Xiaolin Li v. Franchoice, Inc., Case No. 19-cv-1267 (MJD/ECW)
| Decision Date | 19 December 2019 |
| Docket Number | Case No. 19-cv-1267 (MJD/ECW) |
| Parties | XIAOLIN LI, Plaintiff, v. FRANCHOICE, INC., and PETER GILFILLAN, 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. 12.) 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.
Plaintiff initiated this action on May 13, 2019. (Dkt. 1.) Plaintiff subsequently filed an Amended Complaint on June 14, 2019.
The operative Amended Complaint alleges as follows: Plaintiff Xiaolin Li ("Li" or "Plaintiff") is a citizen of Iowa, and resides in Bettendorf, Iowa. (Dkt. 11 ¶ 4.) Li became interested in purchasing a franchise in early 2016. (Id. ¶ 10.) In investigating franchises, Li downloaded a PowerPoint deck entitled "Why and How to Buy a Franchise: An Exciting Alternative to A Corporate Job," created by Defendant Peter Gilfillan ("Gilfillan") who claimed to be an Entrepreneur, Franchise Consultant, and International Bestselling author of the book Hire Yourself: Control Your Own Destiny through Franchise Ownership. (Id.) On May 7, 2016, Gilfillan emailed Li for the first time, stating, "Think of me as a match maker . . . my role is to get to know you and then search for proven franchises that are a perfect match for you." (Id. ¶ 11.) On May 9, 2016, Gilfillan emailed again, letting Li know that he would be in good hands with Defendant FranChoice, Inc. ("FCI") because "we have PRE-SCREENED literally hundreds of franchise companies to find the ones that are A+ Opportunities." (Id. ¶ 12.) 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.) Gilfillan is an individual residing in Illinois and is a citizen of that state. (Id.)
On June 14, 4016, Li emailed Gilfillan the requirements he had for a franchise. (Id. ¶ 13.) These requirements included a fast or stable growing franchise with a strong profitability record, not new or declining concepts, and that he would be happy to generate $50K in cash a year to the point that the cash flow would exceed his corporate income. (Id.)
On June 17, 2016, Gilfillan advised Li that multi-unit ownership would be a good fit for Li. (Id. ¶ 14.)
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 theperfect franchise business." (Id. ¶ 15.) FCI stressed that Plaintiff 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.) Gilfillan also provided Plaintiff a document entitled "Franchise Company Investigation Procedure" that stated that the 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, "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. ¶ 16.)
On June 27, 2016, Gilfillan sent a letter to Li summarizing his understanding of Li's wishes and needs for a franchise business, including an opportunity that would allow Li to create an income and a proven franchise system with a simple business model that leveraged available capital, created consistent cash flow, delivered a good rate of return; and maintained a flexible schedule. (Id. ¶ 17.) On June 28, 2016, Gilfillan called Li to discuss four potential franchise systems that met these criteria, one of which was ILKB, LLC ("ILKB"). During this conversation, Li expressed interest in ILKB, which contacted him a few days later. (Id. ¶ 18.) Non-party ILKB is the franchisor of "iLoveKickboxing.com" franchises, which are fitness facilities dedicated to kickboxing, a form of physical fitness. (Id. ¶ 7.) At all relevant times, ILKB was a New York limitedliability company with its headquarters in New York State. (Id.) ILKB offered and sold franchises only in and from New York State. (Id.)
Prior to the purchase of an ILKB franchise, Gilfillan made the following representations or omissions concerning the financial performance of the franchise: Gilfillan encouraged Li to become a multi-unit owner to leverage the economy of scale and represented that it would be possible for Li to open additional locations with the profits of one or two locations; Gilfillan represented that Li would only need to invest $225,000 to $250,000 in one ILKB unit; and Gilfillan represented that an ILKB franchise could be operated through absentee ownership. (Id. ¶ 18.)
In reliance upon these representations, Li invested $110,000 in franchise fees for the purchase of three territories, additional investments in building the location, and undertook substantial lease and loan obligations. (Id. ¶ 19.) Plaintiff signed a single-unit franchise agreement on August 30, 2016, and a multi-unit agreement for two additional locations on the same date. (Id.) Li then undertook substantial lease obligations and opened his outlet in Wheeling, Illinois on August 12, 2017. (Id. ¶ 20.)
After opening the business, Plaintiff learned that the representations that Gilfillan had made to Li relating to ILKB franchises were untrue, including his discovery that: ILKB franchisees did not generally make a profit of $100,000 within a year; the costs associated with setting up a studio were higher than represented; it was not possible to operate the franchise as an absentee owner; and it was not possible to open additional locations with the profits of one or two locations. (Id. ¶ 23.)
Defendants also failed to do or disclose their due diligence by not discovering orcommunicating to Plaintiff the existence of lawsuits and a bankruptcy related to ILKB's founder and its affiliates. (Id. ¶¶ 24-25.) Li asserts that had he known of this information he would not have purchased any franchises from ILKB. (Id. ¶ 25.)
Plaintiff asserts claims for relief against Defendants for their alleged violations of the New York Franchise Sales Act, N.Y. Gen. Bus. L. 680 et seq.; the Illinois Franchise Disclosure Act, 815 Ill. Comp. Stat. Ann. 705/6; and the Minnesota Franchise Act, Minn. Stat. §80C.01 et seq. Plaintiff also asserts claims against Defendants for common law fraud and negligent misrepresentation.
Defendants move to dismiss Plaintiff's claims under the New York Franchise Sales Act ("NYFSA"), the Illinois Franchise Disclosure Act ("IFDA"), and the Minnesota Franchise Act ("MFA").
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...
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