KIM et al v. GENESIS CO., LTD.

Filing 57

OPINION. Signed by Judge Kevin McNulty on 10/26/17. (DD, )

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEW JERSEY

SUNGHOON KIM and SHKIM
CORPORATION,

-

Civ. No. l-8556 (KM)(MAH)

Plaintiffs,
OPINION
GENESIS CO., LTD et al.,
Defendants.

MCNULTY. U.S.D.J.:

Currently before this Court are two motions: defendants’ motion to
dismiss the complaint and plaintiffs’ motion to amend the summons and
complaint. (ECF nos. 28, 42).1 Defendants argi.ie that this court lacks personal
jurisdiction over one defendant, the plaintiffs failed to effectuate service, and
the complaint fails to state a claim. (ECF no. 28). Plaintiffs seek to amend their
complaint to add parties and change the causes of action. (ECF no. 42).
However, regardless of the motions before them, federal courts have an
ever-present obligation to ensure that subject matter jurisdiction exists. Courts
must decide this issue sua sponte as necessary. Concluding that this Court
lacks jurisdiction, I will dismiss the action.
I.

MOTION TO AMEND

I first consider the motion to amend.
Plaintiff Sunghoon Kim (“Kim”), is a citizen of New Jersey; plaintiff
SHKIM Corporation is a New York corporation. The original complaint asserted
twelve state-law claims against Genesis Co., Ltd (“Genesis”), a South Korean

I

Citations to the record are abbreviated as follows:
Compl. = Complaint (ECF no. 1)
AC = Amended Complaint (ECF no. 38)
1

company. Jurisdiction was premised on diversity of citizenship, 28 U.s.c.

§

1332(a). (Compl.

¶

2).

While the motion to dismiss the original complaint was pending, the
plaintiffs proffered an amended complaint. It names two additional defendants:
Phoenix U.S.A. corporation (“Phoenix”), and BBQ USA LLC (“BBQ USA”).
Phoenix and BBQ USA are New Jersey corporations. (AC

¶

8, 11). With the

addition of Phoenix and BBQ USA, the parties are no longer diverse. Rather,
the Amended complaint asserts that this court has federal question
jurisdiction pursuant to 28 U.S.C.

§

1331. (AC

¶

2). The sole federal claim in

the Amended Complaint is based on the Federal Trade Commission’s Franchise
Rule, 16 C.F.R.

§

436. (AC

¶

2, 53-56). The Amended Complaint also asserts

ten pendent state-law claims.
The substantive allegations of the Amended Complaint are as follows.
Kim, now a New Jersey resident, came to the United States from South Korea
to open a “BBQ Chicken Restaurant” under a franchise agreement. (AC

¶

18,

20-2 1). Kim operates his restaurant through SHKIM Corporation, which he
wholly owns and controls. (AC

¶

5). The Amended Complaint alleges that these

three defendants acted wrongfully in various ways during the course of their
franchise dealings. (AC

¶

9-17).

Leave to amend a complaint is granted freely. Fed. R. Civ. P. 15(a); see
also Foman v. Davis, 371 U.S. 178, 182 (1962). No reason to deny amendment
appears. Indeed, it seems that the two newly-named parties, Phoenix and BBQ
USA, are essential to the claims. Kim signed his franchise agreement with
Phoenix, and BBQ USA later assumed responsibility for the agreement. (AC

¶

22, 32). Although Kim argues that Phoenix and BBQ USA act as agents of

Genesis, they remain central to this litigation. Moreover, it is an outstanding
question as to whether Genesis is even amenable to service. (ECF no. 28)
(Indeed, this may have been the impetus for the filing of the amended
complaint.)
The remainder of this Opinion analyzes the amended complaint.

2

II.

SUBJECT MATTER JURISDICTION

A. Standards
Federal courts are courts of limited subject matter jurisdiction. “[Fjederal
courts have an ever-present obligation to satisfy themselves of their subject
matter jurisdiction and decide the issue sua sponte

....“

Liberty Mist. Ins. Co. v.

Ward Trucking Co., 48 F.3d 742, 750 (3d Cir. 1995). Under Fed. R. Civ. P.
12(h)(3), “if the court determines at any time that it lacks subject matter
jurisdiction, the court must dismiss the action.” That obligation is paramount
because subject matter jurisdiction “calls into question the very legitimacy of a
court’s adjudicatory authority.” Council Tree Commc’ns., Inc. v. FCC, 503 F.3d
284, 292 (3d Cir. 2007) (quoting Am. CanoeAss’n

ii.

Murphy Farms, Inc., 326

F.3d 505, 515 (4th Cir. 2003)). Ultimately, I must dismiss a case if there is no
subject matter jurisdiction because “subject matter jurisdiction is non
waivable.” Nesbit a Gears Unlimited, Inc., 347 F.3d 72, 76-77 (3d Cir. 2003).
Subject matter jurisdiction exists in the federal courts on the basis of
(1) diversity of citizenship, 28 U.S.C.
jurisdiction, 28 U.S.C.

§

§

1332, and (2) federal questidn

1331. Diversity exists when there is “complete

diversity” of the parties and the controversy’s value exceeds $75,000. 28 U.S.C.

§

1332; Strawbridge v. Curtiss, 7 U.S. (3 Cranch) 267 (1806). If any plaintiff

and any defendant are citizens of the same state, diversity is broken and the
action must be dismissed, unless there is another basis for jurisdiction.
Federal question jurisdiction exists for “all civil actions arising under the
Constitution, laws, or treaties of the United States.” 28 U.S.C.

§

1331. For a

claim to “arise under” the Constitution, federal law, or a treaty, “a right or
immunity created by the Constitution or laws of the United States must be an
element, and an essential one, of the plaintiffs’ cause of action.” Phillips
Petroleum Co. v. Texaco, Inc., 415 U.S. 125, 127 (1974) (citing Gully a First Nat’l
Bank in Meridian, 299 U.S. 109, 112 (1936)).

3

For this court to have jurisdiction to hear this case, then, there must be
either (1) diversity jurisdiction or (2) federal question jurisdiction, I will evaluate
each possibility in turn.
B.

Diversity Jurisdiction

The Constitution provides, in Article III, section 2, that “[t]he judicial
Power [of the United States] shall extend

...

to Controversies

...

between

Citizens of different States.” Congress has authorized federal courts to exercise
jurisdiction based on diversity of citizenship since the Judiciary Act of 1789.
Caterpillar Inc. v. Lewis, 519 U.S. 61, 68 (1996). In Strawbridge u. Curtiss, the
Supreme Court construed the original Judiciary’s Act’s diversity provision to
require complete diversity of citizenship. 7 U.S. (3 Cranch) at 267. This
interpretation has persisted. The current diversity of citizenship statute
permits federal district court jurisdiction in suits for more than $75,000
“between

...

citizens of different states.” 28 U.S.C.

§

1332(a). This applies “only

to cases in which the citizenship of each plaintiff is diverse from the citizenship
of each defendant.” Lewis, 519 U.S. at 68.
Diversity of citizenship does not appear on the face of the amended
complaint. Plaintiff Kim and defendants Phoenix and BBQ USA are all New
Jersey citizens. (AC

¶

4, 8, 11). Under the “complete diversity” rule, see supra,

when any plaintiff and any defendant are from the same state, the federal
district courts do not possess diversity jurisdiction.
It may be argued that when the complaint was filed in its original form,
diversity existed—i.e., citizens of New Jersey and New York were suing one
defendant, a Korean corporation. While federal diversity jurisdiction “is
generally determined based on the circumstances prevailing at the time the
suit was filed,” this rule does not apply “where the parties change, in contrast
to cases in which the circumstances attendant to those parties change.”
Kaufman v. Allstate New Jersey Ins. Co., 561 F.3d 144, 152 (3d Cir. 2009). For
example, if parties are diverse when the case is filed, diversity will not be
destroyed if a party changes citizenship. See Anderson v. Watts, 138 U.S. 694

4

(1891); Mollan v. Torrance, 22 U.S. 537 (1824). If, however, nondiverse parties
are added after the case is filed, diversity jurisdiction can be destroyed. See
Grupo Dataflux v. Atlas Global Group, L.P., 541 U.S. 567 (2004); Kabakjian v.
United States, 267 F.3d 208, 212 (3d Cir. 2001).
Here, the parties have changed; this New Jersey plaintiff has added two
New Jersey defendants to the case. Diversity of citizenship is destroyed and
this court no longer has jurisdiction based on 28 U.S.C.
C.

§

1332.

Federal Question Jurisdiction

The amended complaint thus invokes not diversity jurisdiction, but this
court’s federal question jurisdiction. To satisfy federal question jurisdiction, a
complaint must assert at least one claim that arises “under the Constitution,
laws, or treaties of the United States.” 28 U.S.C.

§

1331. This claim must assert

a federal right or immunity created by the Constitution, a federal law, or a
treaty. Phillips Petroleum Co., 415 U.S. at 127-28 (citing Gully, 299 U.S. at
112); Louisville & Nashville R.R. Co. v. Mottley, 211 U.S. 149 (1908). Federal
question jurisdiction exists when “a well-pleaded complaint establishes either
that federal law creates the cause of action or that the plaintiffs right to relief
necessarily depends on resolution of a substantial question of federal law.”
Franchise TaxBd. of State of Cal. v. Constr. Laborers Vacation TrustforS. CaL,
463 U.S. 1, 27—28 (1983).
In the amended complaint, plaintiffs assert one federal-law claim and ten
state-law claims. (AC). The sole federal claim is alleged to arise under the FTC’s
Franchise Rule, 16 C.F.R.

§

436. (AC

¶

2, 53-56). Plaintiffs assert that this

federal claim under the Franchise Rule claim establishes federal question
jurisdiction over the case, pursuant to 28 U.S.C.

§

1331. (AC

¶

2). I find,

however, that federal law does not create a cause of action, and that the
complaint does not pose a substantial question of federal law. See Franchise
Tax Rd., supra.
The FTC’s Franchise Rule establishes requirements for the disclosure of
information to prospective franchisees. 16 C.F.R.

5

§

436—437. The Franchise

Rule was promulgated by the VPC pursuant to the Federal Trade Commission
Act (VItA), 15 U.S.C.

§

4 1—58. Courts have almost uniformly rejected an

implied right of action under the VItA. Dreisbach v. Murphy, 658 F.2d 720 (9th
Cir. 1981); Naylor v. Case & McGrath, Inc., 585 F.2d 557, 561 (2d Cir. 1978);
Alfred Dunhill Ltd. v. Interstate Cigar Co., Inc., 499 F.2d 232 (2d Cir. 1974);
Holloway v. Bristol-Myers Corp., 485 F.2d 986 (D.C. Cir. 1973). But see
Guernsey v. Rich Plan of Midwest, 408 F. Supp. 582 (N.D. md. 1976)
(recognizing a private right of action under the VFCA).
In Holloway the District of Columbia Circuit held that there was no
implied right of action under the FTCA. 485 F.2d 986 (D.C. Cir. 1973). As
Holloway was decided before the Supreme Court’s decision in Cort v. Ash, 422
U.s. 66 (1975), the court applied a somewhat different, more liberal, standard
to decide if there was an implied right of action. Since Cort v. Ash, the Supreme
Court has been considerably more restrictive in implying private rights of
actions under other federal statutes. See, e.g., Alexander v. Sandoval, 532 U.S.
275 (2001); Transamerica Mortg. Advisors, Inc. v. Lewis, 444 U.S. 11(1979).
This year, the Supreme Court stated that “[i]f the statute itself does not
displa[y] an intent to create a private remedy, then a cause of action does not
exist and courts may not create one, no matter how desirable that might be as
a policy matter, or how compatible with the statute.” Ziglar v. Abbasi, 137 S.
Ct. 1843, 1856 (2017) (internal quotation marks omitted) (citing Sandoval, 532
U.S. at 286-87). There is thus no need to relitigate whether the FTCA
encompasses a private right of action; I hold that it does not.
Since a private right of action does not exist under the VFCA, it stands to
reason that a private right of action does not exist under regulations
promulgated pursuant to the VItA. At any rate, it is well-settled that there is
no federal private right of action to enforce the Franchise Rule. See, e.g., Senior
Ride Connection v. ITNAmerica, 225 F. Supp. 3d 528, 531 n.l (D.S.C. 2016)
(“[Tjhere is no federal private right of action to enforce the Franchise Rule

....“);

A Love of Food I, LLC v. Maoz Vegetarian USA, Inc., 70 F. Supp. 3d 376, 382

6

(D.D.C. 2014) (“The FTC can bring suit to enjoin a franchisor’s failure to
furnish the required information in violation of the Franchise Rule, but no
private right of action is available to franchisees under these regulations.”
(citations omitted)); Mercy Health Sys. of Se. Pa. v. Metro. Partners Realty LLC,

No. 2-10 15, 2002 WL 1774060, at *2 (July 29, 2002) (same); Freedman u.
Meldy’s, Inc., 587 F. Supp. 658, 662 (E.D. Pa. 1984) (same); see also 72 Fed.
Reg. 15,478 n.350 (Mar. 30, 2007) (“We note that there is no private right of
action to enforce the Franchise Rule”).
Kim and SHKIM have asserted no viable federal cause of action pursuant
to the Franchise Rule regulations or the VPCA. Count I, the sole federal cause
of action, is thus dismissed for failure to state a claim. Because the federal
question was entirely insubstantial, and because there has not been significant
progress in the case, I decline to exercise supplemental jurisdiction. See 28
U.S.C.

9

1367(c) (“The district courts may decline to exercise supplemental

jurisdiction

...

[ii] the district court has dismissed all claims over which it has

original jurisdiction

.

This case is therefore dismissed for lack of subject matter jurisdiction.
CONCLUSION

III.

For the foregoing reasons, this case is dismissed for lack of subject
matter jurisdiction. The dismissal is without prejudice to the filing, within 30
days, of a second amended complaint that remedies the defects of the first.2 An
appropriate order follows.
Dated: October 26, 2017

.N MCNULTY
United States District Ju

“Where a district court lacks subject-matter jurisdiction, its ‘disposition of such
a case will
be without prejudice.”’ Siravo z’. Crown, Cork & Seal Co., 256 F. App’x
577, 580-8 1 (3d Cit. 2007) (citing In re Orthopedic “Bone Screw” Prods. Liab. Litig., 132
F.3d 152, 155 (3d Cir. 1997)).
2

...

7