate the constitutional requirement of a case or controversy.” Warth, 422 U.S. at 511.

In the SAC, Plaintiff seeks injunctive and declaratory relief under FDUTPA on behalf of its members for Count 1, asserting [*11]  violations of the FTC Franchise Rule; and Count 2, asserting violations of FDUTPA based upon Defendants’ specific deceptive practices. See ECF No. [62], Prayer for Relief ¶¶ 1-2.

  1. Count 1 — per se violations of FDUTPA

Defendants argue that Plaintiff lacks standing because (1) the Association’s members do not have standing to seek declaratory and injunctive relief for violations of the FTC Franchise Rule arising from alleged misrepresentations in the current Franchise Disclosure Document (“FDD”), which they will not be provided in the future; (2) the interests sought to be protected in Count 1 are not germane to the Association’s purpose; and (3) the participation of the Association’s individual members will be required.2 The Court considers each argument in turn.

According to Defendants, Plaintiff must establish that its members would have standing to maintain the action and Plaintiff’s conclusory allegations are insufficient. In the SAC, Plaintiff alleges in that “[a]t least one of its members (indeed, all its members) will suffer an injury-in-fact by the real and immediate, threatened harm from Defendants’ conduct.” ECF No. [67] at 8 (quoting ECF No. [62] ¶ 72). Defendants argue further [*12]  that because Plaintiff is seeking injunctive relief, it must also satisfy the requirement of showing a threat of future harm, and Plaintiff cannot because its members are existing franchisees who will not be provided a Tim Hortons FDD in the future. In response, Plaintiff argues that it need not allege future harm of its members, and even if required to, the allegations in the SAC are sufficient. Plaintiff argues further THUSA deliberately misconstrues the claim in Count 1. Thus, the Court considers whether Plaintiff’s members have standing to assert Count 1.

  1. Plaintiff’s members do not have standing to assert Count 1

In order to establish Article III standing, an individual member must allege that it suffered an injury in fact. Spokeo, 136 S. Ct. at 1547. “Where the plaintiff seeks declaratory or injunctive relief, as opposed to damages for injuries already suffered, . . . the injury-in-fact requirement insists that a plaintiff ‘allege facts from which it appears there is a substantial likelihood that he will suffer injury in the future.'” Strickland v. Alexander, 772 F.3d 876, 883 (11th Cir. 2014) (quoting Malowney v. Fed. Collection Deposit Grp., 193 F.3d 1342, 1346 (11th Cir. 1999)).

The FDUTPA provides that “anyone aggrieved by a violation of this part may bring an action to obtain a declaratory judgment that an act or practice violates this [*13]  part and to enjoin a person who has violated, is violating, or is otherwise likely to violate this part.” Fla. Stat. § 501.211(1). As is evident from the parties’ briefing, courts in this district appear to be split on whether a plaintiff has standing to seek declaratory and injunctive relief under FDUTPA if the plaintiff does not demonstrate a threat of future injury. Compare Gastaldi v. Sunvest Cmtys. USA, LLC, 637 F. Supp. 2d 1045, 1057 (S.D. Fla. 2009) and Dye v. Bodacious Food Co., No. 14-80627-CIV, 2014 U.S. Dist. LEXIS 180826, 2014 WL 12469954, at *3 (S.D. Fla. Sept. 9, 2014) with Dapeer v. Neutrogena Corp., 95 F. Supp. 3d 1366, 1373 (S.D. Fla. 2015) and Seidman v. Snack Factory, LLC, No. 14-62547-CIV, 2015 U.S. Dist. LEXIS 38475, 2015 WL 1411878, at *5 (S.D. Fla. Mar. 26, 2015).

In Gastaldi and Dye, the courts concluded that based upon FDUTPA’s broad wording, plaintiffs need not show an ongoing practice or irreparable harm in order to establish standing for injunctive and declaratory relief under FDUTPA. Gastaldi, 637 F. Supp. 2d at 1057; Dye, 2014 U.S. Dist. LEXIS 180826, 2014 WL 12469954, at *3-4. However, the court in Dye did not specifically address Article III standing, and the court’s discussion in Galstaldi demonstrates that standing under FDUTPA is a separate inquiry from Article III standing. See 637 F. Supp. 2d at 1057-58 (“Any person aggrieved by a violation of the FDUTPA may seek declaratory and/or injunctive relief under the statute. . . . Plaintiffs also satisfy the requirements for threshold standing under Article III.”). This distinction is what the court in Dapeer explicitly recognized and emphasized.

“Although [*14]  the FDUTPA allows a plaintiff to pursue injunctive relief even where the individual plaintiff will not benefit from an injunction, it cannot supplant Constitutional standing requirements. Article III of the Constitution requires that a plaintiff seeking injunctive relief allege a threat of future harm.” Dapeer, 95 F. Supp. 3d at 1373; see also Ohio State Troopers Assoc, Inc. v. Point Blank Enterps., Inc., 347 F. Supp. 3d 1207, 1227 (S.D. Fla. 2018) (where individual plaintiffs failed to show a sufficient likelihood of being affected in the future, association lacked standing). Therefore, Plaintiff’s reliance on language from Gastaldi regarding the broadness of the FDUTPA is misplaced. Plaintiff’s allegations must not only satisfy FDUTPA standing requirements but must also satisfy the threshold requirements for standing under Article III. Upon review, the Court agrees with Defendants that, notwithstanding FDUTPA’s broad application, Plaintiff must allege a plausible threat of future harm based upon the alleged disclosure violations in Count 1.

Defendants argue that because Plaintiff’s members are existing franchisees and will not be provided franchise disclosure documents in the future, none of Plaintiff’s members has standing to seek an injunction to prevent future violations of the FTC Franchise Rule. Plaintiff contends that a violation of the [*15]  FTC Franchise Rule alleges a plausible per se violation of FDUTPA, and that Defendants deliberately misconstrue the claim asserted in Count 1. Thus, the Court looks to the allegations in the SAC.

In Count 1, Plaintiff alleges that its members’ injuries arising from Defendants’ non-disclosure or misrepresentations consist of excess mark-ups for Selected Goods, loss of equity from Defendant’s right of first refusal, and diminished benefits from Defendants’ misuse of monies in the Advertising Fund. ECF No. [62] ¶ 89. Plaintiff alleges further that, as a result of the non-disclosures and misrepresentations, “the Association’s franchisee members have and will continue to sustain damages and irreparable harm to their businesses.” Id. ¶ 90. However, as Plaintiff itself points out, the claim in Count 1 is premised upon per se FDUTPA violations arising from Defendants’ alleged violations of the FTC Franchise Rule, which requires that certain information be provided in a FDD. See 16 C.F.R. § 436.5. Therefore, the relevant injurious act in this case is the failure to comply with the FTC Franchise Rule by making the requisite disclosures or accurate representations, not the three alleged deceptive and unfair practices [*16]  that form the basis of Count 2. As such, Plaintiff’s members’ injuries in Count 1 stem from Defendants’ past non-compliance with disclosure requirements, not any subsequent actions.

Plaintiff alleges that Defendants made several false disclosures and omissions in the FDD, and therefore has stated a claim for per se violations of FDUTPA. However, while the FTC Franchise Rule requires a franchisor to provide a prospective franchisee with a current FDD, see 16 C.F.R. § 436.2, there is no ongoing disclosure requirement or requirement that a franchisor provide FDDs to existing franchisees. As alleged in this case, Plaintiff is a group of the majority of the franchisees in the Tim Hortons restaurant chain in the United States. ECF No. [62] ¶ 1 (emphasis added). Thus, it is not a misreading of the allegations in the SAC to conclude that if Plaintiff’s members are already franchisees, as opposed to prospective franchisees, they have already received FDDs. There is no allegation in the SAC to the contrary, nor does Plaintiff argue otherwise. Rather, Plaintiff alleges that the Association’s express purpose is “[t]o provide a common interest organization for Tim Hortons franchisees, creating a forum for discussion, [*17]  education and advocacy for franchise owners.” Id. ¶ 74 (emphasis added). Taking these allegations as true, Plaintiff’s members are all existing franchisees, and therefore, they will not be provided FDDs again in the future. As such, Plaintiff’s allegations of ongoing injury to its members as a result of Defendants’ per se violations of FDUTPA is a conclusion that is simply not supported by the facts in this case.

Defendants contend that because Plaintiff’s members are existing franchisees who will not receive FDDs, the injury-in-fact—the failure to disclose in compliance with the FTC Franchise Rule—is neither sufficiently actual or imminent to satisfy Article III’s requirements with respect to Plaintiff’s members. The Court agrees. See Nat’l Parks Conservation Ass’n v. Norton, 324 F.3d 1229, 1241 (11th Cir. 2003) (“where a plaintiff seeks prospective injunctive relief, it must demonstrate a ‘real and immediate threat’ of future injury in order to satisfy the ‘injury in fact’ requirement”) (citing City of Los Angeles v. Lyons, 461 U.S. 95, 103-04, 103 S. Ct. 1660, 75 L. Ed. 2d 675 (1983) and Wooden v. Bd. of Regents, 247 F.3d 1262, 1283-84 (11th Cir. 2001)). Because Plaintiff cannot plausible allege that its members likely suffer a real and immediate threat from Defendants’ future non-compliance with the FTC Franchise Rule, Plaintiff’s members lack Article III standing to seek the relief requested. As a result, Plaintiff [*18]  lacks standing to seek either injunctive or declaratory relief as to Count 1.

  1. The interests sought to be protected in Count 1 are not germane to Plaintiff’s purpose

Defendants argue next that the interests sought to be protected in Count 1 of the SAC are not germane to the Association’s purpose and, therefore, Plaintiff cannot satisfy the second prong of associational standing. As alleged in the SAC, Plaintiff’s purpose is “[t]o provide a common interest organization for Tim Hortons franchisees, creating a forum for discussion, education and advocacy for franchise owners.” ECF No. [62] ¶ 74. Thus, Defendant argues that because the Association is for the benefit of existing franchisees, as opposed to the general public or prospective franchisees, the interests sought to be protected in Count 1 are not germane to the Association’s purpose. The Court agrees. Since Plaintiff’s members fail to show an injury in fact with respect to Count 1 because they will not receive FDDs in the future, the interests sought to be protected in Count 1 are not the interests of current franchise owners. As a result, Plaintiff fails to satisfy the second prong of associational standing with respect to Count [*19]  1.

  1. Participation of individual members

Because the Court finds that Plaintiff fails to satisfy the first two prongs for associational standing with respect to Count 1, alleging per se violations of FDUTPA based upon noncompliance with the FTC Franchise Rule, the Court need not consider whether Plaintiff can satisfy the third prong with respect to Count 1.

As a result, Count 1 is due to be dismissed for lack of standing.

  1. Count 2 — unfair and deceptive practices

    a. Plaintiff’s members have standing to assert Count 2

Defendants do not appear to challenge the first prong of associational standing with respect to Count 2 of the SAC. Nevertheless, upon review, the Court finds that with respect to Count 2, Plaintiff’s members do have standing to assert claims for declaratory and injunctive relief. Plaintiff’s claim in Count 2, unlike Count 1, is premised upon several allegedly deceptive and unfair trade practices that Defendants engaged in after Plaintiff’s members had established franchisee relationships with Defendants. According to the SAC, Defendants engage in these practices with respect to franchisees, including marking up prices of Selected Goods, misappropriating Advertising Fund [*20]  monies, and enacting an equity-stripping policy, and therefore the SAC alleges a real or imminent threat of future injury to Plaintiff’s members. As a result, Plaintiff satisfies the first prong of the associational standing inquiry with respect to Count 2.

  1. The interests sought to be protected in Count 2 are germane to the Association’s purpose

The Defendant does not appear to challenge the second prong of associational standing with respect to Count 2. Nevertheless, upon review, the Court determines that in contrast to Count 1, Plaintiff satisfies the second prong with respect to Count 2. The SAC alleges that one of the main purposes of the Association is “advocacy for franchise owners.” As previously noted, Count 2 seeks relief for alleged deceptive or unfair practices by Defendants related to the franchise relationship. Accordingly, the allegations in the SAC are sufficient to establish that the interests sought to be protected in Count 2 are germane to Plaintiff’s purpose.

  1. Participation of individual members

Defendants argue that many of Plaintiff’s claims of alleged wrongdoing will require the participation of individual franchisees for proof. In response, Plaintiff argues that [*21]  the individual participation limitation to associational standing does not prevent standing where some individual participation may be necessary. Moreover, Plaintiffs contend that the fact that money damages are not being sought in the SAC should be dispositive with respect to this prong of the Court’s inquiry.

“[W]hether an association has standing to invoke the court’s remedial powers on behalf of its members depends in substantial measure on the nature of the relief sought. If in a proper case the association seeks a declaration, injunction, or some other form of prospective relief, it can reasonably be supposed that the remedy, if granted, will inure to the benefit of those members of the association actually injured.” Warth, 422 U.S. at 515; see also Hunt, 432 U.S. at 343. However, when the “individual participation of each injured party [is] indispensable to proper resolution of the cause” an association will lack standing. Id. As Plaintiff points out, the third prong of associational standing is prudential, rather than constitutional. United Food & Com. Workers Union Local 751 v. Brown Grp., Inc., 517 U.S. 544, 555, 116 S. Ct. 1529, 134 L. Ed. 2d 758 (1996). “[P]rudential limitations are rules of ‘judicial self-governance; that ‘Congress may remove . . . by statute.” Id. at 558 (quoting Warth, 422 U.S. at 509).

At the outset, the Court notes that, contrary to Plaintiff’s [*22]  assertion, “[a] court’s inquiry into the extent of individual participation is required does not end . . . simply because a claim seeks declaratory relief.” Nat’l Franchisee Ass’n v. Burger King Corp., 715 F. Supp. 2d 1232, 1239 (S.D. Fla. 2010). Therefore, Plaintiff’s suggestion that the Court’s inquiry ends simply because Plaintiff seeks only declaratory and injunctive relief is incorrect. Indeed, the Court’s determination depends not only on the nature of the relief sought, but also upon the nature of the claims asserted. See Hunt, 432 U.S. at 343. Thus, the Court looks to the nature of Plaintiff’s claim in Count 2.

To state a FDUTPA claim for injunctive relief, a party must allege a deceptive act or unfair practice, and that the party was aggrieved by the act or practice. CareerFairs.com v. United Bus. Media LLC, 838 F. Supp. 2d 1316, 1324 (S.D. Fla. 2011) (citing Kelly v. Palmer, Reifler, & Assoc., P.A., 681 F.Supp.2d 1356, 1366 (S.D. Fla. 2010)). A deceptive practice is one that is “likely to mislead” consumers. Davis v. Powertel, Inc., 776 So. 2d 971, 974 (Fla. 1st DCA 2000). An unfair practice is “one that ‘offends established public policy’ and one that is ‘immoral, unethical, oppressive, unscrupulous or substantially injurious to consumers.'” Samuels v. King Motor Co. of Fort Lauderdale, 782 So.2d 489, 499 (Fla. 4th DCA 2001) (quoting Spiegel, Inc. v. Fed. Trade Comm’n, 540 F.2d 287, 293 (7th Cir. 1976)). In the SAC, Plaintiff alleges that Defendants engaged in price gouging and a predatory pricing scheme through their mark-ups on Selected Goods, an equity-stripping policy based upon a right of first refusal, and misappropriation and misuse of Advertising Fund [*23]  monies to the detriment of its franchisee members, and that these practices are deceptive or unfair.

As an example of why individual participation is indispensable in this case, Defendants point to Plaintiff’s price-gouging claim based upon allegations that its members are forced to purchase supplies from a sole supplier at a substantial mark-up from the market rate, and that the mark-up eliminates the ability of franchisees to turn a profit. ECF No. [67] at 11. Defendants contend that at least two individualized inquiries would be required with respect to this claim — what the market rate was at the time the supplies were purchased, and characteristics and circumstances of individual franchisees, such as business management and individual sales practices, with respect to determining the effects on the franchisees’ ability to turn a profit. However, Defendants’ argument misses the mark. Plaintiff’s claim in Count 2 does not seek damages, and as previously noted, to state a claim for injunctive relief under FDUTPA, a plaintiff need only allege that it is a party aggrieved by a deceptive or unfair trade practice. Plaintiff has done so here. Thus, assuming that Count 2 otherwise sufficiently [*24]  states a FDUTPA claim, Defendants fail to persuade the Court that individualized inquiries from each of Plaintiff’s franchisee members would be required. Accordingly, at this juncture, Plaintiff satisfies the third prong for associational standing with respect to Count 2. Therefore, the Court will not dismiss Count 2 for lack of standing.

  1. The SAC fails to state a FDUTPA claim in Count 2 against THUSA or Cil

Defendants also challenge the sufficiency of the FDUTPA claim alleged in Count 2 of the SAC, arguing that the allegations in the SAC are simply different versions of the same allegations underlying Plaintiff’s breach of contract claims in previous complaints in this case and two previous lawsuits. Defendants argue further that the practices alleged to be unfair and deceptive are clearly disclosed in the FDD and Franchise Agreements. As such, Plaintiff’s FDUTPA claim based on these practices fails because a FDUTPA claim will not lie when the acts complained of comply with the terms of a contract.3 See Zlotnick v. Premier Sales Grp., 431 F. Supp. 2d 1290, 1295 (S.D. Fla. 2006) (plaintiff failed to state FDUTPA claim where defendant acted in accordance with express terms of contract) aff’d, 480 F.3d 1281 (11th Cir. 2007); [*25]  see also Amar Shakti Enters., LLC v. Wyndham Worldwide, Inc., No. 6:10-cv-1857-Orl-31KRS, 2011 U.S. Dist. LEXIS 93676, 2011 WL 3687855, at *3 (M.D. Fla. Aug. 22, 2011) (FDUTPA claim did not lie where franchise agreement permitted conduct alleged to be unfair or deceptive). Conduct constituting a breach of contract is actionable under FDUTPA if the conduct underlying the breach is, by itself, unfair or deceptive. PNR, Inc. v. Beacon Prop. Mgmt., Inc., 842 So. 2d 773, 777 n.2 (Fla. 2003). Here, Plaintiff has not plausibly alleged conduct that by itself is unfair or deceptive in conjunction with its claims of a price-gouging scheme, equity-stripping policy, or misuse of the Advertising Fund.

  1. Price-gouging scheme

As a part of Defendants’ price-gouging scheme, Plaintiff contends that Defendants marked up prices of Selected Goods to effectively eliminate the ability of franchisees to make a profit, collected undisclosed royalties from franchisees through predatory pricing on Selected Goods, and utilized their buying power solely for the benefit of the franchisor and not the Tim Hortons franchise system as a whole. ECF No. [62] ¶ 93(a)-(c).4

However, the Franchise Agreement discloses specifically with respect to the provision of Selected Goods that franchisees may be required to purchase directly from the franchisor, and that the franchisor may make a profit. The Agreement, in pertinent [*26]  part, states as follows:

[T]he Franchisee specifically agrees that the Franchisor may require that any and all Items, including ingredients and commodities which may form any part of the Items or the whole product of any food or beverage made, sold or consumed on the Premises or from the Franchised Restaurant . . . be purchased solely from the Franchisor, TH or a third party.

[. . .]

It is hereby acknowledged by the Franchisee, that in purchasing such Items, the Franchisor or TH may make a profit or may receive an allowance, commission, rebate, advantage or other benefit on the price of Items sold to the Franchisee.

ECF No. [67-6] at 4 § 5.07(c). In addition, the Agreement provides that franchisees may seek approval to purchase supplies from sources other than those already designated by the franchisor:

If the Franchisee desires to purchase Items for which the Franchisor has not approved only a single supplier from other than an Approved Supplier, the Franchisee shall submit (or request its proposed supplier to submit) to the Franchisor a written request to approve the proposed supplier . . . .

Id. at 5 § 5.07(h). Plaintiff has not alleged that its members attempted to request alternate suppliers. In addition, the [*27]  mere fact that Defendants obtained a larger profit than Plaintiff’s members would like does not in and of itself constitute a deceptive or unfair practice. See, e.g. Stubblefield v. Follette Higher Educ. Grp., Inc., No. 8:10-CV-824-T-24-AEP, 2010 U.S. Dist. LEXIS 50393, 2010 WL 2025996, at * (M.D. Fla. May 20, 2010) (underlying act of making higher profit margin where agreement specified a profit margin did not constitute unfair and deceptive trade practice).

  1. Equity-stripping policy

As part of the equity-stripping policy, Plaintiff alleges that Defendants enacted a policy to strip equity from franchisees including the valuable goodwill of owning a franchise business. ECF No. [62] ¶ 93(g).

However, the Agreement again specifically provides for the allegedly equity-stripping right of first refusal, stating the following:

In the event that the Franchisee wishes to transfer the Franchised Restaurant business carried on at the Premises pursuant to this Agreement, the Franchisee shall do so only by first offering to resell the Franchised Restaurant business to the Franchisor at the depreciated value of the furniture, equipment, signs and improvements.

Id. at 9 § 11.02. The SAC alleges no more than the fact that Defendants may act in accordance with this [*28]  provision in the Agreement, which in and of itself does not plausibly constitute an unfair or deceptive practice.5

  1. Misuse of the Advertising Fund

Plaintiff alleges that Defendants misused the Advertising fund by failing to provide any benefit to franchisees with regard to marketing, misappropriating Advertising Funds monies for improper uses, and failing to properly account for Advertising Fund monies. ECF No. [62] ¶ 93(d)-(f).

With respect to the Advertising Fund, the Franchise Agreement provides that no benefit is guaranteed to franchisees, as follows:

The Franchisee acknowledges that . . . the Franchisor accordingly undertakes no obligation to ensure that the Franchisee or any individual Tim Hortons franchisee benefits directly or indirectly in its local market or otherwise from the placement of such advertising and, for greater clarity, the Franchisee acknowledges that this Agreement confers no right to benefit directly or indirectly, in a pro-rata manner or otherwise, from the Franchisee’s Advertising Contribution or any general or specific use thereof and/or the Advertising Fund at large.

[. . .]

[T]he Franchisor assumes no direct or indirect liability or obligation to the Franchisee [*29]  with respect to the maintenance, administration or direction of the Advertising Fund . . . .

Id. at 7-8 §§ 8.01, 8.02(f). That Plaintiff’s members allegedly derived no benefit from the Advertising Fund based on Defendants’ alleged misuse of funds alone does not plausibly constitute an unfair or deceptive trade practice.6

  1. Plaintiff fails to allege actions independent from breaches of contract

Indeed, Plaintiff does not dispute that the language in the Franchise Agreements deals specifically with the practices it alleges are deceptive and unfair, but instead argues that “no reasonable reading of the disclosures would suggest that THUSA would be contractually allowed to engage in the . . . schemes implemented by THUSA to the detriment of the Association’s franchisee members.” ECF No. [71] at 16 (emphasis added). Plaintiff’s reliance upon Kenneth F. Hackett & Associates, Inc. v. GE Capital Information Technology Solutions, Inc., 744 F. Supp. 2d 1305, 1312 (S.D. Fla. 2010) is misplaced because the deceptive and unfair practices alleged there were not specifically encompassed with the parties’ agreement. 744 F. Supp. 2d at 1312-13. Here, by contrast, although Plaintiff attempts to recast its claim as independent from the Franchise Agreements, the alleged practices relate directly to Defendants’ performance pursuant to the terms of those Franchise Agreements. [*30]  Thus, taking Plaintiff’s allegations as true regarding the price-gouging scheme, equity-stripping policy, and misuse of the Advertising Fund, the SAC states claims that amount to no more than breaches of the Franchise Agreements. See Sweeney v. Kimberly-Clark Corp., No. 8:14-CV-3201-T-17EAJ, 2015 U.S. Dist. LEXIS 123080, 2015 WL 5446797, at *7 (M.D. Fla. Sept. 15, 2015) (“a claim under FDUTPA does not arise merely from an alleged breach of warranty or a breach of contract claim.”) (citation omitted). As a result, Count 2 fails to state a plausible claim for violation of FDUTPA. See Hogan v. Praetorian Ins. Co., No. 1:17-cv-21853, 2018 U.S. Dist. LEXIS 232708, 2018 WL 8266803, at *11 (S.D. Fla. Jan. 11, 2018) (dismissing FDUTPA claim where allegations were conclusory and, even if accepted as true, did not create plausible inference of unfair or deceptive acts). Count 2 is due to be dismissed.

Because the Court determines that Count 2 fails to state a plausible claim under FDUTPA based on the alleged practices, the Court does not reach Defendant THUSA’s argument regarding the choice-of-law provision or consider Defendant Cil’s arguments regarding the sufficiency of the allegations against him individually.

Defendants also argue, regarding the first prong of the standing inquiry, that because the franchise agreements, which all of Plaintiff’s members signed, contain an Ohio choice-of-law provision, Plaintiff’s members are barred from asserting FDUTPA claims in the first instance. However, this argument is more relevant to Plaintiff’s ability to state a claim, rather than to Plaintiff’s standing.

THUSA has provided exemplars of the language in the FDDs and Franchise Agreements that refer specifically to these practices, which the Court may properly consider at this juncture. See Harris v. Ivax Corp., 182 F.3d 799, 802 n.2 (11th Cir.1999) (court may properly consider a document attached to a motion to dismiss in a case in which a plaintiff refers to a document in its complaint, the document is central to its claim and its contents are not in dispute); Brooks v. Blue Cross & Blue Shield of Fla., Inc., 116 F.3d 1364, 1368-69 (11th Cir. 1997).

Plaintiff also claims that Defendants forced renovations and renewals of equipment at prices that are substantially above market rates, ECF No. [62] ¶ 93(h), but other than the SAC stating that equipment is included within the Selected Goods, see id. ¶ 32, there are no factual allegations supporting the forced renovations aspect of Plaintiff’s claim.

With respect to Plaintiff’s claim regarding equity-stripping, there is the added concern that there are no allegations in the SAC that any of Plaintiff’s members in fact attempted to sell their franchises, and thus, any purported injury based upon Defendants’ alleged policy would be merely conjectural. Thus, Plaintiff has not sufficiently alleged an injury in fact with respect to its claim based upon equity-stripping.

Moreover, Plaintiff’s Advertising Fund claim suffers from an additional flaw. Plaintiff alleges that non-party RBI manages the advertising funds for each of its brands, ECF No. [62] ¶ 19. RBI has used various strategies to extract more money from the Tim Hortons franchise system by using the Advertising funds in ways never before used or contractually permitted. Id. at ¶ 63. It funnels money to itself, THUSA, and non-party TDL, at the expense of franchisees, ECF No. Id. ¶¶ 63-64. Nevertheless, Plaintiff alleges further that THUSA controls the annual contributions to the Advertising Fund, and immediately following RBI’s takeover, made several changes to the administration of the Fund that included using monies from the fund for items unrelated to marketing and advertising. Id. ¶¶ 67-68. Taken as true, these allegations are inconsistent, and at best, the plausible inference to be drawn from them is that non-party RBI, not Defendants in this case, is the allegedly responsible party. Indeed, the heading in Plaintiff’s SAC on this issue is telling: “RBI Misappropriates Advertising Fund Monies.” See ECF No. [62] at 11.

Florida Federal Court Rejects Franchise Lawyers’ Fee Request as ‘Too High’

Oct 29, 2020 - Franchise, Dealer & Antitrust Decisions in One Sentence by |

FLORIDA FEDERAL COURT REJECTS FRANCHISE LAWYERS’ FEE REQUEST AS ‘TOO HIGH’

In a recent franchise case in Florida, a federal district court refused to grant the fees requested by the franchisee lawyers’ in their fee petition because the franchisee lawyers’ fees were “too high” when viewed against the rates charged by other lawyers in the area who are experienced in complex litigation; in slashing the lawyers’ requested fees by almost 40% across the board, the court stated: “The case at bar was not complex, and Defendant Childress won on the basis of default [with the other side not putting up a defense].”

Drone Nerds Franchising Llc v. Childress

United States District Court for the Southern District of Florida

October 7, 2020, Decided; October 7, 2020, Entered on Docket

Case No. 19-CV-61153-RUIZ/STRAUSS

Excerpts of the Case:

REPORT AND RECOMMENDATION

THIS CAUSE came before me upon Defendant/Counter-Plaintiff’s [(“Defendant Childress'”)] Motion for Attorneys’ Fees and Costs (DE 83) (the “Motion”). The Motion has been referred to me to take all action as required by law pursuant to 28 U.S.C. § 636(b)(1)(A) and the Magistrate Judge Rules of the Local Rules of the Southern District of Florida. (DE 84). I have reviewed the Motion, the record in this case and am otherwise duly advised. For the [*3]  reasons discussed herein, I RECOMMEND that the Motion (DE 83), be GRANTED IN PART and DENIED IN PART. Specifically, I recommend that attorneys’ fees be awarded in the amount of $20,947.50 and that no costs be awarded.

  1. DISCUSSION

Defendant Childress’ Motion seeks $38,095.00 in attorney’s fees and $2,435.15 in costs. (DE 83 at 3). “Courts have discretion to award fees under FDUTPA.” Hard Rock Cafe Int’l USA, Inc. v. RockStar Hotels, Inc., No. 17-CV-62013, 2019 U.S. Dist. LEXIS 85437, 2019 WL 3412155, at *9 (S.D. Fla. May 20, 2019), report and recommendation adopted, No. 17-CV-62013, 2019 WL 3408888 (S.D. Fla. June 4, 2019) (citation omitted). Also, “Fla. Stat. § 817.416(3) explicitly permits one who demonstrates a violation under the Act to recover ‘all moneys invested in such franchise or distributorship’ plus ‘reasonable attorney’s fees.'” Burger King Corp. v. Austin, 805 F. Supp. 1007, 1026 (S.D. Fla. 1992). Thus, as the Court previously found, Defendant is entitled to an award of reasonable attorneys’ fees and costs against the Default Plaintiff.

  1. Reasonableness of Fees

When determining the reasonableness of attorneys’ fees, courts begin by multiplying a reasonable hourly rate by the number of hours reasonably expended. Norman v. Housing Auth. of Montgomery, 836 F.2d 1292, 1299 (11th Cir. 1988) (citing Hensley v. Eckerhart, 461 U.S. 424, 433, 103 S. Ct. 1933, 76 L. Ed. 2d 40 (1983)). The result of that calculation is known as the lodestar, see id. at 1301-02, which is “strongly presumed to be reasonable.” Martinez v. Hernando Cnty. Sheriff’s Office, 579 F. App’x 710, 715 (11th Cir. 2014) (citations [*6]  omitted).

The party seeking an award of fees has the burden of documenting the hours incurred and the applicable hourly rates. Norman, 836 F.2d at 1303 (citing Hensley, 461 U.S. at 437). Fee applicants are required to exercise billing judgment and to exclude entries that are excessive, redundant, or otherwise unnecessary. Am. Civil Liberties Union v. Barnes, 168 F.3d 423, 428 (11th Cir. 1999) (citing Hensley, 461 U.S. at 434). Entries for clerical or administrative tasks should also be excluded. See Ortega v. Berryhill, No. 16-24697-CIV, 2017 WL 6026701, at *2 (S.D. Fla. Dec. 5, 2017) (“Purely clerical or secretarial tasks that require no legal skill or training, such as converting pleadings to PDF, faxing and mailing, updating lists and calendars, and filing or e-filing documents, should not be billed at a paralegal rate regardless of who performs them.” (citing Spegon v. Catholic Bishop of Chicago, 175 F.3d 544, 553 (7th Cir. 1999))).

It is axiomatic that hours that are unreasonable to bill to one’s client are unreasonable to bill to an adversary, “irrespective of the skill, reputation or experience of counsel.” Barnes, 168 F.3d at 428 (quoting Norman, 836 F.2d at 1301). If fee applicants fail to exercise billing judgment, courts must do it for them. Id. A court “is itself an expert on the question and may consider its own knowledge and experience concerning reasonable and proper fees and may form an independent judgment either with or without the aid of witnesses as to value.” Norman, 836 F.2d at 1303 (citations [*7]  omitted).

A fee summary from Attorney Robert M. Einhorn’s Affidavit is shown below reflecting the rates, hours, and amounts billed by attorneys, a law clerk, and a paralegal in this case:

Summary by Attorney/Paralegal:

TimekeeperHourly RateHoursTotal
Robert M. Einhorn, Esq.$750.0019.7$14,775.00
Alejandro Brito, Esq.$725.005.8$ 4,205.00
Alaina B. Siminovsky, Esq.2$500.0025.9$12,950.00
Cecilia Hernandez, clerk$200.0028.2$ 5,640.00
Aude Piriou, paralegal$150.003.5$ 525.00
  TOTAL:$38,095.00

(DE 83-1 at ¶9).

  1. Reasonableness of Hourly Rate

Defendant Childress requests that this Court find the hourly rates above to be reasonable stating in support the following:

  1. Robert M. Einhorn, named partner and highly experienced commercial trial lawyer and member of the Florida Bar since 1990; $750.00 per hour . . .;
  2. Alejandro Brito, named partner and highly experienced commercial trial lawyer and member of the Florida Bar since 1996; $725.00 per hour . . .;
  3. Alaina B. Karsten, former partner and member of the Florida Bar since 2009; $500.00 per hour . . .;
  4. Cecilia Hernandez, law clerk and recent law school graduate; $200.00 per hour . . .; and
  5. (sic) Aude Piriou, paralegal; $150 per hour . . .;

(DE 83 at [*8]  3). In a separate filing, counsel states that none of the attorneys in this case have received a fee award for their services in cases in the Southern District of Florida in the last two years. (DE 86).

I should consider several factors in determining the prevailing market rate, such as “the attorney’s customary fee, the skill required to perform the legal services, the attorney’s experience, reputation and ability, the time constraints involved, preclusion of other employment, contingency, the undesirability of the case, the attorney’s relationship to the client, and awards in similar cases.” Mallory v. Harkness, 923 F. Supp. 1546, 1555 (S.D. Fla. 1996) (referring to factors set out in Johnson v. Ga. Highway Express, Inc., 488 F.2d 714, 717-18 (5th Cir. 1974), abrogated in part by Blanchard v. Bergeron, 489 U.S. 87, 90, 109 S. Ct. 939, 103 L. Ed. 2d 67 (1989)). As the party seeking an award of fees, [Movant] has the burden of “supplying the court with specific and detailed evidence from which the court can determine the reasonable hourly rate.” Barnes, 168 F.3d at 427 (quoting Norman, 836 F.2d at 1303). “A reasonable hourly rate is ‘the prevailing market rate in the relevant legal community for similar services by lawyers of reasonably comparable skills, experience, and reputation.'” Id. at 436 (quoting Norman, 836 F.2d at 1299). “The general rule is that the ‘relevant market’ for purposes of determining the reasonable hourly rate for an attorney’s services is ‘the place [*9]  where the case is filed.'” Id. at 437 (citing Cullens v. Georgia Dep’t. of Transp., 29 F.3d 1489, 1494 (11th Cir.1994)).

Here, Defendant Childress does not carry his burden to justify the requested rates. Attorney Einhorn’s Affidavit does nothing to further explain why the listed timekeepers are entitled to the hourly rates requested beyond what is in the Motion. (DE 83-1). Further, I find that the requested rates are too high. Recent awards for lawyers experienced in complex areas of law, such as intellectual property, have been less. Boigris v. EWC P&T, LLC, No. 19-21148-CIV, 2020 U.S. Dist. LEXIS 32941 , 2020 WL 1692013, at *2-3 (S.D. Fla. Feb. 25, 2020), report and recommendation adopted, No. 19-21148-CIV, 2020 U.S. Dist. LEXIS 63035, 2020 WL 1692080 (S.D. Fla. Mar. 16, 2020) (finding the appropriate rate at the partner level to be in the $400 range in a traditional intellectual property case and awarding $475 per hour for partner work and $350 per hour for associate work); Newman v. Eduardo Meloni, P.A., No. 0:20-CV-60027-UU, 2020 U.S. Dist. LEXIS 163064 , 2020 WL 5269442, at *2 (S.D. Fla. Sept. 4, 2020) (finding a $450 per hour requested rate reasonable in class action lawsuit for senior partner with sixteen years of experience and a $350 per hour requested rate reasonable for associate with more than five years of experience); Berkley Vacation Resorts, Inc. v. Castle Law Grp., P.C., No. 18-CV-60309, 2019 WL 7344834, at *2-3 (S.D. Fla. Nov. 18, 2019), report and recommendation adopted, No. 18-60309-CIV, 2019 WL 7344793 (S.D. Fla. Dec. 11, 2019) (finding the reduced hourly rates that were requested to be reasonable as follows: 1) $400 for partner and chair of litigation [*10]  department with more than 41 years of experience litigating in state and federal courts; 2) $375 for partner with more than 15 years of experience litigating in state and federal courts; 3) 275 for senior counsel with more than 11 years of experience litigating in state and federal courts).

I find that a reasonable hourly rate for professionals assisting in this case are as follows based upon the above and my own knowledge regarding reasonable hourly rates in this community:

TimekeeperHourly Rate
Robert M. Einhorn, Esq.$475.00
Alejandro Brito, Esq.$450.00
Alaina B. Siminovsky, Esq.$350.00
Cecilia Hernandez, clerk$200.00
Aude Piriou, paralegal$150.00

The case at bar was not complex, and Defendant Childress won on the basis of default. Defendant Childress argues that the work was performed in an efficient manner, but efficiency does not justify the requested hourly rates. Accordingly, I recommend the above-reflected rates be awarded as reasonable hourly rates in this case.

Alaina B. Siminovsky is referenced as Alaina B. Karsten in Attorney Einhorn’s Affidavit that was submitted in support of the Motion.

Virtual Healthcare Franchisee’s Fraud Claims Based on Franchisor’s Financials Must be Reasserted

Jul 20, 2020 - Franchise, Dealer & Antitrust Decisions in One Sentence by |

Virtual Healthcare Franchisee’s Fraud Claims Based on Franchisor’s Financials Must be Reasserted

 A virtual healthcare franchisee’s common law fraud claim that the franchisor of a cloud-based marketplace for telehealth services fraudulently induced the franchisee to invest in the franchise and in so doing also violated the anti-fraud provision of the New York Franchise Sales Act (NYFSA) based on statements allegedly made at a Franchise Expo regarding future performance were mere puffery under Missouri law, and to the extent other similar claims were based on the franchisor’s misrepresentations made during the negotiations and execution of the parties’ franchise agreement (including specific representations about future revenue and expense ‘projections’), the allegations were insufficient to sufficiently identify which individual defendants made which statements; further, issues of fact remained as to whether the franchisee’s alleged reliance on the representations made by the defendants was reasonable.

 CHARLES FABIUS, ET AL., PLAINTIFFS V. MEDINEXO USA, LLC, ET AL., DEFENDANTS, U.S. District Court, E.D. Missouri, Eastern Division. No. 4:19CV2526 JCH. Dated April 3, 2020

 ———————————————–

 Excerpts from case:

 

DISCUSSION

 Fraud In The Inducement

 As noted above, in Count III of their Complaint Plaintiffs assert a claim for fraud in the inducement. (Compl., ¶¶ 86-92). Specifically, Plaintiffs allege as follows:

  1. In the initial meeting between Mr. Fabius and defendants Toro and Adelman, the defendants made several false, misleading and fraudulent statements and representations of material facts to him, including unsupported statements about the potential earning capacity as a [] Medinexo franchisee.
  2. Subsequently during the negotiation of the parties’ franchise agreement, defendants again provided plaintiffs with false, misleading and fraudulent information in the form of a “Budget Example” that provided a completely fabricated two-year earnings projection.

 

( Id., ¶¶ 87, 88).

 

Under Missouri law, in order to succeed on their claim for fraudulent inducement Plaintiffs must establish facts in support of the following elements: “(1) that [Defendants] made certain material representations to [Plaintiffs]; (2) such representations were false when made; (3) that [Defendants] knew the representations were false; (4) that the representations were made with the purpose of deceiving [Plaintiffs]; (5) that [Plaintiffs were], in fact, deceived; (6) [Plaintiffs] reasonably relied on the representations in signing the [Franchise Agreement]; and (7) [Plaintiffs] suffered damage as a proximate result of the fraudulent misrepresentations.” Bracht v. Grushewsky, 448 F.Supp.2d 1103, 1110 (E.D. Mo. 2006) (citing Trotter’s Corp. v. Ringleader Restaurants, Inc., 929 S.W.2d 935, 939 (Mo. App. 1996)). “As with any cause of action, ‘[a] failure to establish any one of the essential elements of fraud is fatal to recovery.”’ Argus Health Systems, Inc. v. Benecard Services, Inc., No. 10-00187-CV-W-JTM, 2011 WL 5570064, at *2 n. 4 (W.D. Mo. Nov. 16, 2011) (quoting Emerick v. Mutual Benefit Life Ins. Co., 756 S.W.2d 513, 519 (Mo. 1988) (en banc)).

 

In their Motions to Dismiss, Defendants claim Plaintiffs’ fraud in the inducement claim is subject to dismissal for several reasons. The Court will address Defendants’ assertions in turn.

 

  1. Statements Made At The Franchise Expo

 

As noted above, Plaintiffs assert Defendants stated at the Franchise Expo that, during the first year of operation Fabius would earn approximately $75,000, during the second year he would earn approximately $400,000, and he “would make so much money” as a Medinexo franchisee that he would not consider renewing the franchise agreement after five years. (Compl., ¶ 20). In their Motions to Dismiss Defendants argue these alleged misrepresentations are not actionable, because they constituted “mere puffery.” ( See Adelman’s Memo in Support, P. 6; Memorandum in Support of Defendants Medinexo USA, LLC’s and Jorge Toro’s Motion to Dismiss (“Medinexo’s Memo in Support”), PP. 5-6).

 

Under Missouri law, “predictions of future success and profitability…are not misrepresentations of past or existing fact and cannot be the subject of a fraud action.” Trotter’s Corp., 929 S.W.2d at 940.

To constitute fraud, the alleged misrepresentation must relate to a past or existing fact. Mere statements of opinion, expectations, and predictions for the future are insufficient to authorize a recovery for fraudulent misrepresentation. In particular, predictions and opinions regarding future profitability of a business cannot form a basis for fraud as a matter of law.

 

Id. (citations omitted). See also Morrison v. Back Yard Burgers, Inc., 91 F.3d 1184, 1186 (8 th Cir. 1996) (applying Arkansas law8 , and holding that representations relating solely to future events, such as projections related to franchise profits, cannot support an action for fraud); VT Investors v. R & D Funding Corp., 733 F.Supp 823, 837-38 (D. N.J. 1990) (holding a statement that the company in which plaintiffs invested would “in the near future, realize a positive cash flow in excess of $60,000 per month”, could only be characterized as non-actionable puffery “because it is such an emphatic statement of opinion”).

 

In response to Defendants’ motions Plaintiffs do not dispute, but rather appear to concede, that the statements regarding potential profitability allegedly made during the Franchise Expo cannot serve as the basis for a claim of fraud, as they constituted at most puffery on Defendants’ part. Specifically, Plaintiffs claim they do not allege only that Defendants “made vague statements of potential[] profitability that in some circumstances could amount to mere ‘puffery’; rather defendants provided what appeared to be an empirical analysis in support of these representations and agreed to append them to the parties’ agreement.” (Plaintiffs’ Adelman Opp., P. 12 (emphasis added), citing Franchise Agreement, Exh. C, “Budget Example”).9

 

Upon consideration, the Court agrees the statements allegedly made at the Franchise Expo constituted mere puffery, insufficient to sustain a claim of fraud in the inducement. The Court finds this to be especially true because, as noted by Defendant Adelman, Plaintiffs allege Defendants made the initial profit representations “without knowledge of Plaintiffs’ business plans, experience, and expected level of investment in the franchise.” (Adelman’s Memo in Support, P. 7). Under these circumstances, this portion of Defendants’ Motions to Dismiss will be granted.

 

  1. Misrepresentations Made During the Negotiation And Execution Of The Franchise Agreement

 

As noted above, in their Complaint Plaintiffs further allege that during the negotiation of the Franchise Agreement, Defendants provided ”  additional written financial performance representations , once again, making specific representations about and providing additional future revenue and expense ‘projections.”’ (Compl., ¶ 34 (emphasis in original)). Plaintiffs claim the executed Franchise Agreement incorporated by reference one such representation, a “Budget Example” expressly stating earnings projections for the first two years of franchise operation. ( Id., ¶ 35). Plaintiffs maintain Defendants included said projections despite knowing that the data as provided was deceptive, overstated and not based in facts. ( Id., ¶¶ 36-38).

 

In their Motions to Dismiss, Defendants assert that with these allegations Plaintiffs fail to state a claim for relief, for two reasons.

 

  1. The Alleged Statements Attributed To The Various Defendants Are Not Pleaded With Sufficient Particularity

 

Allegations of fraud are subject to a heightened pleading requirement under Federal Rule of Civil Procedure 9(b), which states in relevant part as follows: “In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” To meet the requirements of Rule 9(b), a pleading must include “such matters as the time, place and contents of false representations, as well as the identity of the person making the misrepresentation and what was obtained or given up thereby.” Abels v. Farmers Commodities Corp., 259 F.3d 910, 920 (8 th Cir. 2001) (internal quotations and citations omitted). “In other words, the complaint must plead the who, what, where, when, and how of the alleged fraud.” Drobnak v. Andersen Corp., 561 F.3d 778, 783 (8 th Cir. 2009) (internal quotations and citations omitted).

 

In their Motions to Dismiss, Defendants contend Plaintiffs’ fraud in the inducement claim fails because they rely on collective allegations rather than individualized statements of fact. (Adelman’s Memo in Support, P. 5; Medinexo’s Memo in Support, P. 8). In other words, Defendants claim Plaintiffs impermissibly attribute the alleged misrepresentations to Defendants Toro and Adelman together, without specifying which individual in fact made the statements or provided the allegedly fraudulent materials. ( Id.).

 

In their response to Defendants’ motions, Plaintiffs do not deny that they group Defendants Adelman and Toro together in their fraud in the inducement claim. ( See, e.g., Plaintiffs’ Adelman Opp., PP. 12-13). Instead, Plaintiffs persist in their failure to distinguish between Defendants, stating that “at the initial meeting between Mr. Fabius and defendants Toro and Adelman, the defendants made three very specific statements regarding potential profitability and/or financial success as a franchisee [].” ( Id., P. 12 (emphasis added)).

 

Upon consideration, the Court finds Plaintiffs have not stated their claim for fraud in the inducement with sufficient particularity to satisfy the heightened pleading requirements of Rule 9(b). See Level One Technologies, Inc. v. Penske Truck Leasing Co., L.P., No. 4:14CV1305 RWS, 2015 WL 1286960, at *7-8 (E.D. Mo. Mar. 20, 2015). This failure becomes especially important in light of Defendant Adelman’s contention that he is not specifically alleged to have had any involvement in the supposed “financial performance representations”, or provision of the “Budget Example”, the sole remaining instances of purported fraud. ( See Adelman’s Memo in Support, P. 6). Rather than dismiss Plaintiffs’ Complaint outright, however, the Court will grant Plaintiffs leave to file an Amended Complaint, in which they state with particularity the misrepresentations attributable to each Defendant.

 

  1. Any Purported Reliance By Plaintiffs Was Not Reasonable

 

Defendants finally argue that Plaintiffs’ fraud in the inducement claim is subject to dismissal because Plaintiffs could not reasonably have relied on Defendants’ speculative approximations of future performance. (Adelman’s Memo in Support, PP. 7-8; Medinexo’s Memo in Support, PP. 6-9). As support for this contention, Defendants note Plaintiffs allege the following in their Complaint: that at that time he encountered Defendants, Fabius had a background and experience in the telehealth business, and considered himself well qualified to own and operate the kind of franchised virtual healthcare business being sold by Defendants (Compl., ¶ 17); that Fabius performed due diligence prior to making his franchise investment, including approaching certain professions that performed analyses of franchised businesses, and retaining counsel to review the form franchise agreement and FDD provided by Defendants ( Id., ¶ 24); that Item 19 of Medinexo’s FDD specifically stated that neither Medinexo nor its employees made any representations about a franchisee’s future financial performance or past financial performance of company-owned or franchised outlets ( Id., ¶ 32); and that Fabius himself acknowledged lingering concerns regarding Medinexo’s lack of historical data ( Id., ¶ 24).

 

Upon consideration, the Court finds an issue of fact remains as to whether Plaintiffs’ alleged reliance on representations made by Defendants was reasonable. The Court notes Item 26 of the parties’ Franchise Agreement provides in relevant part as follows: ” Other than Exhibit D hereto, You have not relied on any warranty or representation or guaranty, expressed or implied, as to the potential success or projected income or profits of the business venture contemplated hereby, and You acknowledge that, other than Exhibit D hereto, Our sales staff, personnel, employees, officers and representatives are not permitted to make claims or statements as to earnings, sales, income, profits, prospects or chances of Your success that are not disclosed in Our Franchise Disclosure Document, nor are they authorized to represent or estimate sales figures as to any particular franchise.” ( See Franchise Agreement, ECF No. 33-1, P. 44 (emphasis added)). The Court agrees with Plaintiffs that the quoted provision creates an issue of fact as to whether the parties carved out an exception to Item 19 of Medinexo’s FDD, sufficient to permit Plaintiffs reasonably to rely on the Budget Example as a projection of future income and expenses. While it ultimately may prove difficult for Plaintiffs to demonstrate the requisite reasonable reliance in light of Fabius’s admitted expertise in the subject matter at issue, his engagement in extensive due diligence, his review of the disclosure documents, his participation in the negotiation of the integrated Franchise Agreement, and his execution of the Franchise Agreement despite his admitted concerns regarding Medinexo’s lack of historical data, the Court finds it inappropriate to deem such reliance absent as a matter of law at this time. This portion of Defendants’ Motions to Dismiss will therefore be denied.

 

 

Connecticut Federal Court Rules for Franchisee and Strikes Unfair Floating Forum Selection Clause

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

Connecticut Federal Court Rules for Franchisee and Strikes Unfair Floating Forum Selection Clause

The United States District Court for the District of Connecticut has ruled that a franchisee of Doctors Express who purchased the exclusive rights to develop and manage Doctors Express Urgent Care franchises in two counties in New York and Connecticut was permitted to sue the franchisor in a court in Connecticut despite a forum selection clause in the agreement requiring that the litigation be filed in Alabama since the forum selection clause could not be presumed enforceable, because it was not reasonably communicated to the franchisee that he agreed to file suit in the jurisdiction where a future assignee of Doctors Express was based and because enforcement by that assignee, AFC Franchising, LLC, was not sufficiently foreseeable to him; accordingly, it would be “unfair, unjust, and unreasonable” to hold the franchisee to a clause that did not provide sufficient notice as to the forum being selected.

DANILO PURUGGANAN, PLAINTIFF V. AFC FRANCHISING, LLC, DEFENDANT, Bus. Franchise Guide (CCH) P 16657 (C.C.H.), 2020 WL 3274207 (May 13, 2020)

 

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Excerpt of Court’s Decision:

 

Because the Defendant’s motion turns on the interpretation and enforceability of the MDA’s forum selection clause, as indicated above, the Court’s assessment of the four inquiries set forth by the Second Circuit supplants the traditional inquiry undertaken in a forum non conveniens analysis. Federal common law governs the fourth inquiry, and the Second Circuit has assumed without deciding that federal common law likewise applies to the first inquiry. Starkey v. G Adventures, Inc., 796 F.3d 193, 196 n.1 (2d Cir. 2015). “In answering the interpretive questions posed by parts two and three of the four-part framework, however, [the Court] normally appl[ies] the body of law selected in an otherwise valid choice-of-law clause.” Martinez, 740 F.3d at 217–18. In this case, the MDA contains a choice-of-law clause specifying Maryland as the substantive law to be applied. (MDA ¶ 19.6.) However, as the Defendant points out, Maryland has adopted the federal standard in determining the enforceability of a forum selection clause, see, e.g., Davis Media Grp., Inc. v. Best W. Int’l, Inc., 302 F. Supp. 2d 464, 466 (D. Md. 2004), and the parties do not identify any differences in the substantive law of Maryland that preclude this Court from applying relevant federal precedent to the interpretive issues posed here, see Martinez, 740 F.3d at 223. The Court will accordingly “apply general contract law principles and federal precedent to discern the meaning and scope of the forum clause.” Id. (quotation marks and citation omitted).

Here, the Court answers the inquiry at both steps one and three in the negative and therefore the clause does not enjoy the presumption of enforceability.1 With respect to the first inquiry, “[a] forum selection clause is reasonably communicated where it is phrased in clear and unambiguous language,” and where it is included “within the main text of a contractual agreement.” Compuweigh Corp. v. Honeywell Int’l, Inc., No. 3:16-CV-01108 (VAB), 2016 WL 7197360, at *3 (D. Conn. Dec. 9, 2016) (quotation marks and citations omitted); see also Midamines SPRL Ltd. v. KBC Bank NV, No. 12-CV-8089 (RJS), 2014 WL 1116875, at *3 (S.D.N.Y. Mar. 18, 2014), aff’d, 601 Fed. Appx. 43 (2d Cir. 2015) (“A clause is reasonably communicated to a party where the party signs an agreement that explicitly directs the party to the clause”). Here, the MDA apprised Purugganan that suits arising out of or in connection with the MDA must be brought in the “state or judicial district in which we have our principal place of business at the time the action is commenced ….” (MDA ¶ 19.7 (emphases added).) The MDA defines “we,” “us,” or “our” as referring only to Doctors Express, without including any successors in interest, assignees or other persons or entities that might obtain a subsequent interest in the MDA. (MDA at 1.) Thus, the four corners of the MDA unambiguously establish that the parties agreed to litigate in the forum in which Doctors Express’s principal place of business was located at the time the lawsuit was filed.

Indeed, there are no provisions in the MDA that notified the Plaintiff that if the agreement were assigned to another party, the Plaintiff also agreed that suit must be brought in the forum in which the assignee’s principal place of business was located. “Although notice can be sufficient without explicitly naming the jurisdiction in which contracting parties agree to litigate, a forum selection clause must nonetheless allow the parties to predict with a reasonable degree of certainty where they may be haled into court.” Gordian Grp., LLC v. Syringa Expl., Inc., 168 F. Supp. 3d 575, 582 (S.D.N.Y. 2016). While “[f]ederal courts thus generally enforce forum selection clauses tied to a party’s principal place of business despite the risk that the party might relocate,” they “have not, however, extended this principle to enforce forum selection clauses containing even more uncertainty[.]” Id.

AFC relies upon a series of cases in which courts upheld the validity of a so-called “floating forum selection clause” as a general matter. These cases are inapposite because in each involving an assignee, the forum selection clause expressly contemplated that the clause would apply equally with respect to the principal place of business of the assignee of a contracting party. See e.g., Preferred Capital, Inc. v. Assocs. in Urology, 453 F.3d 718, 723 (6th Cir. 2006) (enforcing forum selection clause where “[t]he contract clearly stated that assignment was a possibility, and that in the event of assignment, any disputes would be governed by the laws of the state of incorporation of the assignee” and further provided that suit would be venued exclusively where the contracting party’s or its assignee’s principal place of business was located) ; IFC Credit Corp. v. Aliano Bros. Gen. Contractors, 437 F.3d 606 (7th Cir. 2006) (upholding validity of identical forum selection clause); IFC Credit Corp. v. Burton Indus., Inc., No. 04 C 5906, 2005 WL 1243404 (N.D. Ill. May 12, 2005) (same);2 Danka Funding, L.L.C. v. Page, Scrantom, Sprouse, Tucker & Ford, P.C., 21 F. Supp. 2d 465, 472 (D.N.J. 1998) (concluding that “where a forum-selection clause professing consent to jurisdiction in the state where a party’s or its assignee’s principal place of business lies is part of an agreement in a sophisticated business transaction, and one party to the agreement is a law firm, the forum-selection clause is valid absent fraud, serious inconvenience, or a violation of public policy, notwithstanding that the law firm was unaware of the assignee’s principal place of business at the time of signing the agreement”).

Accordingly, interpreting the MDA’s forum selection clause as providing adequate notice to the Plaintiff that he might have to litigate in the forum of the principal place of business of some future, unknown assignee of Doctors Express is simply a bridge too far from what the case law will sustain. The interpretation of the clause posited by the Defendant simply would not allow the Plaintiff “to predict with a reasonable degree of certainty where [he] may be haled into court.” Gordian Grp., 168 F. Supp. 3d at 582.

Even if the Court were to determine that the forum selection clause was reasonably communicated to the Plaintiff, moreover, the Court declines to find that AFC, as an assignee, is subject to the clause at step three of the analysis. The Court acknowledges that the mere “fact a party is a non-signatory to an agreement” is not a basis “to preclude enforcement of a forum selection clause.” Aguas Lenders Recovery Grp. v. Suez, S.A., 585 F.3d 696, 701 (2d Cir. 2009). Rather, “where the alleged conduct of the non[signatories] is closely related to the contractual relationship, a range of transaction participants, parties and nonparties, should benefit from and be subject to forum selection clauses.” Magi XXI, Inc. v. Stato della Citta del Vaticano, 714 F.3d 714, 722 (2d Cir. 2013) (quotation marks and citation omitted). Accordingly, “[i]f successorship is established, a non-signatory is subject to the … presumption of the enforceability of mandatory forum selection clauses.” Aguas, 585 F.3d at 701. However, under the so-called “closely related test,” “the relationship between the non-signatory and th[e] … signatory must be sufficiently close that the non-signatory’s enforcement of the forum selection clause is ‘foreseeable’ to the signatory against whom the non-signatory wishes to enforce the forum selection clause.” Magi XXI, 714 F.3d at 723.

Under the terms of the MDA and the circumstances presented here, AFC’s enforcement of the forum selection clause was not, in any way, foreseeable to Purugganan.3 While the MDA contemplates that Doctors Express can assign this Agreement … to a third party without restriction” (MDA ¶ 15.1) and provides that it is binding upon the parties’ “permitted assigns, and successors-in-interest” (MDA ¶ 19.9), as discussed above, the forum selection clause neglects to extend the phrase “our principal place of business” to an assignee of Doctors Express and in fact specifically confines the forum selection clause to the principal place of business of Doctors Express. This case is therefore not akin to those instances where federal courts have held that an assignee of a contracting party was sufficiently “closely related” to the signatory to enforce a forum selection clause identifying a specific, unfluctuating forum. Cf. e.g., Cfirstclass Corp. v. Silverjet PLC, 560 F. Supp. 2d 324, 329 (S.D.N.Y. 2008) (holding that defendant could invoke forum selection clause in agreement signed by its predecessor-in-interest requiring that disputes be litigated in the courts of England and Wales).

In sum, because it was not reasonably communicated to the Plaintiff that he agreed to suit in the jurisdiction in which an unknown and unidentified future assignee of Doctors Express has its principal place of business, and because enforcement of the forum selection clause by AFC was not sufficiently foreseeable to Purugganan to satisfy the closely related test, the forum selection clause is not entitled to a presumption of enforceability. In addition, because it is “‘unfair, unjust, or unreasonable to hold’ parties to clauses that do not provide sufficient notice as to the forum being selected,” Gordian Grp., 168 F. Supp.3d at 582 (quoting M/S Bremen v. Zapata Off-Shore Co., 407 U.S. 1, 18 (1972)), the Court would, for the same reasons, decline to enforce the forum selection clause at step four of the analysis.

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.

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