Kiddie Acad. Domestic Franchising, LLC v. Wonder World Learning, LLC

KIDDIE ACADEMY DOMESTIC FRANCHISING, LLC Plaintiff, v. WONDER WORLD LEARNING, LLC, et al., Defendants.

Civil Action No. ELH-17-3420

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND

November 15, 2019

MEMORANDUM OPINION

This Memorandum Opinion resolves a motion for leave to file a second amended counterclaim, submitted by defendants Wonder World Learning, LLC ("Wonder World" or "WWL") and Sumanth Nandagopal and Supriya Sumanth, who are husband and wife.¹

On November 16, 2017, plaintiff Kiddie Academy Domestic Franchising, LLC ("Kiddie" or "Kiddie Academy") sued its former franchisee, Wonder World, and the franchisee's principals, the Sumanths, alleging trademark and copyright infringement, breach of contract, and breach of guaranty, and seeking declaratory judgment. ECF 1 (the "Complaint"). Plaintiff, a franchisor of early childhood learning centers, alleges that defendants, who opened a Kiddie franchise in Cedar Park, Texas in August 2015, defaulted on their financial obligations and have refused to return copyrighted materials. Id.

In response to Kiddie Academy's lawsuit, defendants filed counterclaims against Kiddie and brought third-party claims against nine of Kiddie's officers. ECF 22 ("Counterclaim"). Counterclaimants contend that Kiddie Academy falsely represented the costs of constructing and operating the franchise and their business prospects, which induced defendants to enter a franchisor-franchisee relationship and to construct a Kiddie childhood center.

Plaintiff moved to dismiss the Counterclaim. But, Judge Marvin Garbis, to whom the case was then assigned, denied the motion and permitted defendants to amend. ECF 24.²

On May 7, 2018, defendants filed a "First Amended Counterclaim And First Amended Third-Party Complaint" against Kiddie and the same nine Kiddie officers. ECF 25 (sometimes called "FAC"). The First Amended Counterclaim contains ten counts lodged under Maryland and federal law, including fraud (Counts One through Three); negligent misrepresentation (Count Four); defamation (Count Five); detrimental reliance (Count Six); and the federal Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. §§ 1971, et seq. (Counts Seven through Ten).

Again, plaintiff moved to dismiss. ECF 27. In a Memorandum Opinion (ECF 33) and Order (ECF 34) dated March 31, 2018, I dismissed the third-party defendants from the suit and dismissed the counts asserted in the FAC, with the exception of Count Four.

Now pending is defendants' "Motion to Allow Filing Of Second Amended Counterclaim And Second Amended Third Party Complaint," filed on June 8, 2019. ECF 40. It is supported by a memorandum of law (ECF 40-1) (collectively, the "Motion" or "Motion to Amend") and five exhibits. ECF 40-3 to ECF 40-7. The proposed "Second Amended Counterclaim and SecondAmended Third-Party Complaint" is docketed at ECF 40-2 (sometimes referred to as "SAC").³ In particular, defendants seek to reinstate all but one of the third-party defendants. Counterclaimants also seek to revive the fraud claims lodged in Counts One, Two, and Three of the FAC, and to amend the allegations contained in Count Four. Id. at 2. And, they seek to increase the amount of damages pleaded in the SAC.

Plaintiff opposes the Motion to Amend on the basis that the proposed amendments are "futile." ECF 41 at 4. Counterclaimants have replied. ECF 42.

No hearing is necessary to resolve the Motion. See Local Rule 105(6). For the reasons that follow, I shall grant the Motion to Amend in part and deny it in part.

I. Procedural Background⁴

As noted, Kiddie Academy initiated the instant suit on November 16, 2017. ECF 1. According to Kiddie, defendants entered into a Franchise Agreement with Kiddie on March 14, 2014, pursuant to which WWL agreed to open and operate a Kiddie franchise for an early childhood learning center in Cedar Park, Texas. Id. ¶ 7; ECF 1-1 (Franchise Agreement). As part of the Franchise Agreement, the Sumanths executed a Personal Guaranty, making them personally liable for WWL's obligations. ECF 1, ¶ 7; ECF 1-1 at 63-64 (Personal Guaranty).

Defendants allegedly defaulted on payments owed to Kiddie under the Franchise Agreement. As a result, Kiddie terminated its relationship with defendants on November 14, 2017. ECF 1, ¶ 16; ECF 1-3 (Termination Notice). Nevertheless, defendants have allegedly retainedKiddie curricular materials and have continued to use its trademarks, copyright materials, and trade dress. ECF 1, ¶¶ 24-25.

As noted, the Complaint lodges claims for trademark and copyright infringement and breach of the Franchise Agreement and Personal Guaranty. Plaintiff also seeks declaratory relief with respect to the defendants' contractual obligations.

Defendants answered the suit and filed the Counterclaim on March 26, 2018. ECF 22. They lodged claims under Maryland and federal law against Kiddie Academy and nine Kiddie Academy officers. Plaintiff moved to dismiss the Counterclaim on April 16, 2018. ECF 23. By Order of April 27, 2018, Judge Garbis directed defendants to amend the Counterclaim. ECF 24.

On May 7, 2018, defendants filed the FAC (ECF 25) against Kiddie Academy and nine Kiddie officers: Greg Helwig, Kiddie's President and Chief Executive Officer; Lene Steelman, Kiddie's Controller/Vice President ("VP") of Accounting; Joshua Frick, Kiddie's VP of Real Estate; David Gould, Kiddie's former Development Manager; Susan Wise, the Chief Financial Officer and Chief Operating Officer; Kevin Murphy, the VP of Operations; Chris Commarota, the VP of Construction; Anthony F. Malizia, former Construction Manager; and William Huggins, Franchise Business Consultant. Id. ¶¶ 6-15.

The FAC contains ten counts. Count One asserts a claim of "(Intentional Misrepresentation) Fraud or Deceit" against Kiddie, Helwig, Steelman, Frick, Gould, Wise, and Murphy. Id. ¶¶ 62-67. Count Two sets forth a claim of "(Fraud in the Inducement)" against Kiddie, Helwig, Steelman, Frick, Gould, Wise, and Murphy. Id. ¶¶ 68-70. Count Three asserts a claim of "(Intentional Misrepresentation) (Concealment or Non-Disclosure)" against Kiddie, Helwig, Steelman, Frick, Gould, Wise, and Murphy. Id. ¶¶ 71-81. In Count Four, counterclaimants assert "Negligent Misrepresentation" against Kiddie, Helwig, Steelman, Frick,Gould, Wise, and Murphy. Id. ¶¶ 82-88. Count Five, lodged against Kiddie, Commarota, Malizia, and Huggins, asserts "(Defamation Per Se of a Private Individual) Supriya Sumanth." Id. ¶¶ 89-92. Count Six contains a claim of "Detrimental Reliance," filed against Kiddie, Helwig, Steelman, Frick, Gould, Wise, and Murphy. Id. ¶¶ 93-96. Counts Seven, Eight, and Nine allege RICO violations under 18 U.S.C. §§ 1961 et seq., against Kiddie, Helwig, Steelman, Frick, Gould, Wise, and Murphy, based on mail fraud and wire fraud. Id. ¶¶ 97-114. In Count Ten, also under RICO, counterclaimants allege that Kiddie, Helwig, Steelman, Frick, Gould, Wise, and Murphy conspired to violate 18 U.S.C. § 1962(c), in violation of 18 U.S.C. § 1962(d). Id. ¶¶ 115-20.

Kiddie moved to dismiss the FAC. ECF 27. The motion was supported by a memorandum of law (ECF 21-1) and one exhibit. See ECF 27-2 (the Franchise Agreement). Plaintiff argued that the statute of limitations had run on defendants' counterclaims. ECF 27-1 at 13-19. And, Kiddie argued that the FAC failed to state plausible claims. As relevant here, plaintiff contended that the fraud claims lodged in Counts One and Two failed because they did not satisfy the heightened pleading requirements of Fed. R. Civ. P. 9(b). Id. at 19-22. According to plaintiff, Count Three's fraudulent concealment claim also warranted dismissal because defendants failed plausibly to allege the "special relationship required in order to impose a duty on Kiddie Academy to disclose material facts to them." Id. at 22. Likewise, plaintiff moved to dismiss the negligent misrepresentation claim raised in Count Four, asserting that it was "based on alleged projections or withholding of information, not affirmative statements." Id. at 23. Defendants opposed the motion to dismiss (ECF 30), and Kiddie replied. ECF 31.

By Memorandum Opinion (ECF 33) and Order (ECF 34) of March 31, 2019, I granted in part and denied in part Kiddie's motion to dismiss. As a preliminary matter, I dismissed the claims against the third-party defendants because defendants had failed to effect service, as required byFed. R. Civ. P. 4(m). ECF 33 at 3-4. Thus, I "consider[ed] the [motion to dismiss] only with regard to the Amended Counterclaim filed by the defendants." Id.

On the face of the submission, I was unable to conclude that defendants' claims were barred by limitations. Id. at 24-28. Therefore, I proceeded to examine plaintiff's contention that the FAC failed to state claims under Fed. R. Civ. P. 12(b)(6) and Fed. R. Civ. P. 9(b). With the exception of Count Four, I dismissed the counts lodged in the FAC. ECF 33 at 59.

With respect to Counts One and Two, I observed: "Critically, defendants fail to provide any facts to support the assertions that Kiddie deliberately made statements with the intent to deceive or for the purpose of defrauding the counterclaimants. Id. at 33. Equally problematic, defendants rooted their fraud claims in "repeated false assurances and predictions," which "are not actionable for fraud, unless defendants plead with sufficient particularity that such statements were knowingly false or 'made with reckless indifference' to their truth and 'made for the purpose of defrauding' them," something defendants "ha[d] not done." Id. at 35. Because defendants failed plausibly to allege that Kiddie Academy intended to deceive them, I granted the motion to dismiss with respect to Count One and Count Two. Id.

I also dismissed Count Three. I observed that in Maryland, to state a claim of fraudulent concealment, the plaintiff must allege that the defendant had a duty to disclose material facts, which arises only "'in certain relationships such as a confidential or...