Sonic Industries LLC et al v. Halleran et al
Filing
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ORDER granting in part and denying in part 31 Plaintiff's Motion to Dismiss. Signed by Honorable Robin J. Cauthron on 1/19/17. (lg)
IN THE UNITED STATES DISTRICT COURT FOR THE
WESTERN DISTRICT OF OKLAHOMA
SONIC INDUSTRIES LLC,
a limited liability company, et al.,
Plaintiffs,
v.
ARTHUR J. HALLERAN, JR., an
individual, and OKS CAMPBELL LLC,
a limited liability company, et al.,
Defendants.
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Case No. CIV-16-709-C
MEMORANDUM OPINION AND ORDER
Sonic Industries LLC, Sonic Franchising LLC, and Sonic Industries Services Inc.
(collectively, “Plaintiffs” or “Sonic”) filed this case alleging breach of contract and unjust
enrichment against Arthur J. Halleran, Jr.; OKS Campbell, LLC; OKS Commercial & U,
LLC; OKS Beach Place, LLC; OKS Stadium, LLC; and OKS Hialeah Gardens, LLC
(collectively, “Defendants” or “OKS”). Defendants answered and brought counterclaims
against Plaintiffs, raising questions regarding the choice of law provisions contained in
contracts between the parties and alleging various violations of Florida and Oklahoma law.
Now before the Court is Sonic’s Partial Motion to Dismiss Counterclaims (Dkt. No. 31).
OKS has responded and the Motion is now at issue.
This case involves a transaction between Sonic as the franchisor and OKS as the
developer and franchisee where OKS obtained the rights to develop twenty new Sonic
restaurants and purchase two existing restaurants in Florida. Sonic initiated this case
claiming OKS failed to pay all amounts due under the contracts and has therefore been
unjustly enriched by retaining “POP Kits” and other property under the open and unpaid
accounts. In its counterclaims, OKS alleges Sonic failed to provide proper financial
disclosures in the Franchise Disclosure Documents and made other false representations to
OKS regarding profitability and desirability of the restaurants in question, causing significant
losses on OKS’s investment.
The standard for consideration of motions to dismiss brought pursuant to
Fed. R. Civ. P. 12(b)(6) is set forth in the Supreme Court’s decision in Bell Atl. Corp. v.
Twombly, 550 U.S. 544 (2007), and the subsequent decision in Ashcroft v. Iqbal, 556 U.S.
662 (2009). In those cases, the Supreme Court made clear that to survive a motion to
dismiss, a complaint must contain enough allegations of fact which, when taken as true,
“state a claim to relief that is plausible on its face.” Twombly, 550 U.S. at 570. Plaintiffs
must “nudge[] their claims across the line from conceivable to plausible” to survive a motion
to dismiss. Id. Thus, the starting point in resolving Sonic’s Motion is to examine the factual
allegations supporting each claim that the counterclaimants wish the Court to dismiss. The
Court will accept all well-pleaded factual allegations in the complaint as true and construe
them in the light most favorable to the nonmoving party. Peterson v. Grisham, 594 F.3d 723,
727 (10th Cir. 2010). However, conclusory allegations need not be accepted as true. Kansas
Penn Gaming, LLC v. Collins, 656 F.3d 1210, 1214 (10th Cir. 2011).
Governing Law
As a threshold matter, the Court must determine which state’s substantive law applies
to the counterclaims at issue. Sonic argues Oklahoma law should apply because the
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agreements between the parties contained an Oklahoma choice of law clause applicable to
the contract claims and because the most significant relationship test yields the result that
Oklahoma law should also apply to the tort claims. OKS argues the agreements state Florida
law will govern franchise disagreements in addition to Oklahoma law, and has asserted
claims under the laws of both states.
When a federal court exercising diversity jurisdiction is faced with a choice of law
determination, the court “must apply the choice of law provisions of the forum state in which
it is sitting.” Shearson Lehman Bros., Inc. v. M & L Invs., 10 F.3d 1510, 1514 (10th Cir.
1993) (citations omitted). In Oklahoma, contract choice of law rules require the court to
apply the law of the state (1) chosen by the parties, (2) where the contract was made or
entered into, or (3) the place of performance if indicated in the contract. Moore v. Subaru
of Am., 891 F.2d 1445, 1449 (10th Cir. 1989) (citations omitted).
Here, there are agreements between the parties containing choice of law clauses. The
parties have not challenged the validity of the agreements, only the scope of the choice of law
clauses. The choice of law clause contained in the License Agreement states:
The terms and provisions of this Agreement shall be interpreted in
accordance with and governed by the laws of the State of Oklahoma, provided
that if the laws of the State of Oklahoma would not permit full enforcement of
Section 16 of this Agreement, then the laws of the state in which the Sonic
Restaurant is located or Licensee is domiciled shall apply to the extent that any
or all of such laws more fully permit enforcement of Section 16 of this
Agreement. Notwithstanding the foregoing, the franchise laws or regulations
of the state in which the Sonic Restaurant is located, in effect on the original
date of this Agreement, shall apply to this Agreement. . . . SONIC and
Licensee agree that any and all breaches of this Agreement, including breaches
occurring after termination, cancellation, or expiration of this Agreement, shall
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be deemed to have occurred where the corporate headquarters of SONIC are
located.
(License Agmt., Dkt. No. 31-1, p. 32) (emphasis added). The plain meaning of the clause
states Oklahoma law will govern the Agreement, but if there is no recourse for claims
brought under Section 16 (which is not implicated by the counterclaims), then the law of the
location of the restaurant will apply. Thus, the franchise laws and regulations of the location
of the restaurant will also apply. Restatement (Second) of Contracts § 202 (2016).
Given that Section 16 provides protections to Sonic, it is logical for the parties to draft
language allowing licensee protection in the following sentence. The Court finds no need
to examine beyond the plain meaning of the agreement between the parties. The Guaranty
Agreement (Dkt. No. 31-6, p. 3) contains an Oklahoma choice of law clause and the
Development Agreement also contains an Oklahoma choice of law clause (Dkt. No. 31-11,
pp. 15-16) and a savings clause electing Florida law as a contingent (Dkt. No. 31-11, p. 11).
Because the claims at issue involve the License Agreement, the Court concludes this choice
of law provision should apply and OKS will be permitted to assert claims stemming from
both Oklahoma and Florida law.
When evaluating tort issues, Oklahoma choice of law rules apply the law of the state
with the most significant relationship to the parties. Moore, 891 F.2d at 1448. This test
considers “‘(1) the place where the injury occurred, (2) the place where the conduct causing
the injury occurred, (3) the domicile, residence, nationality, place of incorporation and place
of business of the parties, and (4) the place where the relationship, if any, between the parties
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occurred.’” Yavuz v. 61 MM, Ltd., 576 F.3d 1166, 1178-79 (10th Cir. 2009) (quoting
BancOklahoma Mortg. Corp. v. Capital Title Co., 194 F.3d 1089, 1103-04 (10th Cir. 1999)).
Here, the injured parties, OKS, reside in Florida. The alleged breach and fraudulent
acts occurred within Sonic’s headquarters, located in Oklahoma. In fact, the parties agreed
that “any and all breaches” of the License Agreement would be deemed to have occurred
“where the corporate headquarters of SONIC are located.” (License Agmt., Dkt. No. 31-1,
p. 32.) The fourth factor places Sonic in Oklahoma and Delaware and OKS in Florida. As
for the final factor, Sonic states all contracts were issued from the Sonic headquarters in
Oklahoma.
OKS makes no counterargument regarding the most significant relationship test, but
does state “[w]hile the Sonic Defendants’ unlawful conduct may have primarily occurred in
Oklahoma, the OKS Plaintiffs were required to perform under the License Agreements in
Florida.” (Ds.’ Resp., Dkt. No. 35, p. 13.) After considering the factors, the Court
determines the breach of the covenant of good faith and fair dealing and fraud claims will be
subject to Oklahoma law.1
Count II – Bad Faith
OKS brings a claim of breach of the implied covenant of good faith and fair dealing,
or bad faith, arguing Sonic abused its discretionary authority, failed to exercise its authority
in good faith, and the alleged conduct constituted a willful and malicious breach of said duty.
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OKS brought its fraud claim only pursuant to Oklahoma law.
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Sonic argues the claim must be dismissed because there is no special relationship between
the parties and the agreement is merely a commercial contract. According to the choice of
law discussed above, Oklahoma law will apply to this issue.
Oklahoma law recognizes an implied covenant of good faith and fair dealing in every
contract, but its breach is usually not recoverable as a tort independent from breach of
contract. First Nat’l Bank & Trust Co. of Vinita v. Kissee, 1993 OK 96, ¶ 24, 859 P.2d 502,
509. The Oklahoma Supreme Court has recognized an independent bad faith claim when
there is a “special relationship” between the parties. A special relationship that will “give[]
rise to tort liability for bad faith is marked by (1) a disparity in bargaining power where the
weaker party has no choice of terms, also called an adhesion contract, and (2) the elimination
of risk.” Embry v. Innovative Aftermarket Sys. L.P., 2010 OK 82, ¶ 7, 247 P.3d 1158, 1160
(citation omitted). Typically, bad faith claims are asserted in the insurance context and the
Oklahoma Supreme Court has been reluctant to expand the meaning of special relationship
“beyond the insurance field.” Id. 2010 OK 82, ¶ 6, 247 P.3d at 1160; compare Hitch
Enterprises, Inc. v. Cimarex Energy Co., 859 F. Supp. 2d 1249, 1264 (W.D. Okla. 2012)
(dismissing claim based on lessee-royalty owner relationship); Rodgers v. Tecumseh Bank,
1988 OK 36, 756 P.2d 1223, 1225-27 (declining to extend independent tort to commercial
loan contracts).
Here, the relationship between the parties is that of franchisor and franchisee. OKS
has not offered any facts indicating this is an adhesion contract or that Sonic eliminated its
risk in the contract. While Sonic may have had more bargaining power because it is a large
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corporation, OKS cannot be said to have had no bargaining power or no choice of terms. The
Court finds no indication that the agreements in question were not ordinary commercial
contracts. Accordingly, OKS will not be permitted to assert a separate tort in this matter, but
the same facts will apply to the breach of contract claim. Because no amendment could cure
the deficiencies discussed herein, the bad faith claim must be dismissed with prejudice.
Count III – Fraud
With regard to the third count for fraud, Sonic argues the claim is deficient because
it fails to meet the heightened pleading requirements imposed by Fed. R. Civ. P. 9(b). A
fraud claim must “set forth the time, place and contents of the false representation, the
identity of the party making the false statement and the consequences thereof.” In re
Edmonds, 924 F.2d 176, 180 (10th Cir. 1991) (citations omitted). Rather than requiring
“factually or legally valid” allegations or detailed statements regarding fraud, the Tenth
Circuit explains “Rule 9(b) requires that the pleadings give notice to the defendants of the
fraudulent statements for which they are alleged to be responsible.” Schwartz v. Celestial
Seasonings, Inc., 124 F.3d 1246, 1253 (10th Cir. 1997) (citation omitted).
Here, the pleadings set out the time as late 2007 (when Halleran was granted
development rights), early 2007 (when Halleran was coerced into acquiring two failing
restaurants), the time period in which each License Agreement was signed, and prior to the
signing (when the Financial Disclosure Documents containing false information were
delivered and other misrepresentations regarding investment expectations were made).
(Countercl., Dkt. No. 17, pp. 14-17.) The Court finds this satisfies the time requirement.
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Next, the counterclaim states the location of the restaurants and territories in question and
the place Mr. Ritger is alleged to have visited when he made representations to OKS.
(Countercl., Dkt. No. 17, pp. 14, 17.) No other place is material to the allegations. The
Court need not recite the alleged contents of the fraudulent statements and actions, but the
Court finds them to be sufficient. Finally, the allegations name Mr. Ritger as a representative
of Sonic and “Sonic Industries” and “Sonic Defendants” in other places where the company
is taking action. The Tenth Circuit does not require the identification of “individual sources
of statements . . . when the fraud allegations arise from misstatements or omissions in
group-published documents such as annual reports, which presumably involve collective
actions of corporate directors or officers.” Schwartz, 124 F.3d at 1254. Because these
allegations are sufficient to provide Sonic with proper notice, the claim will not be dismissed.
Count IV – Violation of the Florida Franchise Act
OKS alleges that Sonic violated the Florida Franchise Act (“FFA”) by “intentionally
misrepresenting the prospects or chances for success of the Sonic franchises sold to the OKS
Plaintiffs.” (Countercl., Dkt. No. 17, p. 24.) The allegations further state Sonic knew the Ft.
Lauderdale shopping mall location must produce $4,000,000 in revenue to be profitable, but
Sonic was also aware no other shopping mall restaurant had produced similar revenue. With
this knowledge, Sonic assured OKS the Fort Lauderdale location was financially viable.
Relying on Sonic’s representations and inaccurate Franchise Disclosure Documents, OKS
entered into agreements with Sonic and suffered substantial losses. Sonic argues this claim
must fail because the License Agreement expressly disclaimed not only representations
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regarding future profitability, but also all oral representations. (Countercl., Dkt. No. 17, pp.
17-18.)
The statute in question states “[i]t is unlawful, when selling or establishing a franchise
or distributorship, for any person . . . [i]ntentionally to misrepresent the prospects or chances
for success of a proposed or existing franchise or distributorship.” Fla. Stat. § 817.416(2)(a).
To recover under the FFA, OKS must show “‘proof of intentional words or conduct by the
franchisor, concerning the prospects or chances of success of the enterprise, which were
relied upon by the franchisee to his detriment, and which are not in accordance with the
facts.’” Hall v. Burger King Corp., 912 F. Supp. 1509, 1529 (S.D. Fla. 1995) (quoting
Travelodge Int’l, Inc. v. Eastern Inns, Inc., 382 So.2d 789, 791 (Fla. 1st DCA 1980)). The
Court finds OKS has successfully pleaded facts, that when taken as true, state a claim for
relief and the claim will not be dismissed.
Count V – Violation of the Florida Deceptive and Unfair Trade Practices Act
OKS alleges that Sonic violated the Florida Deceptive and Unfair Trade Practices Act
(“FDUTPA”), Fla. Stat. § 501.201 et seq. To state a claim, OKS must show “(1) a deceptive
act or unfair trade practice; (2) causation; and (3) actual damages.” Dolphin LLC v. WCI
Communities, Inc., 715 F.3d 1243, 1250 (11th Cir. 2013) (citation omitted). OKS states that
because the FDUTPA adopts any violation of the Federal Trade Commission Act and Sonic
failed to comply with the Franchise Rule, the claim must survive a motion to dismiss.
Sonic argues the pleadings do not contain sufficient specificity and the alleged
wrongful acts were expressly disclaimed in the License Agreement and cannot be a violation
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of the FDUTPA. OKS must plead with particularity according to Fed. R. Civ. P. 9(b).2 See
U.S. ex rel. Clausen v. Lab. Corp. of Am., Inc., 290 F.3d 1301, 1310 (11th Cir. 2002) (stating
a “plaintiff must plead ‘facts as to time, place, and substance of the defendant’s alleged
fraud,’ specifically ‘the details of the defendants’ allegedly fraudulent acts, when they
occurred, and who engaged in them.’”) (citation omitted); see also discussion supra Count
III (examining time, place, contents, and identity requirements of Rule 9(b)). Contrary to
Sonic’s argument, the allegations contained in the counterclaim are much more specific than
the general “theft” and “embezzlement” allegations in Joyeria Paris, SRL v. Gus & Eric
Custom Servs., Inc., No. 13-22214-CIV, 2013 WL 6633175, at *5 (S.D. Fla. Dec. 17, 2013)
(dismissing FDUTPA claims for failure to state a claim). The claim will not be dismissed
for Rule 9(b) reasons.
Next, Sonic argues the License Agreements expressly disclaim all circumstances
forming the FDUTPA claim. The Court agrees. Florida courts are in agreement that “a party
that signs a contract whose terms contradict the alleged misrepresentations on which he relied
is barred from seeking relief pursuant to FDUTPA, as the party did not reasonably rely on
the misrepresentation.” Zaffrullah v. Countrywide Home Loans, Inc., No. 09-61142-CIV,
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The Florida courts are split on whether the heightened fraud pleading is required to
make out a FDUTPA claim. SIG, Inc. v. AT & T Digital Life, Inc., 971 F. Supp. 2d 1178,
1195 (S.D. Fla. 2013); Guerrero v. Target Corp., 889 F. Supp. 2d 1348, 1355 (S.D. Fla.
2012). However, the split is not an issue here because pleadings clearly allege fraud, so the
heightened standard will apply. See Begualg Inv. Mgmt. Inc. v. Four Seasons Hotel Ltd.,
No. 10-22153-CIV, 2011 WL 4434891, at *5 (S.D. Fla. Sept. 23, 2011) (finding Rule 9(b)
applies because plaintiff’s complaint described fraudulent conduct).
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2010 WL 503074, at *4 (S.D. Fla. Feb. 8, 2010); TRG Night Hawk Ltd. v. Registry Dev.
Corp., 17 So. 3d 782, 784-85 (Fla. Dist. Ct. App. 2009) (listing cases). Because no
amendment could cure the deficiencies discussed herein, the claim must be dismissed with
prejudice.
Count VI – Violation of the Oklahoma Business Opportunity and Sales Act
OKS brings claims pursuant to the Oklahoma Business Opportunity and Sales Act
(“OBSA”), alleging Sonic was no longer exempt from certain filing requirements with the
Oklahoma Department of Securities when they provided false and misleading information
in the Financial Disclosure Documents, or in the alternative, that Sonic failed to deliver the
Financial Disclosure Documents. 71 Okla. Stat. § 807(A)(2) (registration procedure
requiring the filing of disclosure documents); 71 Okla. Stat. § 803(6)(b) (providing
exemption from filing disclosure if disclosures are delivered to purchaser). OKS also claims
the same Financial Disclosure Documents violated the OBSA, which outlaws the use of
fraudulent or deceitful information “in connection with the offer or sale of any business
opportunity.” 71 Okla. Stat. § 819.
Sonic argues that OKS pleads alternative facts in an improper manner. However,
Oklahoma courts have routinely held that alternative pleading is permissible, even when the
presented theories are inconsistent. See Barringer v. Baptist Healthcare of Okla., 2001 OK
29, ¶ 17, 22 P.3d 695, 700; Howell v. James, 1991 OK 47, 818 P.2d 444, 448; 12 Okla. Stat.
§ 2008(E)(2). Therefore, OKS is permitted to argue in the alternative and no claims will be
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dismissed for the sole reason that OKS disputes whether Sonic provided a Financial
Disclosure Document.
The Court finds there are outstanding questions of fact regarding whether the
Financial Disclosure Document was provided and if so, if it was sufficient. “[Q]uestions of
fact may not be decided on a motion to dismiss for failure to state a claim.” Am. Home
Assurance Co. v. Cessna Aircraft Co., 551 F.2d 804, 808 (10th Cir. 1977). Accordingly, the
claim will not be dismissed.
Count VII – Violation of the Oklahoma Consumer Protection Act
OKS asserts a claim under the Oklahoma Consumer Protection Act (“OCPA”), 15
Okla. Stat. §§ 751 et seq. Sonic argues the claim must be dismissed because the Federal
Trade Commission (“FTC”) has authority to regulate franchisors and the OCPA exemption
applies, making this claim inapplicable. The OCPA exemption states the Act shall not apply
to “[a]ctions or transactions regulated under laws administered by the Corporation
Commission or any other regulatory body or officer acting under statutory authority of this
state or the United States.” 15 Okla. Stat. § 754.
OKS points to two cases where the exemption precluded OCPA claims and the
regulating authority allowed a private right of action to pursue the same claim. OKS argues
there must be a private right of action for the OCPA exemption to apply, but this argument
is not supported by the statute or case law. The statute makes no mention of a private right
of action as a requirement for the exemption. See id. The fact that a private right of action
existed was not material to the holding in Estate of Hicks ex rel. Summers v. Urban East,
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Inc., 2004 OK 36, ¶ 32, 92 P.3d 88, 95, where the Oklahoma Supreme Court simply found
that because an action was regulated by the Oklahoma Department of Health, the OCPA
claim exemption applied. Similarly in Brice v. AT & T Communications, Inc., 2001 OK CIV
APP 112, ¶ 14, 32 P.3d 885, 887, as corrected (Aug. 22, 2001), the determination turned on
the fact that the Oklahoma Corporation Commission had authority over the issue. In Ward
v. Toyota Motor Insurance Services, Inc., No. CIV-11-230-KEW, 2012 WL 1108039, at *3
(E.D. Okla. Apr. 2, 2012) (unpublished) the plaintiff argued the OCPA claim should not be
dismissed because no private right of action was available under the FTC or the Oklahoma
Used Motor Vehicle and Parts Commission. The court held “the exemption [at § 754] is
express and unequivocal. As a result, no reasonable basis exists as a matter of law for the
claims.” Id.
OKS has not disputed Sonic’s proposition that the FTC has authority to regulate
Sonic’s activity as a franchisor; in fact, OKS has alleged breach of the Franchise Rule.
(Countercl., Dkt. No. 17, pp. 13-14.) Because the OCPA exemption makes no requirement
of a private cause of action and the FTC regulates the conduct at issue, the claim must be
dismissed with prejudice.
CONCLUSION
Accordingly, Plaintiffs’ Motion to Dismiss (Dkt. No. 31) is GRANTED in part and
DENIED in part. The remaining counterclaims include Count I, breach of contract; Count
III, fraud; Count IV, violation of the Florida Franchise Act; and Count VI, violation of the
Oklahoma Business Opportunity and Sales Act.
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IT IS SO ORDERED this 19th day of January, 2017.
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