Orange Rabbit, Inc. v. FranChoice, Inc., Case No. 19-cv-687 (MJD/ECW)
| Decision Date | 19 December 2019 |
| Docket Number | Case No. 19-cv-687 (MJD/ECW) |
| Parties | THE ORANGE RABBIT, INC. and NICHOLAS GIACOPELLI, Plaintiffs, v. FRANCHOICE, INC. and RAY FANNING, 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. 18.) 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 denied.
Plaintiffs filed the initial Complaint on March 14, 2019. (Dkt. 1.) Defendants subsequently moved to dismiss the Complaint. (Dkt. 7.) This Motion was mooted after Plaintiffs filed an Amended Complaint. (Dkt. 24.)
The operative Amended Complaint alleges as follows: Plaintiff Nicholas Giacopelli ("Giacopelli") resides in and is a citizen of New Jersey. (Dkt. 14 ¶ 4.) Plaintiff Orange Rabbit, Inc. ("Orange Rabbit") is a New Jersey corporation with its principal place of business in New Jersey. (Id. ¶ 5.) Giacopelli became interested in purchasing a franchise in early 2016. (Id. ¶ 11.) To this end, he was introduced to Defendants Franchoice, Inc. ("FCI") and Ray Fanning ("Fanning"). (Id.) FCI is a corporation formed under the laws of Minnesota, with its principal place of business in Eden Prairie, Minnesota. (Id. ¶ 6.) It is a franchise broker that assists prospective franchisees in identifying, investigating, selecting, and acquiring franchises. (Id.) Fanning, an FCI representative, is an individual residing in Arnold, Maryland and is a citizen of that state. (Id. ¶ 7.)
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 represented that it would match "entrepreneurs like you with the perfect franchise business." (Id. ¶ 13.) 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.)
During a telephone conversation on February 11, 2016, Fanning told Giacopelli that he had over 20 years' experience in franchising; that he was a "franchise expert" across multiple industries; that he personally had owned many small businesses and franchises; and that he was a broker because he was "passionate about helping people" and liked to "invest in people." (Id. ¶ 12.) Fanning claimed he had helped thousands of people achieve their business ownership goals and offered to "coach" Giacopelli though the "due diligence" process of evaluating the franchise. (Id.)
On February 11, 2016, Fanning provided Giacopelli with documentation representing that: a franchise provided "a tried and proven concept with operations, marketing, distribution, accounting, technical support, brand, etc. all in place, tested, re-tested and ready for a sharp, hard-working entrepreneur to join the team"; most franchises allowed someone with little experience in the business to learn new skills and build a thriving business using the franchisor's system; and a franchise disclosure document disclosed the history of the franchise and its officers and directors, all costs and fees that the franchisee would be subject to, any relevant litigation history of the company or its officers, and "any business failures, ownership transfers, franchise agreement terminations or other potentially adverse information relating to the success rate of the existing units in the system." (Id. ¶ 14.)
On February 19, 2016, Fanning called Giacopelli to discuss four potential franchisors, one of which was ILoveKickBoxing. (Id. ¶ 15.) Non-party ILKB, LLC ("ILKB") is the franchisor of "iLoveKickboxing.com" franchises, which are fitness facilities dedicated to kickboxing, a form of physical fitness. (Id. ¶ 8.) At all relevant times, ILKB was a New York limited liability company with its headquarters in New York State. (Id.) ILKB offered and sold franchises only in and from New York State. (Id.)
Giacopelli emailed Fanning to ask if Giacopelli could collect information directly on these franchises and if it would hurt his opportunity to represent Giacopelli, to which Fanning replied that it would, thereby making Fanning the principal source of information other than ILKB itself. (Id. ¶ 15.) During the discussion, Giacopelliexpressed interest in ILKB, which contacted him the same day. (Id.)
On February 19, 2016, Fanning made the following representations to Giacopelli to induce him to purchase an ILKB franchise: that ILKB franchises took three to six months to become profitable; that ILKB owners made a profit of $4,000 to $15,000 a month; that franchisees required a total investment of $120,000 to $309,000 to begin the operations of a single iLoveKickboxing.com outlet; that ILKB was suitable for semi-absentee ownership; and that a franchise owner could expect to start making money within three to six months, thereby generating $4,000 to $15,000 a month in net profit, for $100,000 a year or more of "mailbox money." (Id. ¶ 16.)
On March 1, 2016, Fanning provided the following information to Giacopelli that had been received from ILKB: that if Giacopelli purchased several territories he could increase his profits by first opening two franchises and then using the profits from those to open an additional three franchises; that ILKB franchises took three to six months to break even and become profitable; that ILKB was suitable for absentee ownership; and that ILKB had an impressive marketing strategy and a lot of resources to ensure each outlet's success. (Id. ¶ 16(e).) Fanning also represented during this call with Giacopelli that ILKB had been experiencing explosive growth, that ILKB's founder, Michael Parrella ("Parrella"), was a "marketing genius," and that ILKB had a marketing strategy that insured that each outlet would be successful. (Id. ¶ 16(f).) According to Fanning, Parrella was a personal friend and that Fanning had seen Parrella do great things and was a "horse you would bet on." (Id.)
In reliance upon FCI and Fanning's representations that they were "franchiseexperts" with decades of experience, that they had superior knowledge, and that Fanning would coach him through the due diligence process, Giacopelli believed all of FCI and Fanning's representations as statements of fact, and relied upon Fanning's superior knowledge of franchising and professed expertise, and upon the specific representations that Fanning had made in deciding to purchase an ILKB franchise. (Id. ¶ 17.) Based on this reliance, Giacopelli invested $110,000 in franchise fees for three territories and over $389,000 in building and outfitting his first location, and undertook substantial lease and loan obligations. (Id. ¶¶ 17-18.) Plaintiffs' Somerset, New Jersey location opened on June 14, 2016. (Id.) Contrary to FCI and Fanning's representations, Plaintiffs' franchise has not been profitable and has accumulated operating losses in excess of $150,000, which are continuing, and Plaintiffs owe a minimum of $300,000 on their lease. (Id. ¶ 20.)
After opening the business, Plaintiffs learned that the representations that FCI and Fanning had made to Giacopelli relating to ILKB franchises were untrue, including their discovery that: ILKB franchisees did not generally become profitable within three to six months; ILKB franchisees did not generally make a profit of $4,000 to $15,000 per month; the costs associated with setting up a studio were higher than purported; it was not possible to operate the franchise as an absentee owner; it was not possible to open additional locations with the profits of one or two locations; ILKB's marketing was not effective enough to make the franchise profitable, as Defendants had insufficient knowledge of the actual marketing that ILKB and franchisees use; and ILKB franchisees do not generate $100,000 a year or more of "mailbox money." (Id. ¶ 21.)
Defendants also failed to do or disclose their due diligence with relation to ILKB, as represented, 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.)
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. and the New Jersey Consumer Fraud Act, § 56:8-1. Plaintiffs also assert claims against Defendants for common law fraud and negligent misrepresentation.
Defendants move to dismiss Plaintiffs' New York Franchise Sales Act ("NYFSA") and New Jersey Consumer Fraud Act ("NJCFA") 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...
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