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

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

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

(Text of Excerpts from the Case Below)

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

United States District Court for the District of Arizona

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

No. CV-18-03374-PHX-SPL

Reporter

2019 U.S. Dist. LEXIS 111696 *

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

ORDER

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

1. Background

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

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

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

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

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

1. 12(B)(6)

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

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

III. Analysis

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

1. Claims Against Defendant Kondatha

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

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

1. Minnesota Franchise Act

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

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

1. Personal Jurisdiction

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

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

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

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

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

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

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

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

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

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

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

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

The United States District Court for the District of New Jersey rejected the petroleum franchisor’s request to dismiss on summary judgment the gasoline dealer franchisee’s case for wrongful termination because, according to the Court, the defendant bears the burden of proof in actions under the PMPA, and the bulk of defendant’s evidence was testimonial and thus subject to credibility determinations; material disputes existed regarding the following facts, going to the franchisor’s good faith in demanding changes to the renewal agreement:

(1) the existence of a formula for calculating increases in rent at Defendant’s franchises — although Defendant contended such a policy exists, it cited oral deposition, in-court testimony, or affidavits, uncorroborated by any written policy;

(2) whether the petroleum franchisor’s employees, Deakin and McGee, in fact warned plaintiff that rental values would increase when they initially met;

(3) whether the franchisor’s employees, Deakin and McGee, suggested, during that initial meeting, that plaintiff franchisee could operate a truck stop at the property;

(4) whether defendant failed to provide the franchisee dealer with training; whether the franchisee’s need for training was apparent; and whether the franchisor had a training program that was available;

(5) whether the franchisor placed franchisee dealer’s account on COD status in retaliation for her request to operate the station as a commission;

(6) whether the franchisor defendant had a motive not to renew the agreement, as shown by the strained relationship between Sathu, Deakin, and McGee;

(7) defendant franchisor received an offer from Tim Horton’s to open a franchise at the location; and

(8) the substantial increase in rent, which the Court noted was not conclusive of bad faith on the part of Defendant but was nonetheless relevant.

Four S Shell, LLC v. PMG, LLC, Civil Action No. 3:16-cv-5701 (PGS) (TJB), 2019 U.S. Dist. LEXIS 115034 (D.N.J. July 11, 2019)

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Tyler, the Franchisee Dealer, alleged a violation of the Automobile Dealers’ Day in Court Act; breach of contract; and tortious interference with existing contractual relations; all arising out of the Pierce defendants’ allegedly unlawful and fraudulent conduct toward Tyler concerning the marketing, sale, and service of fire and rescue trucks and related goods and equipment in the States of New York and Pennsylvania; the Court, however, dismissed the Franchisee Dealer’s claims because the Automobile Dealers’ Day in Court Act does not cover fire trucks; a contract terminable at will cannot be the basis of a tortious interference claim; and “in the absence of explicit contractual language stating that a party may not unreasonably withhold consent, parties may withhold consent for any reason or no reason, and that no implied obligation to act in good faith exists to limit that choice.”

Tyler Fire Equip., LLC v. Oshkosk Corp., No. 14-CV-6513-CJS, 2019 U.S. Dist. LEXIS 104539 (W.D.N.Y. June 21, 2019)

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Tyler Fire Equip._ LLC v. Oshkosk Corp._ 2019 U.S. Dist

Plaintiff Nurse Next Door Home Healthcare Services (USA), Inc.’s Motion for Default Judgment against Defendant Four Gloves, Inc., the franchisee, is GRANTED in part and DENIED in part, such that Plaintiff is entitled to damages of unpaid fees of $55,000 and royalties of $81,250, totaling $136,250, based primarily on the Court’s conclusion that Nurse Next Door is entitled to that amount which “to the extent possible, put[s] the injured party in as good a position as that party would have been in had the contract been performed,” specifically royalty payments for the five-year term, but specifically not those other fees (7% and a monthly technology fee), since under the Franchise Agreement the latter fees assumed the use by the franchisee of the Nurse Next Dorr’s Care Services Center, which, due to the termination, had never been made by the franchisee.

Nurse Next Door Home Healthcare Servs. (USA) v. Four Gloves, Inc., Civil Action No. 8:18-cv-02101-PX, 2019 U.S. Dist. LEXIS 106612 (D. Md. June 26, 2019)

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Federal Court ruled in favor of franchisor GNC in setting aside a default entered against it where the franchisor asserted that the failure to timely respond fell short of constituting culpability because it was attributable to a mere miscommunication between GNC’s litigation counsel and GNC’s in-house legal department, and where GNC further contended that the existence of meritorious defenses to Plaintiffs’ claims and corresponding lack of prejudice to Plaintiffs warranted setting aside the clerk’s entry of default; and where Plaintiffs opposed GNC’s Motion on the basis that GNC’s explanation for its untimely participation in this matter evinced a deliberate, strategic choice rather than a negligent oversight.

Kyllonen v. GNC Franchising, LLC, No. 2:18-cv-01526-GMN-BNW, 2019 U.S. Dist. LEXIS 99822 (D. Nev. June 13, 2019)

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In a distribution case, a bone cement recipe owner’s action against a manufacturer of bone cement for the owner’s competitor, alleging theft of a trade secret, misappropriations that were discovered or by the exercise of reasonable diligence should have been discovered more than three years before the suit was filed were time-barred under the Pennsylvania Misappropriations Act (PUTSA), but the owner of the trade secret was permitted to sue for misappropriations that occurred within the three-year period before filing of the Complaint because Pennsylvania applied the rule of separate accrual to trade secret misappropriations of a continuing nature based on the text of the PUTSA and Pennsylvania’s common law rule of separate accrual of the cause of action.

Heraeus Med. GmbH v. Esschem, Inc., No. 18-1368, 2019 U.S. App. LEXIS 18636 (3d Cir. June 21, 2019)

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