Fransmart Llc v. Freshii Dev. Llc

• Decision Date: 01 March 2011
• Docket Number: Case No. 1:10cv257.
• Parties: FRANSMART, LLC, Plaintiff,v.FRESHII DEVELOPMENT, LLC, Defendant.
• Court: U.S. District Court — Eastern District of Virginia

768 F.Supp.2d 851

FRANSMART, LLC, Plaintiff,

v.FRESHII DEVELOPMENT, LLC, Defendant.

Case No. 1:10cv257.

United States District Court, E.D. Virginia,Alexandria Division.

March 1, 2011.

Ellen R. Lokker, Lokker Law PLC, Reston, VA, Stephen Andrew Cobb, Odin Feldman & Pittleman PC, Fairfax, VA, for Plaintiff.Joel Layton Dahnke, Joel L. Dahnke, Esquire PLC, Fairfax, VA, for Defendant.

MEMORANDUM OPINION

T.S. ELLIS, III, District Judge.

This is a diversity breach-of-contract dispute between two limited liability companies. Plaintiff, a franchise consulting company, contracted with defendant, a franchisor, to assist defendant in marketing and selling defendant's franchises. When defendant ceased making payments under the terms of the contract, plaintiff sued for breach. In response, defendant raises a number of affirmative defenses, including (1) lack of standing, (2) fraudulent inducement, (3) lack of specificity, (4) lack of mutuality, and (5) unconscionability.

At issue are the parties' cross-motions for summary judgment. Specifically, plaintiff moves for summary judgment on its breach-of-contract claim and for summary judgment on each of defendant's affirmative defenses. Defendant, in turn, moves for summary judgment on the following three affirmative defenses: (1) lack of standing, (2) lack of specificity, and (3) lack of mutuality.

For the reasons that follow, summary judgment must be granted in favor of plaintiff on the breach-of-contract claim and on all five of defendant's affirmative defenses.

I.¹

Plaintiff, Fransmart, LLC (“Fransmart”), a Delaware limited liability company with its principal place of business in Alexandria, Virginia, is in the business of assisting franchisors in the sale of franchises. Fransmart was formed in October 2009 under the name DanCo Holdings, LLC (“DanCo”). Fransmart's predecessor-in-interest, now Fransmart Royalty Trust, LLC (“Royalty Trust”), was formed in 2003 as Fransmart, LLC (“Old Fransmart”). In late January or early February 2010, Old Fransmart transferred substantially all of its assets and liabilities to DanCo. Thereafter, DanCo changed its name to Fransmart and Old Fransmart changed its name to Royalty Trust. Dan Rowe has served as the President and Chief Executive Officer (“CEO”) of both Old Fransmart and Fransmart.

Defendant, Freshii Development, LLC (“Freshii”), a Delaware limited liability company with its principal place of business in Chicago, Illinois, is the franchisor of fast-food restaurants that offer fresh, healthy foods instead of the unhealthy alternatives found at traditional fast-food establishments. Freshii's founder, Matthew Corrin, is a young entrepreneur who entered into the healthy-food restaurant business in 2005 when he opened his first restaurant, Lettuce Eatery, in Toronto. Corrin experienced considerable success with his first restaurant and quickly expanded to several additional Lettuce Eatery restaurants in the Toronto area.

In late 2007, Corrin began to consider franchising his fast-casual healthy restaurant concept in the United States under the name “Freshii.” To this end, Corrin hired the law firm DLA Piper to create a Franchise Disclosure Document and a standard franchise agreement. Freshii then began offering franchises for sale in the United States in March 2008. At the time Freshii started its franchising operations in the United States, Freshii's Chief Operating Officer, Anthony DeSalvo, had substantial experience in the restaurant business.

In April 2008, Corrin and Rowe met in Chicago to discuss a potential business relationship. During the course of their conversations, Rowe represented that Old Fransmart would provide a “sound expansion model for Freshii to create a successful nationwide franchise brand in the United States and world-wide.” Freshii contends that Rowe's statement was consistent with the statements on Old Fransmart's website, which claimed that “[Old] Fransmart's consulting services are encompassed in the ‘Fransmart Way’ program, our proprietary business methodology for developing emerging brands into franchise chains.” During the April 2008 meeting. Rowe also represented to Corrin that:

[Old] Fransmart would be a strong long-term business partner because it was a company with a national presence in the United States, with offices on both coasts, full time public relations and marketing teams, and with numerous employees and staff experienced with start-up restaurant franchisors and who were not paid solely on a commission basis.

Following the April 2008 meeting, Rowe and Corrin spent the next few months negotiating the terms of a business agreement. The two representations made by Rowe during the April 2008 meeting—the representation about Old Fransmart's use of a proprietary “model” and the representation about Old Fransmart's financial viability—were repeated in emails and telephone conversations throughout the subsequent negotiation process.

The negotiations led, in the end, to the execution of a “Consulting Agreement” (hereinafter “Agreement”) on August 15, 2008. The Agreement was drafted either by Rowe or his attorney, and Corrin represented that his own attorney reviewed the Agreement. The Agreement, which lasts for a period of ten years, makes Old Fransmart “the sole and exclusive consultant to [Freshii] in the marketing and sales of individual franchises” in the United States and overseas (except Canada). The Agreement states that it “is for franchise sales services only and does not include consulting or the rights to any [Old] Fransmart technology including but not limited to Autopilot, Franchise in a Box, etc.”

The Agreement clearly delineates Old Fransmart's duties in a section titled “Duties of Consultant.” Under the sub-paragraph titled “General Duties,” the Agreement states that Old Fransmart “shall be solely and exclusively ² responsible for marketing and selling Qualified Franchise Units (as defined below), and will make such personnel available as [Old Fransmart] deems necessary for that purpose throughout the term of this Agreement.” After defining Qualified Franchise Units, the Agreement states that Old Fransmart “will use commercially reasonable efforts to identify and recruit potential franchisees on [Freshii's] behalf.” In the following sub-paragraph, which is labeled “Performance Requirements,” the Agreement lists a specific number of franchises that Old Fransmart must sell each year.

The Agreement also contains compensation, termination, and non-compete provisions. Specifically, the detailed compensation provisions require Freshii to pay Old Fransmart: (1) fifty percent of certain fees, including the initial franchise fees; (2) twenty percent of the franchise royalty revenue: and (3) five percent of the supply revenue. Under the terms of the Agreement, Freshii must pay royalties to Old Fransmart not only during the ten-year period covered by the agreement; it must continue to pay royalties after the Agreement expires or “forevermore.” The Agreement's termination provisions state that the Agreement terminates automatically at the end of the ten-year term, but Freshii may terminate the Agreement earlier if Old Fransmart fails to meet its sales quota or otherwise defaults on its material obligations.³ If the basis for termination is Old Fransmart's failure to meet its sales quota, the Agreement allows Old Fransmart to cure its failure by meeting the sales quota for the current year and the following year by the end of the following year. The Agreement also includes a provision expressly permitting Old Fransmart to provide services to Freshii's competitors.

The Agreement states that Freshii has the right to approve all franchisees “in its sole discretion which shall not be unreasonable withheld.” The Agreement also contains an assignment provision, which states that “[t]he provisions of this Agreement shall be binding upon and inure to the benefit of the parties hereto and to their successors and assigns.” Finally, the Agreement has a choice-of-law provision, which provides that the Agreement “shall be interpreted and construed exclusively under the laws of the Commonwealth of Virginia.”

Once the Agreement was executed by the parties, Old Fransmart began selling franchises on Freshii's behalf and, as required by the terms of the Agreement, Freshii paid Old Fransmart for all franchise sales deals from August 2008 until approximately the end of January 2010. In late January or early February 2010, Old Fransmart restructured its business. According to Fransmart, the purpose of the restructuring was to enable Rowe to acquire majority ownership of the business and to allow the other owners of the company to maintain a passive interest in certain revenues without contributing additional capital. As part of the restructuring, Old Fransmart transferred substantially all of its assets and liabilities to another limited liability company, DanCo, in exchange for a continuing right to receive a portion of the business's revenues. As part of the transfer, Old Fransmart assigned to DanCo all of its contracts with franchisors for franchise sales, including the Agreement with Freshii. Following the asset transfer and assignment, DanCo changed its name to Fransmart and Old Fransmart changed its name to Royalty Trust. Royalty Trust continues to exist as a passive entity, collecting revenue and paying down its sole remaining bank loan liability.

Pertinent to this dispute are the similarities and differences between Old Fransmart and Fransmart. To begin with, Old Fransmart had twenty-four members at the time of the assignment, and its managers were Rowe, Chris Bright, Cal Simmons, and Jonathan Legg. Immediately after the assignment, Fransmart's sole member and manager was Rowe.⁴ Despite these differences in ownership and management structure, Fransmart carried on Old Fransmart's business operations in the same manner, particularly with respect to the Freshii account. Prior to the...