Yumilicious Franchise, L.L.C. v. Barrie

• Decision Date: 06 April 2016
• Docket Number: No. 15–10508.,15–10508.
• Citation: 819 F.3d 170
• Parties: YUMILICIOUS FRANCHISE, L.L.C., Plaintiff–Appellee v. Matthew BARRIE; Kelly Glynn ; Why Not, L.L.C.; Brian Glynn, Defendants–Appellants.
• Court: U.S. Court of Appeals — Fifth Circuit

819 F.3d 170

YUMILICIOUS FRANCHISE, L.L.C., Plaintiff–Appellee

v.Matthew BARRIE; Kelly Glynn ; Why Not, L.L.C.; Brian Glynn, Defendants–Appellants.

No. 15–10508.

United States Court of Appeals, Fifth Circuit.

April 6, 2016.

Todd C. Donohue, Wolf Law Firm, P.C., Southlake, TX, Aaron Douglas Davidson, Klemchuk, L.L.P., Aaron Douglas Davidson, Munck Wilson Mandala, L.L.P., Aaron Douglas Davidson, Baker Botts, L.L.P., Dallas, TX, for Plaintiff–Appellee.

Gary E. Smith, Gary E. Smith, P.C., Dallas, TX, for Defendants–Appellants.

Before REAVLEY, JOLLY, and ELROD, Circuit Judges.

JENNIFER WALKER ELROD

, Circuit Judge:

Yumilicious Franchise, L.L.C., a Texas frozen yogurt company, sued the defendant-appellants, franchisees based in South Carolina, after the franchise agreement between them soured. The franchisees responded with a countercomplaint liberally sprinkled with counterclaims. In a series of rulings, the district court granted partial summary judgment in favor of Yumilicious and dismissed the remainder of the franchisees' counterclaims with prejudice for failure to state a claim under Rule 12(b)(6)

. Because the franchisees failed to plead the required elements of their statutory claims, failed to introduce facts suggesting non-economic injuries, failed to introduce evidence of fraudulent inducement, and contractually waived their right to punitive and consequential damages, we AFFIRM the district court's grant of partial summary judgment and AFFIRM the dismissal of the franchisees' remaining counterclaims.

I.

Yumilicious is a growing company that franchises frozen yogurt restaurants in Texas. In 2010, Matthew Barrie, Kelly Glynn, and Brian Glynn, the principals of Why Not, L.L.C., entered into an agreement to franchise two Yumilicious frozen yogurt locations in South Carolina. The franchise agreements bound Yumilicious and Why Not. Barrie, Kelly Glynn and Brian Glynn also personally guaranteed Why Not's obligations under the franchise agreements.

Yumilicious filed this lawsuit against Why Not and the individual defendants (collectively "Why Not") alleging Why Not breached the franchise agreement when it closed one of its stores without permission and failed to make payments for royalties and products. Why Not counterclaimed asserting breach of contract, fraud, fraudulent and negligent inducement, and violations of the Texas Deceptive Trade Practices Act, the Business Opportunity Act of Texas, and the Federal Trade Commission Act Disclosure Rules (the Franchise Rule). Why Not alleged that Yumilicious induced it to enter the franchise agreements by mentioning pending negotiations with national suppliers but that the South Carolina stores were doomed from the start because Yumilicious did not conclude those supply agreements. Ultimately, Yumilicious reached an agreement with a Texas regional supplier that would only ship products to South Carolina by the pallet, a quantity too large for one or two stores to use economically. Why Not also argued it was unable to obtain product from a national supplier at prices similar to the amount paid by Texas franchisees to the Texas regional supplier.

The district court first dismissed Why Not's breach of contract, negligent misrepresentation and fraud claims as inadequately pleaded and its Deceptive Trade Practices Act, Federal Trade Commission Act and Business Opportunity Act claims as time-barred. Yumilicious Franchise, L.L.C. v. Barrie (Yumilicious I ), No. 3:13–cv–4841–L, 2014 WL 4055475 (N.D.Tex. Aug. 14, 2014)

. Why Not amended its pleading by adding a fraudulent inducement claim and asked for reconsideration of the time-barred claims. The district court concluded the statutory claims were not time barred but failed as inadequately pleaded. Yumilicious Franchise, L.L.C. v. Barrie (Yumilicious II ), No. 3:13–cv–4841–L, 2015 WL 1822877 (N.D.Tex. Apr. 22, 2015)

. The district court also granted summary judgment for Yumilicious on Why Not's counterclaims based on fraud, negligent misrepresentation, and fraudulent inducement and on its request for consequential and punitive damages and attorneys' fees. Yumilicious Franchise, L.L.C. v. Barrie (Yumilicious III ), No. 3:13–cv–4841–L, 2015 WL 1856729 (N.D.Tex. Apr. 23, 2015). The district court sua sponte directed the parties to address whether Why Not's remaining claims relating to the Franchise Disclosure Document failed as a matter of law or were inadequately pleaded. After briefing, the district court concluded those claims failed for lack of a private right of action under the Federal Trade Commission Act and dismissed them with prejudice. Yumilicious Franchise, L.L.C. v. Barrie (Yumilicious IV ), No. 3:13–cv–4841–L, 2015 WL 2359504 (N.D.Tex. May 18, 2015). The district court also found for Yumilicious on its breach of contract claims and ordered Why Not to pay damages. Why Not appeals the dismissal of its counterclaims. It does not challenge the dismissal of its contract claims or the finding in favor of Yumilicious on Yumilicious's breach of contract claim.

II.

We review a district court's dismissal for failure to state a claim de novo. Reliable Consultants, Inc. v. Earle, 517 F.3d 738, 742 (5th Cir.2008)

. We take all well-pleaded facts as true, viewing them in the light most favorable to the plaintiff (or here, the counterclaimant), and ask whether the pleadings contain "enough facts to state a claim to relief that is plausible on its face." Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009).

We consider in turn each of Why Not's claims that were dismissed under Rule 12(b)(6)

.

A.

Why Not alleged that Yumilicious's conduct in negotiating the franchise agreements violated the Texas Deceptive Trade Practices Act (DTPA) and the Texas and South Carolina Business Opportunity Acts (BOA).¹ The Texas Business Opportunity Act explicitly states that violations of its terms give rise to a deceptive trade practice claim under the DTPA but does not itself provide a cause of action. Tex. Bus. & Com.Code § 51.302

. Therefore, the Texas BOA and Texas DTPA claims are properly considered a single claim under the Texas DTPA. Why Not, therefore, has one Texas statutory claim for violations of the Texas Deceptive Trade Practices Act's ban on misrepresentation or omission. Tex. Bus. & Com.Code §§ 17.46

(defining a deceptive trade practice), 17.50 (creating a private cause of action for a consumer injured through detrimental reliance on a deceptive trade practice).

The Texas DTPA makes it illegal for a seller or franchisor to "represent [ ] that goods or services have ... characteristics [or] benefits ... which they do not have" or to "fail[ ] to disclose information concerning goods or services which was known at the time of the transaction if such failure to disclose such information was intended to induce the consumer into a transaction into which the consumer would not have entered had the information been disclosed." Tex. Bus. & Com.Code §§ 17.46(b)(5)

, (b)(24). In short, § 17.46(b)(5) bans misrepresentations made by a franchisor while § 17.46(b)(24) bans omissions made by a franchisor.

Why Not alleged that Yumilicious violated these provisions because: (1) Yumilicious failed to provide updated disclosures or an updated Franchise Disclosure Document (FDD)² ; (2) the FDD Yumilicious did provide did not contain disclosures regarding approved vendors or distributors for required products; (3) the information disclosed by Yumilicious in the FDD underestimated start-up costs; and (4) the FDD included some but not all financial performance information previously disclosed by Yumilicious.

Why Not also alleged that Yumilicious's CEO made statements to Why Not indicating Yumilicious was preparing "to go national and supply products to stores outside Texas" and gave repeated assurances that Yumilicious was in the process of negotiating a contract with a national distributor who would offer fair shipping costs.

None of Why Not's allegations satisfy the statutory requirements for a private cause of action under § 17.50

. To begin, Why Not must allege Yumilicious committed a deceptive trade practice as defined by § 17.46. Why Not did not allege that Yumilicious knew any details about the start-up costs,³ financial performance, or other items discussed in the FDD that it allegedly failed to disclose. Furthermore, Why Not acknowledged that it knew throughout negotiations that it would have to obtain supplies from the current supplier in pallet-sized orders. Section 17.46(b)(24), however, "requires intentional omission of a material fact by a Seller for the purpose of duping the customer." Sidco Prods. Mktg, Inc. v. Gulf Oil Corp., 858 F.2d 1095, 1100 (5th Cir.1988) (discussing then § 17.46(b)(23) which has since been renumbered (24)). Because "one cannot be held liable under the DTPA for failure to disclose facts about which he does not know," Why Not did not allege any illegal omissions. Robinson v. Preston Chrysler–Plymouth, Inc., 633 S.W.2d 500, 502 (Tex.1982).

Nor do the statements made by Yumilicious's CEO constitute misrepresentations under § 17.46(b)(5)

. Yumilicious's CEO represented that the company was in negotiations with a national supplier when the company's conversations with Why Not took place. The parties agree that Yumilicious was in such negotiations at the time. The failure of those negotiations does not make the prior statement false. Why Not did not allege that Yumilicious promised to conclude an agreement with a national supplier. Without an affirmative misrepresentation or material omission, Why Not's claim did not state a deceptive trade practice under § 17.46(b)(5)

.

Even if Yumilicious's conduct during negotiations did constitute a deceptive trade...