Johnson v. FranChoice, Inc., Case No. 19-cv-1417 (MJD/ECW)
| Decision Date | 19 December 2019 |
| Docket Number | Case No. 19-cv-1417 (MJD/ECW) |
| Parties | MICHAEL JOHNSON and STRONG LIFE LLC, Plaintiffs, v. FRANCHOICE, INC. and CHRIS CYNKAR, Defendants. |
| Court | U.S. District Court — District of Minnesota |
This matter is before the Court on Defendants' Motion for Partial Dismissal Pursuant to Rule 12(b)(6). (Dkt. 11.) This case has been referred to the undersigned United States Magistrate Judge for a report and recommendation pursuant to 28 U.S.C. § 636 and Local Rule 72.1. For the reasons discussed below, the Court recommends that Defendants' Motion for Partial Dismissal Pursuant to Rule 12(b)(6) be granted in part and denied in part.
The operative Complaint alleges as follows: Michael Johnson is an individual citizen of Michigan and resides in Michigan. (Dkt. 1 ¶ 4.) Johnson formed Plaintiff Strong Life, LLC as the vehicle for acquiring for acquiring a franchise from non-party ILKB, LLC ("ILKB"), the franchisor of "iLoveKickboxing.com" franchises, which are fitness facilities dedicated to kickboxing, a form of physical fitness. (Id. ¶¶ 3-5.) At all relevant times, ILKB was a New York limited liability company with its headquarters in New York State. (Id. ¶ 7.) ILKB offered and sold franchises only in and from New York State. (Id.)
Johnson became interested in purchasing a franchise in 2015. (Id. ¶ 10.) Johnson had a call with Defendant Chris Cynkar ("Cynkar"), a franchise broker with Defendant FranChoice, Inc. ("FCI"). (Id. ¶ 11.) Cynkar is an individual residing in Pittsburgh, Pennsylvania. (Id. ¶ 6.) FCI is a corporation formed under the laws of Minnesota, with its principal place of business in Eden Prairie, Minnesota. (Id. ¶ 5.) It is a franchise broker that assists prospective franchisees in identifying, investigating, selecting and acquiring franchises. (Id.) On July 22, 2016, Cynkar spoke with Plaintiffs to get a sense of what they were looking for in a franchise - namely, a business that they could own in an absentee or semi-absentee manner. (Id. ¶ 11.) Cynkar told Plaintiffs on this call that he was a franchise owner and entrepreneur, and that he "taught at Carnegie Mellon" in the area of business/entrepreneurship. (Id.) Cynkar also said that FCI conducts due diligence on the franchises they represent and that they are confident in the options they present. (Id.)
Through its website (https://www.franchoice.com/), FCI held itself out as directing prospective franchisees to "high quality franchise businesses that match your requirements" and that it would match "entrepreneurs like you with the perfect franchise business." (Id. ¶ 12.) FCI stressed that Plaintiffs could "avoid the confusion of researching" franchise opportunities and could focus on those franchises that FCI had "selected . . . as franchise businesses matching [his] requirements." (Id.) FCI further represented that "[t]hey will be by your side coaching you and making sure you are getting the information you need in order to make the best decision for you." (Id.)
On August 11, 2016, Johnson spoke with Cynkar about various franchise opportunities. (Id. ¶ 13.) Cynkar presented Johnson with four franchise concepts: Supercuts, ILKB, Mosquito Joe, and Deka Lash. (Id.) On this call, Cynkar also made a number of representations about the ILKB franchise opportunity including that: the 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" for franchisees and all marketing is done on the Internet; Johnson would make roughly $10,000 per month in profit; an ILKB franchise could be run by absentee owners; and the owners would not have to spend more than five to ten hours per week dealing with the business. (Id.)
Cynkar put Johnson in touch with ILKB, and ILKB repeated and elaborated upon the representations that Cynkar had made. (Id. ¶ 15.) As Johnson continued to meet and communicate with ILKB to discuss purchasing the franchise, he reported his discussions with ILKB to Cynkar, who "coached" him throughout those discussions toward a decision to purchase an ILKB franchise. (Id.)
In reliance upon the representations by FCI and Jones, Johnson signed a franchise agreement with ILKB for a unit to be located in Michigan and paid ILKB $49,999. (Id. ¶ 16.) In addition, Plaintiffs incurred substantial expenses building out, outfitting and equipping their studio and undertook substantial loan and lease obligations. (Id.) Plaintiffs opened the studio in Brighton, Michigan on October 23, 2017. (Id.)
FCI and Cynkar received a commission from ILKB for the sale of the franchise to Johnson that was in excess of $30,000 of the $49,999 that Johnson paid ILKB. (Id. ¶ 17.)
After opening the business, Plaintiffs learned that the representations that FCI and Cynkar had made to them relating to ILKB franchises were untrue, including learning that the representations that no ILKB studios had closed were false; that most franchisees did not own four or more locations; that ILKB did not handle all of a franchisee's marketing; Johnson did not reach the breakeven point in the third month and neither did most franchisees; representations regarding profitability were false; the costs related to opening a studio were higher than represented; and that absentee ownership is not a feasible model for an ILKB franchise. (Id. ¶¶ 18-20.)
Defendants also failed to do or disclose their due diligence by not discovering or communicating to Plaintiffs the existence of lawsuits and a bankruptcy related to ILKB's founder and its affiliates. (Id. ¶¶ 22-23.) Plaintiffs assert that had they known of this information they would not have purchased any franchises from ILKB. (Id. ¶ 23.)
Plaintiffs assert claims for relief against Defendants for their alleged violations of the New York Franchise Sales Act, N.Y. Gen. Bus. L. 680 et seq.; Michigan Franchise Investment Law, Mich. Comp. L. § 445.1501 et seq.; and the Minnesota Franchise Act, Minn. Stat. §80C.01 et seq. Plaintiffs also assert claims against Defendants for common law fraud, fraud in the omission, and negligent misrepresentation.
Defendants move to dismiss Plaintiffs' New York Franchise Sales Act ("NYFSA"), Michigan Franchise Investment Law ("MFIL"), and Minnesota Franchise Act ("MFA") claims.
In considering a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the pleadings are construed in the light most favorable to the non-moving party, and the facts alleged in the complaint must be taken as true. See Ashley County, Ark. v. Pfizer, Inc., 552 F.3d 659, 665 (8th Cir. 2009). In addition, a court must afford the plaintiff all reasonable inferences from those allegations. See Blankenship v. USA Truck, Inc., 601 F.3d 852, 853 (8th Cir. 2010). At the same time, to withstand a motion to dismiss under Rule 12(b)(6), litigants must properly plead their claims under Federal Rule of Civil Procedure 8 and meet the principles articulated by the United States Supreme Court in Iqbal and Twombly.
Under Rule 8(a)(2), a pleading must contain a "short and plain statement of the claim showing that the pleader is entitled to relief." Fed. R. Civ. P. 8(a)(2). The pleading standard articulated by Rule 8 "does not require detailed factual allegations, but it [does demand] more than an unadorned, the-defendant-unlawfully-harmed-me-accusation." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotation marks and citations omitted). A "pleading that offers 'labels and conclusions' or 'a formulaic recitation of the elements of a cause of action will not do.'" Id. (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007)). Thus, to "survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to 'state a claim to relief that is plausible on its face.'" Id. (quoting Twombly, 550 U.S. at 570). "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." Id. (quoting Twombly, 550 U.S. at 556). "[T]he plausibility standard, which requires a federal court complaint to state a claim for relief that is plausible on its face, . . . asks for more than a sheer possibility that a defendant has acted unlawfully." Ritchie v. St. Louis Jewish Light, 630 F.3d 713, 717 (8th Cir. 2011) (internal quotation and citation omitted). "Determining whether a complaint states a plausible claim for relief will, . . . be a context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Iqbal, 556 U.S. at 679 (citation omitted).
Following Twombly and consistent with Iqbal, the Eighth Circuit explained:
While a plaintiff need not set forth "detailed factual allegations," Twombly, 127 S. Ct. at 1964, or "specific facts" that describe the evidence to be presented, Erickson v. Pardus, 551 U.S. 89, 127 S. Ct. 2197, 2200 (2007) (per curiam), the complaint must include sufficient factual allegations to provide the grounds on which the claim rests. Twombly, 127 S. Ct. at 1965 n. 3. A district court, therefore, is not required "to divine the litigant's intent and create claims that are not clearly raised," Bediako, 354 F.3d at 840, and it need not "conjure up unpled allegations" to save a complaint. Rios v. City of Del Rio, 444 F.3d 417, 421 (5th Cir. 2006) (internal quotation omitted).
Gregory v. Dillard's, Inc., 565 F.3d 464, 473 (8th Cir. 2009).
If matters outside the pleadings "are presented to and not excluded by the court, the motion must be treated as one for summary judgment under Rule 56." Fed. R. Civ. P. 12(d). While matters "outside the pleadings" may not be considered in deciding a Rule 12 motion to dismiss, documents "necessarily embraced by the complaint are not matters outside the...
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