Sashital et al v. SEVA Beauty, LLC et al

Filing 19

MEMORANDUM Opinion and Order: For the foregoing reasons, the court denies Plaintiffs' Motion for a Temporary Restraining Order, Preliminary Injunction, and/or Declaratory Judgment 5 ; terminates as moot Plaintiffs' Motion for an Expedited Hearing 7 ; and strikes Defendants' Motion to Dismiss or Compel Arbitration without prejudice to renewal 16 . Signed by the Honorable Rebecca R. Pallmeyer on 3/31/2021. Mailed notice. (lw, )

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
MAHESH SASHITAL, MARK FERGUSON,
and MICHAEL SCOTT DAVIS, individually
and on behalf of the class described
below,
Plaintiffs,
v.
SEVA BEAUTY, LLC, and
KARI COMROV,
Defendants.

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No. 20 C 4692
Judge Rebecca R. Pallmeyer

MEMORANDUM OPINION AND ORDER
This lawsuit concerns beauty service franchises that allegedly were destined to fail.
Plaintiffs Mahesh Sashital, Mark Ferguson, and Michael Scott Davis allege that Defendant Seva
Beauty, LLC—a franchisor of beauty spas throughout the United States—and one of its former
employees, Defendant Kari Comrov, induced them to enter franchise agreements by
misrepresenting or omitting material information about the business. Plaintiffs sue Defendants
on behalf of themselves and a putative class of similarly situated franchisees. As the court
understands things, the parties are engaged in arbitration proceedings to resolve certain claims
that clearly fall within the franchise agreements' arbitration clauses. In this forum, Plaintiffs seek
injunctive and declaratory relief. Plaintiffs have moved for a temporary restraining order or a
preliminary injunction that prohibits Defendant Seva from terminating their franchise agreements
for nonpayment of weekly royalty fees. Defendants have moved to dismiss Plaintiffs' complaint
under Rules 12(b)(1) and 12(b)(6), or, in the alternative, to compel arbitration. As explained here,
the court denies Plaintiffs' motion and strikes Defendants' motion without prejudice to renewal.
BACKGROUND
Plaintiffs filed this lawsuit on July 23, 2020 in the Circuit Court of Cook County, Illinois,
Chancery Division. (See Verified Class Action Compl. ("Compl.") [1-1].) Defendants filed a notice

of removal in this court on August 10, 2020, on the basis of diversity between the parties, see 28
U.S.C. § 1332(a).

(Notice [1].)

Plaintiffs then filed an emergency motion for a temporary

restraining order (TRO), preliminary injunction, and/or declaratory judgment [5] on August 10,
2020. The court held a telephone hearing on the TRO motion on August 14, 2020. Soon after,
Defendants filed a motion to dismiss the complaint or compel arbitration [16]. The following
background is taken from the Verified Class Action Complaint, except where otherwise stated.
A.

The Fast-Casual Spa Business and the Alleged Fraud
Defendant Seva is an Illinois limited liability company with its principal place of business

in Puerto Rico. (Compl. ¶ 10.)1 Seva is a franchisor of "a system of fast casual spas" located
throughout the United States. (Id. ¶ 1.) Seva's franchises provide beauty services like eyebrow
threading, eyebrow waxing, and eyelash extensions. (Id. ¶¶ 42, 66.)2 By agreement between
Seva and Walmart, Seva's franchises "primarily operate inside Walmart stores and rely on foot
traffic from Walmart customers." (Id. ¶ 52.)3 Defendant Comrov was the director of operations at
Seva at all relevant times. (See Pls.' TRO Mot. [5] ¶ 8.) She left her employment at Seva in April
2019 to join a competing franchisor. (See id. ¶ 38.) Defendant Comrov is a resident of Nevada.
(Compl. ¶ 11.)
Plaintiffs Sashital and Davis are current Seva franchisees. (Id. ¶ 6.) They are residents
of Texas. (Id. ¶¶ 7, 9.) Plaintiff Ferguson is a former Seva franchisee. (See, e.g., Defs.' Mot. to
Dismiss or Compel Arbitration ("Defs.' Mot.") [16] at 5.) Ferguson is a resident of Florida.

When Seva executed the franchise agreements with Plaintiffs, it had its principal
place of business in Highland Park, Illinois. (Id. ¶ 10.)
1

In their opposition to Plaintiffs' motion for a TRO or preliminary injunction
(hereinafter, "Plaintiffs' TRO Motion"), Defendants state that licensed estheticians perform these
services. (See Defs.' Opp. to Mot. for TRO ("Defs.' TRO Opp.") [12] at 2.)
2

The terms of the agreement between Seva and Walmart are unclear. Plaintiffs
allege that Seva refused their repeated requests to see the agreement, though Plaintiffs do not
state when they made the requests. (See, e.g., id. ¶ 57.)
3

2

(Compl. ¶ 8.) Plaintiffs allege that Defendants used fraudulent sales pitches to induce them (and
others similarly situated) to sign franchise agreements with Seva. (See, e.g., id. ¶¶ 1-4.) Seva
then earned millions of dollars in royalties from its franchisees, Plaintiffs allege. (See id. ¶ 4.)
Defendants allegedly "present the 'Seva Beauty' franchise as a no-lose investment opportunity
for significant passive income when, in reality, the business model is a no-win, except for a select
few experienced retailers who have no need for franchise support." (Id. ¶ 1.) Plaintiffs allege that
to sell franchises, Defendants "intentionally omitted financial information from its Franchise
Disclosure Document (FDD)4 regarding the failures of the vast majority of Seva franchises and
instead only provided limited financial information from a handful of its most profitable store
locations." (Id. ¶ 26; see also id. ¶ 46 (alleging that Defendant Comrov told Plaintiffs that "[e]ach
store will break even in the first six months" and that "earning $100,000+ per store is easy").) In
addition, Defendants allegedly failed to disclose that it is challenging to run successful franchises
in rural locations—where trained estheticians are in short supply—and misrepresented the
amount of training required for novices. (See, e.g., id. ¶¶ 31-33, 42-44.) According to Plaintiffs,
Defendants also failed to inform prospective franchisees that the handful of profitable franchises
use fraudulent labor practices to avoid paying employee benefits and overtime. (See, e.g.,
id. ¶¶ 34-35.)
Plaintiffs allege, too, that Defendants misrepresented the nature of Seva's relationship
with Walmart. According to Plaintiffs, that relationship was "[t]he only value Seva provided relative
to its competing franchisors." (Id. ¶ 53.) As referenced above, Seva's franchises are typically
located within Walmart stores.

Defendants allegedly told potential franchisees that Seva's

relationship with Walmart was "solid" when in fact it was "falling apart" and Walmart was "refusing
to renew [franchisees'] leases." (Id. ¶ 54.) Furthermore, Defendants allegedly promised potential

The court understands that prospective franchisees review this document before
signing a franchise agreement.
4

3

franchisees that they could "ensure profitability" by distributing leaflets to Walmart customers—
but concealed that Walmart rules restrict franchisees from approaching customers or advertising
in or near Walmart stores.

(Id. ¶¶ 63-64.)

Besides omitting material information from the

franchise agreements and making intentional misstatements, Plaintiffs allege, Defendants
prevented prospective franchisees from discovering what they were signing up for by handpicking
the current franchisees with whom they could speak and coaching those handpicked franchisees
on what to say. (See, e.g., id. ¶¶ 28-30.)
According to Plaintiffs, "few Seva franchisees make any profit at all."

(Id. ¶ 49.)

Meanwhile, they "have an ongoing obligation to pay royalties to Seva." (Id. ¶ 75.) The Franchise
Disclosure Document requires the franchisee to pay Seva a royalty of "6% of Gross Sales or
$250" per week, "whichever is greater." (2016 FDD, Ex. A-4 to Compl. [1-1] at PageID #:116.)
"Were it not for Seva's misrepresentations," Plaintiffs allege, "Plaintiffs and the Class would not
have an ongoing obligation to pay" the royalties. (Compl. ¶ 75.) The COVID-19 pandemic has
exacerbated the situation, Plaintiffs allege. Government shut-down orders have required many
franchisees to shutter their stores, yet Seva continues to charge royalties. (Id. ¶ 76.) Seva
allegedly provides a "discounted royalty for franchises shut down by [the COVID-related] orders"
only if franchisees sign what Plaintiffs call "an unconscionable general release" of liability.
(Id. ¶ 77.) The court has not found the general release in the record. In an affidavit provided with
Plaintiffs' TRO motion, Plaintiff Sashital states that the general release bars claims for fraud. (See
Sashital Aff., Ex. D to Pls.' TRO Mot. [5-3] ¶¶ 11-12.)
B.

Named Plaintiffs' Franchises
Plaintiffs Sashital, Ferguson, and Davis allege that they entered into franchise agreements

with Seva after hearing Defendant Comrov make representations that franchises break even
quickly; easily earn more than $100,000 per store; and commonly succeed with "absentee"
owners, i.e., owners that do not run day-to-day operations. (Compl. ¶¶ 46, 79-80, 87-88, 93-94,
102.)

According to Plaintiffs, they "first became aware of [Defendants'] fraudulent
4

misrepresentations in 2019 when Seva settled eight individual claims alleging similar fraudulent
representations by Seva for over $2,000,000."

(Id. ¶¶ 86, 91, 97.)

It appears that these

settlements were reached in arbitration proceedings. (See, e.g., Pls.' TRO Mot. at 2 ("Seva has
paid over $2,000,000 to franchises making similar claims in individual arbitrations.").)
1.

Ferguson

Plaintiff Ferguson entered into a franchise agreement with Seva in February 2016.
(Compl. ¶ 79; see Ferguson Franchise Agreement, Ex. 6 to Defs.' TRO Opp. [12-6] at PageID
#:958.) He opened his franchise in a Walmart located in Florida. (Compl. ¶ 81.) Ferguson's
franchise allegedly lost money in 2016, 2017, and 2018, but made a modest profit of just $3,300
in 2019. (Id. ¶ 82.) Ferguson had to close his store for at least two months in 2020 because of
COVID-19-related government orders. (Id. ¶ 83.) During that time, Seva continued charging
royalties. (Id.) In an affidavit provided with Plaintiffs' motion for a TRO, Ferguson avers that
between April and July 2020, he paid employees and rent from gross revenue. (Ferguson Aff.,
Ex. H to Mot. for TRO [5-6] ¶ 4 (PageID #:744).) After doing so, according to Ferguson, he had
nothing left to pay the "fraudulently induced royalty." (Id.) On July 17, 2020, "Seva sent Ferguson
a notice of termination threatening" to shut down his store and charge penalties exceeding
$40,000 "if he did not immediately pay" what Seva represented he owed.

(Compl. ¶ 84.)

Ferguson refused Seva's demand. (Ferguson Aff. ¶ 6 (PageID #:745).) Ferguson states that
Seva then "shut down [his] point of sale system,5 noted on Google that [his] store was closed,
and shut off [his] access to [the franchise's] Facebook page." (Id. ¶ 8.) Defendants, for their part,
acknowledge that Seva terminated the franchise agreement in July 2020 but assert that Seva
"has not taken any actions to collect the amounts owed . . . ." (Defs.' Mot. at 5.) Ferguson avers
that "[w]hile [his] business suffers, he continues to accrue interest on a loan" (presumably for
funds to maintain the franchise) "from his brother for $50,000 . . . and a line of credit for

5

Plaintiffs do not define a "point of sale system."
5

$49,000 . . . ." (Ferguson Aff. ¶ 9 (PageID #:745).)
2.

Sashital

Plaintiff Sashital entered into a franchise agreement with Seva in March 2016 and opened
his franchise in a Walmart store in Texas. (Compl. ¶¶ 87, 89; see Sashital Franchise Agreement,
Ex. 1 to Defs.' TRO Opp. [12-1] at PageID #813.) The franchise "has been a complete failure",
Plaintiffs allege. (Compl. ¶ 89.) It lost more than $48,800 in 2016, $53,100 in 2017, and $133,700
in 2018. (Id. ¶ 90.) Plaintiffs allege that Sashital "continues to timely pay all amounts Seva claims
it is owed," despite "being fraudulently induced to purchase the franchise." (Id. ¶ 92.) Sashital
avers that he had to close his store temporarily because of COVID-19 shut-down orders but does
not specify how long the store was closed. (Sashital Aff. ¶ 12.) Seva kept charging the $250
weekly royalty during that time, Sashital says. (Id.) Sashital states that Seva offered him a
discounted royalty during the COVID-19-related shutdown in exchange for a general release of
liability, but he refused because he considered the terms of the release to be unconscionable.
(Id. ¶¶ 11, 13.) Sashital also states that he took out loans to open and operate his franchise, and
that he "continue[s] to pay interest" on them. (Id. ¶ 14.) He adds that he used $120,000 of his
own retirement funds to open the franchise and does not expect to recoup the investment.
(Id. ¶ 15.)
3.

Davis

Plaintiff Davis entered into a franchise agreement with Seva in March 2016. (Compl. ¶ 93;
see also Davis Franchise Agreement, Ex. 3 to Defs.' TRO Opp. [12-3] at PageID #:885.) Davis
opened his franchise in a Walmart located in Texas. (Compl. ¶ 95.) It, too, "has been a complete
failure." (Id.) According to Plaintiffs, the franchise lost more than $62,400 in 2016, $61,700 in
2017, and $20,700 in 2018. (Id. ¶ 96.) Davis "continues to timely pay all amounts Seva claims it
is owed," despite his belief that Defendants fraudulently induced him to purchase the franchise,
and despite government orders that shuttered his store for an unspecified amount of time during
the COVID-19 pandemic. (Id. ¶ 98; see Davis Aff., Ex. G to Pls.' TRO Mot [5-6] ¶¶ 3-4 (PageID
6

#:740.) Like Plaintiff Sashital, Davis avers that he refused to sign a release in exchange for a
discounted royalty during the pandemic. (See Davis Aff. ¶¶ 5-6.) Davis states that his "business
is in shambles and the royalty pushes [him] over the breaking point." (Id. ¶ 7.) He says that
during the COVID-19 pandemic, the franchise's monthly gross revenues have been approximately
$8,000 (March 2020), $0 (April and May 2020), and $2,600 (June 2020). (Id.) At the same time,
he says, he "continue[s] to pay interest on [his] debts incurred to open and operate the franchise[,]
including a $120,000 loan" that he took against his retirement fund. (Id. ¶ 8.)
***
In their opposition to Plaintiffs' TRO motion, Defendants state that Ferguson assigned his
rights under the franchise agreement in April 2016 to a Florida corporation called Amlex LLC.
(Defs.' TRO Opp. at 5; see Ferguson Assignment Agreement, Ex. 7 to Defs.' TRO Opp. [12-7].)
Likewise, Defendants state that Davis assigned his rights in the franchise to a company called
"Alexion Corp." in May 2016. (Defs.' TRO Opp. at 4; see Davis Assignment Agreement, Ex. 4 to
Defs.' TRO Opp. [12-4] at PageID #:937.) The court notes that the assignment agreements show
that Ferguson is the sole owner of Amlex and Davis is the sole owner of Alexion. (See Ferguson
Assignment Agreement § 5 (PageID #:1011); id. at PageID #:1014; Davis Assignment Agreement
§ 5 (PageID #:938); id. at PageID #:941.) Additionally, the assignment agreements provide that
the assignments do not release Davis or Ferguson from their obligations to Seva under the
Franchise Agreement. (See Ferguson Assignment Agreement at § 5 (PageID #:1011) (stating
that Ferguson, "as the sole owner of Assignee, hereby affirms his/her obligations under the
Guaranty to guarantee and be personally be [sic] bound by the terms of the Franchise Agreement
as they apply to Assignee"); see also Davis Assignment Agreement § 5 (PageID #:938) (same).)
Unlike Plaintiffs Ferguson and Davis, Defendants say, Plaintiff Sashital signed the
franchise agreement at the outset on behalf of a corporation: "Sahiya Enterprises, Inc." (Defs.'
TRO Opp. at 3; see Sashital Franchise Agreement at PageID #:813.) But the court notes that
according to the Franchise Agreement, Sashital is the sole owner of Sahiya and has a "direct
7

interest" in the corporation. (Sashital Franchise Agreement at PageID #:850.) Plaintiffs point out
that

the

Franchise

Agreements

are

binding

(jointly

and

severally)

on

"[a]ll

individuals, . . . corporations and their officers, directors and controlling shareholders, limited
liability companies and their members" that execute the agreement. (Pls.' TRO Reply [13] at 7;
see, e.g., Ferguson Franchise Agreement § 9.02 (PageID #:987).)
C.

Plaintiffs' Claims
Plaintiffs bring this lawsuit on behalf of themselves and a putative class.

(See

Compl. ¶ 17.) They propose the following class definition: "All persons who purchased a Seva
franchise from January 1, 2015 to December 31, 2019 who currently owe monthly royalties to
Seva . . . ." (Id.)
Plaintiffs allege that "Defendants have chosen and consented to the choice of Illinois law
in their franchise agreement with each Class Member." (Id. ¶ 25.) Defendants do not dispute this
point. In their complaint, Plaintiffs seek a declaration that Defendants' conduct violates the Illinois
Franchise Disclosure Act, 815 ILCS 705 et seq., the Illinois Consumer Fraud and Deceptive
Business Practices Act, 815 ILCS 505 et seq., and the Illinois Uniform Deceptive Trade Practices
Act, 815 ILCS 510 et seq. (See Compl., Count IV.) They also assert independent claims under
each statute but request only injunctive and equitable relief in connection with those claims. (See
id., Counts I-III.)
In their TRO motion, Plaintiffs initially asked the court to "maintain the status quo of
operating franchise businesses by preventing assessment of additional fees, interest, penalties,
and termination of the franchise agreements between Plaintiffs and Seva until this matter can be
resolved on the merits." (Pls.' TRO Mot. at 1.) They also asked the court to enjoin Defendants'
allegedly illegal business practices, declare invalid any COVID-19-related release agreement
between Seva and any putative class member, and declare that Defendants have violated the
Illinois consumer protection laws referenced above. (See id. at 24-25.) During a telephone
hearing on August 14, 2020, Plaintiffs agreed to narrow their request to the following: an order
8

prohibiting Defendant Seva from terminating franchise agreements for the non-payment of the
weekly $250 royalty, until a preliminary injunction issues or until the parties resolve their other
claims in arbitration.
Plaintiffs' Franchise Agreements contain an arbitration clause. Relevant here, it provides:
Except as qualified below and in Section 10.03, any dispute between you and us
or any of our or your affiliates arising under, out of, in connection with or in relation
to (a) this Agreement, (b) the parties' relationship, (c) the events leading up to the
entry into this Agreement, (d) your Studio, (e) the scope or validity of the arbitration
obligation under this Section 10.02, shall be submitted to binding arbitration under
the authority of the Federal Arbitration Act and must be determined by arbitration
administered by the American Arbitration Association pursuant to its then-current
commercial arbitration rules and procedures.
(See, e.g., Sashital Franchise Agreement § 10.02.) As the quoted language states, there
are exceptions. They appear in Section 10.03, which provides, in relevant part:
Notwithstanding Section 10.01 or Section 10.02, the parties agree that the
following claims will not be subject to mediation or arbitration:
1. any action for declaratory or equitable relief, including, without limitation, seeking
preliminary or permanent injunctive relief, specific performance, other relief in the
nature of equity to enjoin any harm or threat of harm to such party's tangible or
intangible property, brought at any time, including, without limitation, prior to or
during the pendency of any arbitration proceedings initiated hereunder.
(Id. § 10.03.)6
DISCUSSION
A.

Plaintiffs' Motion for a TRO or Preliminary Injunction
Plaintiffs request a temporary restraining order or preliminary injunction that prohibits

Defendant Seva from terminating franchise agreements for non-payment of the weekly royalty
fee, until the parties resolve their related claims in arbitration. Plaintiffs seek this relief on a class-

The court noticed that the copy of the franchise agreement that Plaintiffs attached
to their Verified Class Action Complaint does not contain the "exceptions to arbitration" clause
(Section 10.03). (See Franchise Agreement (Template), Ex. A-4 to Compl. [1-1] at PageID #:199200.) But the Franchise Agreement for each named Plaintiff contains the clause, as Defendants
acknowledge in their opposition to Plaintiffs' motion for a TRO. (See Defs.' TRO Opp. at 12.)
Neither side discusses this discrepancy. Because Defendants discuss Section 10.03 in their TRO
opposition as if it is present in every Franchise Agreement, the court will assume that it is.
6

9

wide basis. Even construing the request as limited to the three named Plaintiffs, the court
concludes that Plaintiffs have not shown that they are entitled to this extraordinary remedy.
"A preliminary injunction is an exercise of a very far-reaching power, never to be indulged
in except in a case clearly demanding it." Cassell v. Snyders, 990 F.3d 539, 2021 WL 852227,
at *3 (7th Cir. 2021) (internal quotation marks omitted); see also Mazurek v. Armstrong, 520 U.S.
968, 972 (1997) (a court may not grant a request for a preliminary injunction "unless the movant,
by a clear showing, carries the burden of persuasion" (internal quotation marks omitted)). The
party seeking such relief "must demonstrate (1) some likelihood of succeeding on the merits, and
(2) that it has 'no adequate remedy at law' and will suffer 'irreparable harm' if preliminary relief is
denied." Cassell, 990 F.3d at ___, 2021 WL 852227 at *3 (internal quotation marks omitted)
(quoting, inter alia, Lawson Prods., Inc. v. Avnet, Inc., 782 F.2d 1429, 1433 (7th Cir. 1986)). If
the moving party "fails to meet any of these threshold requirements, the court must deny the
injunction." GEFT Outdoors, LLC v. City of Westfield, 922 F.3d 357, 364 (7th Cir. 2019) (internal
quotation marks omitted). If the moving party establishes the threshold requirements, a court
must then "weigh the harm that the plaintiff will suffer absent an injunction against the harm to the
defendant from an injunction." Id. (internal quotation marks omitted). Additionally, the court must
consider whether the injunction is in the public interest. See id. The standards governing a
request for a TRO are the same. See, e.g., USA-Halal Chamber of Com., Inc. v. Best Choice
Meats, Inc., 402 F. Supp. 3d 427, 433 n.5 (N.D. Ill. 2019) (collecting cases).
Before addressing the merits of Plaintiffs' request, the court considers Defendants'
arguments that Plaintiffs are bound by the Franchise Agreements to arbitrate their claims and lack
prudential standing.7 Regarding forum, Defendants admit that the Franchise Agreements "allow

Defendants present the standing issue as an obstacle to Plaintiffs' ability to show
likelihood of success on the merits, but the court treats it as a threshold issue. Defendants also
present the issue as one of Article III standing, but as explained below, their concern is matter of
prudential standing.
7

10

for a petition in this Court for equitable or injunctive relief outside of arbitration." (Defs.' TRO Opp.
at 1-2.) At the same time, they argue that Plaintiffs' claims arise out of or are related to the
Franchise Agreements, and therefore must be arbitrated as provided in those agreements. (See
id. at 9.)

In advancing this theory, Defendants discuss only one claim: the request for a

declaratory judgment that Defendants violate Illinois consumer protection laws. (See id. at 12-14
(arguing that the declaratory judgment claim improperly circumvents the arbitration clause).)
Defendants' argument is unpersuasive because it fails to grapple with (1) the plain language of
Section 10.03 of the Franchise Agreements and (2) their admission that Section 10.03 permits
franchisees to bring declaratory judgment actions in court. Furthermore, as noted above, Plaintiffs
agreed to narrow their request for emergency relief. Plaintiffs now ask the court only for a
temporary injunction prohibiting Seva from terminating franchise agreements for non-payment of
weekly royalty fees. This request for injunctive relief appears to fall cleanly within the "exceptions
to arbitration" clause in the Franchise Agreements.

(See, e.g., Sashital Franchise

Agreement § 10.03 (franchisee need not arbitrate an action for "equitable relief, including, without
limitation, seeking preliminary or permanent injunctive relief . . . to enjoin any harm or threat of
harm to such party’s tangible or intangible property . . . ."); see also Pls.' TRO Reply at 8 (arguing
same).) Defendants offer no explanation why this interpretation is incorrect. Instead, they simply
ignore the implications of Section 10.03 as it relates to Plaintiffs' request for injunctive relief. The
court concludes that Plaintiffs' request for a TRO or preliminary injunction is properly before it.
Whether Plaintiffs have standing to assert their claims is a closer call. As referenced
above, Plaintiff Sashital signed the Franchise Agreement on behalf of Sahiya Enterprises; Plaintiff
Davis signed the agreement on his own behalf but assigned his rights to Alexion in May 2016;
and Plaintiff Ferguson signed the agreement on his own behalf but assigned his rights to Amlex
in April 2016. Defendants characterize Plaintiffs as officers or shareholders of the franchises and
argue that they lack standing under the shareholder standing rule. (See Defs.' TRO Opp. at 8-9
(citing Elsasser v. DV Trading, LLC, 444 F. Supp. 3d 916, 922 (N.D. Ill. 2020) (stating that "a
11

shareholder generally cannot sue for indirect harm he suffers as a result of an injury to the
corporation," such as a diminished individual income attributable to the corporation's losses
(quoting Korte v. Sebelius, 735 F.3d 654, 668 (7th Cir. 2013) (internal quotation marks omitted)));
Sawmill Prods., Inc. v. Town of Cicero, Cook Cnty., Ill., 477 F. Supp. 636, 639 (N.D. Ill. 1979)
(officers and shareholders in a corporation who allege "no direct personal injury" lack standing,
even if they allege "a personal loss resulting from a diminution in their anticipated salaries").) The
shareholder standing rule is a prudential limitation on the court's power to hear a claim. See, e.g.,
Rawoof v. Texor Petroleum Co., 521 F.3d 750, 757 (7th Cir. 2008).
Plaintiffs appear to concede that the shareholder standing rule applies equally to
guarantors. (See Pls.' TRO Reply at 6-7.) They maintain, however, that they are not mere
guarantors of the franchises because the Franchise Agreements bind them personally and
directly. (See id.) Disappointingly, Plaintiffs do not expand on this argument—but Defendants'
discussion of standing is equally abbreviated, and Plaintiffs' argument is viable, at least as applied
to Ferguson and Davis. Under Illinois law, "a shareholder who has a direct and personal interest
in a cause of action may bring suit in an individual capacity even if the corporation's rights are
also implicated," so long as he alleges "something more than wrong to the corporate body." Davis
v. Dyson, 387 Ill. App. 3d 676, 689, 900 N.E.2d 698, 710, 326 Ill. Dec. 801, 813 (1st Dist. 2008);
see

12B WILLIAM M. FLETCHER, FLETCHER CYCLOPEDIA OF THE LAW OF PRIVATE

CORPORATIONS § 5911 (a shareholder claim might be excepted from the shareholder standing
rule when it is an action "based on a contract to which the shareholder is a party"); cf. Hunter v.
Old Ben Coal Co., 844 F.2d 428, 432 (7th Cir. 1988) ("To be a 'direct' beneficiary and therefore
the third party beneficiary of a contract, the parties to the agreement must have manifested in
their contract an intention to confer a benefit upon the third party." (internal quotation marks
omitted) (applying Illinois law)). Plaintiffs Ferguson and Davis were parties to the Franchise
Agreements in their individual capacities, and they remained personally bound by their terms even
after assigning their rights to their solely-owned corporations.
12

Independent of this, all Plaintiffs reasonably can be understood as alleging that they would
not have purchased their franchises but for the misrepresentations Defendants allegedly made
directly to them. For this reason too, the court is satisfied that Plaintiffs have standing to assert
their claims. See, e.g., Mann v. Kemper Fin. Cos., Inc., 247 Ill. App. 3d 966, 979-80, 618 N.E.2d
317, 326, 187 Ill. Dec. 726, 735 (1st Dist.1992) (mutual fund investors could assert fraud claims
in their individual capacities where they alleged that the defendants' fraudulent prospectuses
induced them to invest in the fund). That said, the narrowed request for emergency relief unravels
that conclusion as applied to Plaintiff Ferguson. The parties agree that Seva terminated his
Franchise Agreement, and the request for emergency relief seeks only to prevent the termination
of Plaintiffs' Franchise Agreements. Accordingly, granting an injunction would afford Ferguson
no relief, and he lacks Article III standing. See Lujan v. Defenders of Wildlife, 504 U.S. 555, 56061 (1992) (to establish Article III standing, a plaintiff must allege an injury in fact that is traceable
to the defendant's conduct and can be redressed by a favorable judicial decision).
Turning to the merits of Plaintiff Davis and Plaintiff Sashital's request for a TRO or
preliminary injunction, the court begins with the issue of irreparable harm because it is dispositive
here. As the Seventh Circuit has explained, harm is not irreparable where it is "possible to quantify
[a plaintiff's] losses and compensate him fully with damages." Turnell v. CentiMark Corp., 796
F.3d 656, 666 (7th Cir. 2015); see also Roland Mach. Co. v. Dresser Indus., Inc., 749 F.2d 380,
386 (7th Cir. 1984) (irreparable harm is "harm that cannot be prevented or fully rectified by the
final judgment after trial"). Even where damages can be calculated, however, a damages award
may be inadequate if, for example, it "come[s] too late to save the plaintiff's business"; the plaintiff
"go[es] broke while waiting" for it; or there is a risk that the defendant may become insolvent
before the plaintiff can collect the award. Roland, 749 F.2d at 386; see also id. (recognizing that
the loss of a family business a plaintiff has operated for decades cannot easily be quantified).
Plaintiffs urge that they are entitled to pursue equitable relief for that reason—that their
businesses will not survive litigation. They maintain that absent an injunction, they will need to
13

continue paying (allegedly illegal) weekly royalty fees and interest on their loans, and that Seva
might assess other unspecified penalties. In addition, Plaintiffs argue that Seva will terminate
their Franchise Agreements if they are unable to pay the weekly royalty fees. Given the narrowed
request for relief, the court need consider only the latter form of harm, which Plaintiffs contend is
irreparable. Specifically, Plaintiffs say that if Seva terminates the Franchise Agreements, their
franchises will cease to exist—and the harm from losing one's business is immeasurable. In
support, Plaintiffs cite cases in which courts explained that the loss of customers or goodwill is
difficult to quantify. (See Pls.' TRO Mot. at 19 (citing, inter alia, Travelport, LP v. Am. Airlines,
Inc., 2011 IL App (1st) 111761 ¶¶ 37-41, 958 N.E.2d 1075, 1084-86, 354 Ill. Dec. 879, 888-90).)
Plaintiffs argue that losing customers and goodwill "is exactly what happens if franchisees . . . are
unable to pay royalties." (Pls.' TRO Mot. at 19.) They also cite a case in which an Illinois appellate
court determined that "[t]he necessity of preserving the status quo to prevent the termination of
[a business's] existence would seem to satisfy the requirement that irreparable harm be shown."
Peoria Sav. & Loan Ass'n v. Am. Sav. Ass'n, 109 Ill. App. 3d 1043, 1048, 441 N.E.2d 853, 85556, 65 Ill. Dec. 538, 540-41 (3d Dist. 1982).
Whatever the merits of this argument might be in another context, it has little traction here,
because Plaintiffs offer no evidence or argument that they have loyal customers or goodwill. Nor
do they identify another source of intangible value in the mere existence of their franchises. To
the contrary, they maintain that their franchises were doomed from the start—and have been total
failures—because of Defendants' alleged fraud. Plaintiffs do mention that they wish to "continue
their business with another franchisor," but they do not explain why keeping their current
franchises is necessary or even helpful for achieving that goal. (Pls.' TRO Reply at 2.) In these
circumstances, the court concludes that Plaintiffs have failed to demonstrate that money damages
could not adequately compensate for the termination of their franchise agreements. Thus,
Plaintiffs have not made a clear showing that they will suffer irreparable harm absent an injunction.
Two other factors bear mention; they support, but are not necessary to, the court's
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conclusion. First, at the telephone hearing in August 2020, Seva stated that it had no plans to
terminate Plaintiff Sashital or Plaintiff Davis's franchises. This calls into question whether Plaintiffs
would suffer the harms they identify if the court does not issue an injunction. Second, Plaintiffs
say they discovered the alleged fraud sometime in 2019. (See Compl. ¶¶ 86, 91, 97.) But they
did not request a TRO or preliminary injunction until July 2020, and the COVID-19 pandemic
appears to have prompted their request. Although not dispositive on the issue of irreparable
harm, Plaintiffs' delay "raise[s] questions" about their claim that they "will face irreparable harm if
a preliminary injunction is not entered." Ty, Inc. v. Jones Grp., Inc., 237 F.3d 891, 903 (7th Cir.
2001).
Plaintiffs' motion for a TRO or preliminary injunction is denied.
B.

Defendants' Motion to Dismiss or Compel Arbitration
Defendants move under Federal Rules of Civil Procedure 12(b)(1) and 12(b)(6) to dismiss

Plaintiffs' complaint. In the alternative, they ask the court to compel Plaintiffs to arbitrate their
claims. Plaintiffs filed an opposition brief, but Defendants never filed a reply. In their opposition,
Plaintiffs noted that Defendants' motion to compel entirely ignores the "exceptions to arbitration"
clause in the franchise agreements (Section 10.03). Plaintiffs highlight that obvious omission and
argue that the Franchise Agreements "expressly allow[]" the claims they have brought before this
court, which request only injunctive and declaratory relief. (Pls.' MTD Opp. [17] at 2; see also id.
at 14-15.)
Plaintiffs also make colorable arguments that the court should deny Defendants' motion
to dismiss. For example, the standing issues that Defendants raise are the same the ones they
raised in opposing Plaintiffs' motion for a TRO. In response to Defendants' argument that
Plaintiffs' claims are time-barred under the one-year statute of limitations provided in the
Franchise Agreements, Plaintiffs argue that they did not know or have reason to know about
Defendants' alleged fraud—or that the fraud was the reason their franchises were failing—until
the arbitration settlements in 2019. According to Plaintiffs, that was less than one year before
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they filed their complaint in the Circuit Court of Cook County. Plaintiffs maintain that the statute
of limitations was tolled under Illinois's discovery rule until 2019, and that their claims are timely.
See, e.g., Greenhill v. Vartanian, 917 F.3d 984, 988 (7th Cir. 2019) ("The discovery rule in Illinois
provides that a period of limitations starts to run when the injured party 'knows or reasonably
should know' of the injury and its cause.") (quoting Knox Coll. v. Celotex Corp., 88 Ill. 2d 407, 415,
430 N.E.2d 976, 980, 58 Ill. Dec. 725, 729 (1981)).
Defendants' last argument is that Plaintiffs are improperly seeking a declaratory judgment
of liability for past conduct—i.e., they are asking this court to pass judgment on issues that are
moot. Plaintiffs counter that a ruling on their declaratory judgment claim would resolve an ongoing
controversy—whether the Franchise Agreements are unenforceable for fraudulent inducement—
and therefore would guide their present and future conduct, including whether to pay the ongoing
weekly royalties. Plaintiffs might be correct their claim concerns an ongoing controversy about
the parties' opposing interests in the Franchise Agreements. Although they ask the court to enjoin
termination of their franchisees, their argument and the allegations in their complaint also appear
to suggest that what they are really seeking is equitable rescission of contract because of fraud
and misrepresentation.

The fact that Plaintiffs may have mislabeled the claim as one for

declaratory judgment is not a proper basis for dismissal. These are complicated issues and
neither side briefed them thoroughly. Furthermore, the court's understanding is that the parties
are arbitrating other claims arising from the Franchise Agreements. Months have passed since
Defendants filed their motion to dismiss or compel arbitration; Defendants never filed a reply; and
neither side has filed a status report. The court, therefore, is not sure whether the parties are still
seeking a ruling on issues raised in Defendants' motion. The court therefore will strike the motion
without prejudice to renewal. Should Defendants choose to renew the motion, the court will
expect further briefing.
CONCLUSION
For the foregoing reasons, the court denies Plaintiffs' Motion for a Temporary Restraining
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Order, Preliminary Injunction, and/or Declaratory Judgment [5]; terminates as moot Plaintiffs'
Motion for an Expedited Hearing [7]; and strikes Defendants' Motion to Dismiss or Compel
Arbitration without prejudice to renewal [16].
ENTER:

Dated: March 31, 2021

_________________________________________
REBECCA R. PALLMEYER
United States District Judge

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