Johnson v. FranChoice, Inc.

MICHAEL JOHNSON and STRONG LIFE LLC, Plaintiffs, v. FRANCHOICE, INC. and CHRIS CYNKAR, Defendants.

Case No. 19-cv-1417 (MJD/ECW)

UNITED STATES DISTRICT COURT DISTRICT OF MINNESOTA

November 25, 2020

ORDER

This matter is before the Court on Plaintiffs' Motion to Amend Complaint (Dkt. 65) ("Motion"). For the reasons stated below, the Motion is denied.

I. FACTUAL AND PROCEDURAL BACKGROUND

A. General Background

Plaintiffs initiated this case on May 29, 2019 along with the contemporaneous filing of several related cases (involving different plaintiffs) against Defendant FranChoice, Inc. ("FCI"), a franchise broker, and a number of its agents, including Defendant Chris Cynkar ("Cynkar"), related to their referral of a franchise opportunity to Plaintiffs involving non-party ILKB, LLC ("ILKB"), the franchisor of "iLoveKickboxing.com" franchises. (See Dkt. 1.)

The Complaint contained a claim for common law fraud. (Id. ¶¶ 37-41.) Defendants filed a Motion for Partial Dismissal of the Complaint on June 28, 2019. (Dkt. 11.) However, Defendants did not move to dismiss the fraud-related claim for a lack of particularity under Rule 9(b). (See Dkt. 13.)

B. The Parties' Joint Discovery Plan and the Court's Scheduling Orders

On May 14, 2019, counsel for both parties developed and filed a Joint Discovery Plan applicable not only to the similar cases that existed at that time but also to the cases that were expected to be filed shortly thereafter, such as the present case. (See Mount Holly Kickboxing LLC v. FranChoice, Inc., Case No. 19-cv-300 (MJD/ECW), Dkt. 24.) The Joint Discovery Plan provided in relevant part as follows:

The parties have collectively identified the following factual issues which should be common to all cases in ILKB Franchisee Claims- Wave I and ILKB Franchisee Claims- Wave II:

* * *

(3) the role of FranChoice and its consultants generally in assisting franchisee candidates in their quest for franchise opportunities;

(4) FranChoice's guidelines, directions, protocols, and marketing representations to franchisee candidates with respect to FranChoice's role and its compliance with any applicable franchise sales laws;

(5) FranChoice's procedures in working with franchisee candidates generally;

(6) the basis for FranChoice's representations regarding their role and expertise in assisting franchisee candidates find franchise opportunities;

(7) the franchisor business of ILKB, LLC;

* * *

With regard to the above common fact issues, the parties agree that there is not a need for duplication of discovery efforts. Accordingly, the parties agree that[:]

(a) Plaintiffs in the Mt. Holly Kickboxing case will promptly serve documentary discovery on the common factual issues set forth abovewhich are part of the discovery allowed below under "Additional Joint Discovery Issues," Section 2(b). As with all discovery of common fact issues, responses to that discovery may be used in ILKB Franchisee Claims- Wave I and ILKB Franchisee Claims -Wave II.

(b) After sufficient documentary discovery is completed, one 30(b)(6) deposition of FranChoice will be conducted regarding the above common factual issues in ILKB Franchisee Claims- Wave I and ILKB Franchisee Claims- Wave II; and(c)

After sufficient documentary discovery is completed, one 30(b)(6) deposition of non-party ILKB, LLC will be conducted regarding the above factual issues in ILKB Franchisee Claims- Wave I and ILKB Franchisee Claims- Wave II.

(Id. at 3-4.) Plaintiffs began propounding written discovery in May 2019. (See, e.g., Dkt. 72-1.)

Subsequently, while the Motion for Partial Dismissal was pending, the Court issued a Pretrial Scheduling Order in the present matter on September 4, 2019, which set the following relevant deadlines:

The parties must commence fact discovery procedures in time to be completed on or before July 1, 2020.

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1. Except as otherwise specifically set forth this section, all motions that seek to amend the pleadings or to add parties must be filed and served within 30 days of the Report and Recommendation on the pending motion to dismiss.

2. All motions that seek to amend the pleadings to include punitive damages, if applicable, must be filed and served on or before October 1, 2019.

3. Except as otherwise specifically set forth this section, all non-dispositive motions and supporting documents, including those that relate to fact discovery, shall be filed and served on or before July 20, 2020.

(Dkt. 28 at 2, 4 (emphases in original).) The Report and Recommendation on the partial motion to dismiss was issued on December 19, 2019 (Dkt. 46), making the deadline to amend the pleadings January 18, 2020.

An Amended Pretrial Scheduling Order was issued by the Court on February 5, 2020. (Dkt. 54.) Fact discovery was extended to January 4, 2021. (Id. at 2.) Otherwise, the relevant deadlines remained the same.

A Second Amended Scheduling Order was issued on November 10, 2020. (Dkt. 77.) Fact discovery was extended to March 4, 2021. (Id. at 2.) Non-dipositive motions relating to fact discovery were extended to June 15, 2020. (Id.) Dispositive motions were extended to June 20, 2021. (Id. at 2.) Otherwise, the relevant deadlines remained the same. (Id.)

C. First Motion to Amend to Add Punitive Damages

Plaintiffs previously filed a timely motion to amend the Complaint to add a claim for punitive damages. (Dkt. 31.) The only substantive addition to the Complaint was Count VII seeking punitive damages. This proposed count incorporated the allegations in the preceding paragraphs and then alleged as follows:

Defendants deliberately and intentionally disregarded the rights of Plaintiffs and disregarded the substantial likelihood of serious injury and damages to Plaintiffs by representing that they offered to match Plaintiffs only with franchises that Defendants had investigated and vetted; that such franchises were of high quality; and that Defendants would provide Plaintiffs with all knowledge necessary to make an informed decisions [sic], when, in fact:

- Defendants knew that the founder of ILKB, Michael Parrella, had filed for bankruptcy in 2003 and that his discharge had been vacated in 2008; and knew or should have known, in the exercise of reasonable inquiry of Parrella's bankruptcy consistent with their representationsto Plaintiffs, that Parrella's discharge had been revoked for failure to pay federal taxes and that there were two adversary proceedings in the bankruptcy accusing Parrella of fraud and fraudulent transfers.

- Defendants failed to perform any serious, systematic or professional due diligence upon ILKB; instead all they did was talk to a few existing franchisees, many of whom did not own the type of ILKB franchise that Plaintiffs were considering buying, and Defendants prepared no report, summary or investigation of ILKB.

- Defendants simply took representations of ILKB about the nature of the franchise, including the representations that it was suitable for absentee ownership; that no units had closed; that average ILKB franchisees made revenues and profits at a certain level; and that ILKB did all of the marketing for franchisees, and passed them on to Plaintiffs without checking on them.

- Defendants knew that ILKB engaged in blatantly illegal marketing techniques as early as March 2015 and never questioned whether such techniques had ceased, thus exposing Plaintiffs to the high likelihood, if not certainty, that Plaintiffs would be the victims of fraud.

- Defendants disregarded complaints and warning signs from ILKB franchisees as the whining of "stupid, selfish and ungrateful franchisees" instead of investigating such complaints and determining whether they were true.

- Defendants made specific representations as set forth in the proposed second amended complaint about ILKB without investigating or verifying them, when such representations were false and were known or should have been known to Defendants as false.

(Dkt. 33-2 ¶ 59.)

On May 6, 2020, the Court granted in part and denied in part the motion, allowing only the following allegations in support of the proposed Count VII for punitive damages to be added:

Defendants deliberately and intentionally disregarded the rights of Plaintiffs and disregarded the substantial likelihood of serious injury and damages to Plaintiffs by representing that they offered to match Plaintiffs only with franchises that Defendants had investigated and vetted; that such franchises were of high quality; and that Defendants would provide Plaintiffs with all knowledge necessary to make an informed decisions [sic], when, in fact:

- Defendants made specific representations as set forth above about ILKB without investigating or verifying them, when such representations were false and were known or should have been known to Defendants as false.

As a result of Defendants' deliberate disregard of Plaintiffs' rights, Plaintiffs are entitled to punitive damages.

(Dkt. 55 at 21 (alteration in original).) In this regard, the Court allowed Plaintiffs to claim punitive damages solely regarding the misrepresentations about ILKB that:

[T]he total investment an ILKB franchisee needed to open for business was $200,000; ILKB franchisees break even in three months, with 200 to 225 members; no ILKB franchise had closed; most franchisees owned four or more locations; ILKB has "taken over all marketing"; Johnson would make roughly $10,000 per month in profit; and an ILKB franchise could be run by absentee owners, all go to the financial viability of an ILKB franchise.

(Id. at 19.)

As part of its ultimate decision, the Court also found as follows:

The Court also agrees with Defendants that allegations in the proposed amended complaint regarding representations made by Defendants to Plaintiffs offering to match them "only with franchises that Defendants had investigated" and then not conducting "any serious, systematic or professional due diligence upon ILKB" or taking ILKB's representations at face value at most amounts to gross negligence on the part of Defendants

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