Yumilicious Franchise LLC v. Barrie et al
Filing
47
Memorandum Opinion and Order denying 26 Counter-Plaintiffs Motion for Reconsideration of Previous Order and Motion to Amend. (Ordered by Judge Sam A Lindsay on 4/22/2015) (jrr)
IN THE UNITED STATES DISTRICT COURT
FOR THE NORTHERN DISTRICT OF TEXAS
DALLAS DIVISION
YUMILICIOUS FRANCHISE, L.L.C.,
Plaintiff,
v.
MATT BARRIE; KELLY GLYNN;
BRIAN GLYNN; and WHY NOT, L.L.C.,
Defendants.
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Civil Action No. 3:13-CV-4841-L
MEMORANDUM OPINION AND ORDER
Before the court is Counter-Plaintiff’s Motion for Reconsideration of Previous Order and
Motion to Amend (Doc. 26), filed October 17, 2014. After considering the motion, response, reply,
pleadings, the court’s August 14, 2014 memorandum opinion and order, and applicable law, the
court denies Counter-Plaintiff’s Motion for Reconsideration of Previous Order and Motion to
Amend (Doc. 26).
I.
Background
Rather than filing a separate motion for reconsideration, Defendants Matt Barrie, Kelly
Glynn, Brian Glynn, and Why Not, L.L.C. (collectively, “Defendants” or “Why Not”) embedded
their motion for reconsideration and motion for leave in their October 17, 2014 response to Plaintiff
Yumilicious Franchise, L.L.C.’s (“Plaintiff” or “Yumilicious”) second motion to dismiss
Defendants’ counterclaims by asserting arguments that are randomly dispersed throughout their
response to Plaintiff’s motion to dismiss.1 Consequently, Defendants’ motion for reconsideration
1
The document filed by Defendants is titled “Counter-Plaintiff’s Response to Motion for Partial Dismissal of
Counterclaims Under Rule 12(b)(6) and Pursuant to Court Order Motion for Reconsideration of Previous Order and
Memorandum Opinion and Order 1
is not a model of clarity. Defendants’ response to Plaintiff’s first motion to dismiss Defendants’
counterclaims and Defendants’ original pleadings in support of their counterclaims are similarly
difficult to decipher.
Defendants request the court to reconsider its August 14, 2014 memorandum opinion and
order (Doc. 17) in which the court dismissed with prejudice under Rule 12(b)(6) their counterclaims
for alleged violations of the Texas Deceptive Trade Practices Act (“DTPA”), the Federal Trade
Commission’s Franchise Act or Franchise Rule (“FTCA” or “Franchise Rule”), and the Business
Opportunity Acts of Texas and South Carolina.2 The court previously dismissed these claims after
Motion for Leave to Amend and Authorities in Support Thereof.” Doc. 26. Because Defendants’ response to Plaintiff’s
second motion to dismiss included a motion for reconsideration, Defendants were required, but failed to include the
requisite certificate of conference in their motion. See L.R. 7.1.
2
In their motion for reconsideration, Defendants continue to treat their allegations regarding alleged violations
of the Texas DTPA, the FTCA, and the Business and Opportunity Acts of Texas and South Carolina as separate and
independent causes of action. While a cause of action can be brought under the DTPA for violations of the FTCA, there
is no private right of action under the FTCA itself. Brill v. Catfish Shaks of Am., Inc., 727 F. Supp. 1035, 1041 (E.D.
La. 1989); Texas Cookie Co. v. Hendricks & Peralta, Inc., 747 S.W.2d 873, 877 (Tex. App.—Corpus Christi 1988, writ
denied ) (“The DTPA itself provides in § 17.49(b) that: ‘The provisions of this subchapter do apply to any act or practice
prohibited . . . by a rule or regulation of the Federal Trade Commission.’”).
Likewise, a violation of the TBOA is considered a “false, misleading, or deceptive act or practice under Section
17.46,” and the TBOA provides that a “private right or remedy prescribed by Chapter 17 may be used to enforce” the
TBOA. Tex. Bus. & Com. Code Ann. § 51.302 (West 2009). Contrary to Plaintiff’s pleadings, however, the TBOA does
not require franchisors to provide franchisees with FTCA disclosures or a financial disclosure document (“FDD”) in
accordance with the Franchise Rule. The TBOA instead requires sellers to file a disclosure document with the Texas
Secretary of State that may be in the form of FTCA disclosures. Id. § 51.053. The TBOA also expressly prohibits the
following conduct by sellers, which may form the basis of a DTPA claim:
(1) employ[ing] a representation, device, scheme, or artifice to deceive a purchaser;
(2) mak[ing] an untrue statement of a material fact or omit to state a material fact in connection with
the documents and information required to be provided to the Secretary of State or purchaser;
(3) represent[ing] that the business opportunity provides or will provide income or earning potential
unless the seller has documented data to substantiate the representation of income or earning potential, and
discloses the data to the purchaser when the representation is made; or
(4) mak[ing] a claim or representation that is inconsistent with the information required to be disclosed
in advertising or other promotional material, or an oral sales presentation, solicitation, or discussion
between the seller and the purchaser.
Memorandum Opinion and Order 2
determining: (1) that Defendants’ DTPA claim was based on alleged violations of the FTCA and
the Business Opportunity Acts of Texas (“TBOA”) and South Carolina (“SCBOA”);3 (2) that
Defendants’ DTPA claim was barred by the two-year statute of limitations applicable to DTPA
claims; and (3) that Defendants’ pleadings with respect to their DTPA claim failed to set forth or
raise some basis for tolling the statute of limitations.
Defendants contend that the court erred in dismissing their DTPA, FTCA, and Business
Opportunity Act claims on statute of limitations grounds. Defendants assert that they pleaded the
discovery rule, which is sufficient to create a fact issue. Defendants also contend that section 16.069
of the Texas Civil Practice and Remedies Code applies to their counterclaims, and that, under this
statute, their counterclaims for DTPA, FTCA, and Business Opportunity Act violations are not
barred by the statute of limitations.
II.
Discussion
A.
Tolling Based on Discovery Rule
With respect to the discovery rule, Defendants direct the court to paragraph thirty-six of their
original pleadings4 in which they allege: “These fraudulent misrepresentations were ongoing until
Id. § 51.301. Accordingly, for these reasons, the court previously construed and continues to construe Defendants’
counterclaim for alleged violations of the DTPA, FTCA, TBOA, and SCBOA, as a single claim under section 17.46 of
the DTPA.
3
Neither party has presented any authority to show that the SCBOA, like the TBOA, contains a similar
provision that allows private parties to assert a deceptive trade practices act claim under South Carolina law. For this
reason and because the parties previously acknowledged that Texas law applies to Defendants’ claims, the court did not
previously analyze Defendants’ assertion of a claim under South Carolina law for alleged FTCA disclosure violations,
and the court does not do so here.
4
Defendants also cite to their amended pleadings in support of their motion for reconsideration; however, in
ruling on the motion for reconsideration, the court only considers the pleadings in Defendants’ original pleadings, which
formed the basis for the first motion to dismiss and the court’s ruling that is the subject of the motion for reconsideration.
Memorandum Opinion and Order 3
the failure of the Forest Acres store and could not, through reasonable diligence, have been
discovered by [Defendants] until shortly before that time.” Defs’ Resp. to Mot. to Dismiss ¶ 16.
Defendants contend that these allegations are sufficient to support tolling under the discovery rule.
The court disagrees.
The discovery rule tolls a statute of limitations “until the plaintiff knew or, by exercising
reasonable diligence, should have known of the facts giving rise to a cause of action.” Barker v.
Eckman, 213 S.W.3d 306, 311-12 (Tex. 2006). The discovery rule only applies to injuries that are
“inherently undiscoverable and the injury itself must be objectively verifiable.” Id. The discovery
rule is a “plea in confession” or “matter in avoidance” to the statute of limitations. Woods v. William
M. Mercer, Inc., 769 S.W.2d 515, 518 (Tex. 1988). The party relying on the discovery rule therefore
has the burden of pleading and proof, and the failure to affirmatively plead the discovery rule waives
the matter. Id. (“A matter in avoidance of the statute of limitations that is not raised affirmatively
by the pleadings will, therefore, be deemed waived.”).
The affirmative defenses expressly pleaded by Defendants do not reference the discovery rule
at all. Even assuming that Defendants’ pleadings are sufficient to satisfy the requirement that the
discovery rule must be affirmatively pleaded, the court concludes that the pleadings are devoid of
any facts to support their conclusory assertion that the alleged misrepresentations by Plaintiff
continued for two years until the failure of the Forest Acres or Columbia store. According to
Defendants’ pleadings, all of the affirmative misrepresentations or omissions by Plaintiff occurred
before Defendants signed the franchise agreements for both stores in May or June 2010. Moreover,
Defendants concede that Plaintiffs ignored their repeated pleas for help before the Forest Acres store
closed. Defs.’ Counterclaim ¶ 21.
Memorandum Opinion and Order 4
While Defendants also allege that “the gravity of the distribution and supply issues was not
immediately evident” because Yumilicious provided a four-month supply of essential proprietary
products to Defendants before the Forest Acres store opened, they acknowledge that the reason their
franchise business failed and was unable to compete financially with other yogurt shops is because
Defendants were not permitted to purchase small quantities of products but instead, “[f]rom
inception . . . [were required] to purchase Yumilicious product[s]” in cost prohibitive pallet-size,
bulk quantities from Yumilicious’s regional distributor. Id. ¶ 19. Thus, Defendants were aware from
the beginning that this was an issue. Even though Defendants allege that Yumilicious assured them
before entering the Lexington franchise agreement that it was in the process of negotiating a contract
with a national distributor that would be able to provide products at a fair market price, there are no
allegations by Defendants regarding any corresponding assurances by Yumilicious that the switch
to a national distributor would obviate the requirement that purchases be made in bulk, pallet-size
quantities. Accordingly, Defendants knew or reasonably should have known the facts giving rise
to their DTPA claim based on this alleged misrepresentation long before the Forest Acres store failed
and closed in October 2012. Defendants nevertheless waited until December 12, 2013, before filing
this action. The discovery rule therefore does not save Defendants’ counterclaim based on alleged
violations of the DTPA.
B.
Section 16.069—Statute of Limitations for Counterclaims
On the other hand, the court agrees with Defendants that section 16.069 of the Texas Civil
Practice and Remedies Code5 applies to their DTPA counterclaim, and, under this statute, their
5
Section 16.069 provides that if a counterclaim or cross claim is filed not later than thirty days after the date
on which the party’s answer is due and “arises out of the same transaction or occurrence that is the basis of an action,”
the claim is not barred by limitations “even though as a separate action it would be barred by limitation on the date the
Memorandum Opinion and Order 5
DTPA claim is not barred by statute of limitations. After revisiting the grounds asserted in
Plaintiff’s first motion to dismiss, however, the court concludes that Defendants’ DTPA claim fails
for other reasons raised in Plaintiff’s original motion to dismiss that the court did not previously
address.
C.
Other Grounds Warranting Dismissal of Defendants’ DTPA Claim
In their first motion to dismiss, Yumilicious argued that it was entitled to dismissal of
Defendants’ fraud and DTPA claims, which are based on the same factual allegations, because
Defendants failed to allege any facts that, if proved, would establish that Yumilicious knew its
representations were false when made or that it intentionally failed to disclose information to mislead
Why Not. In addition, Yumilicious contended that Defendants failed to allege any facts that Why
Not detrimentally relied on the allegedly false disclosures or omissions or that Yumilicious’s alleged
conduct caused Defendants to suffer damages.
Defendants did not specifically address this argument by Plaintiff in response to the motion
to dismiss. Defendants instead simply responded that they had “alleged fraud with sufficient
particularity” under Rule 9(b), and that they had “clearly alleged an action under the DTPA created
by violation of the FTC Franchise Rule” by stating that:
25. The Texas Business Opportunity Act requires compliance with the FTC
Franchise Rule in order to maintain an exemption and avoid a per se violation of the
Texas Deceptive Trade Practices Act (DTPA), which provides for recovery of all
damages including consequential damages and punitive damages which may be
trebled under the DTPA, as well as recovering attorney’s fees. Further, at the time of
selling the initial franchise, Yumilicious was not in compliance with the South
Carolina Business Opportunity Law.
Defs.’ Resp. to Pl.’s Mot. to Dismiss ¶ 11 (Doc. 12).
party’s answer is required.” Tex. Civ. Prac. & Rem. Code Ann. § 16.069.
Memorandum Opinion and Order 6
As best as the court can ascertain, Defendants’ DTPA claim is based on representations
allegedly made by Yumilicious before and after the parties entered the Columbia franchise agreement
and Yumilicious’s alleged failure to provided certain disclosures under the Franchise Rule in
accordance with the FTCA. With respect to Franchise Rule disclosures, Defendants allege that: (1)
Plaintiff failed to provide updated disclosures or an updated FDD; (2) the FDD did not contain
disclosures regarding approved vendors or distributors for required products; (3) the information
disclosed by Plaintiff and included in the FDD underestimated the amount of start-up or build-out
costs; and (4) the FDD that Plaintiff provided to Defendants before they signed the franchise
agreements included some but not all of the financial performance information previously disclosed
by Plaintiff.
Defendants further allege that before they signed either of the two franchise agreements,
Yumilicious’s chief executive officer Salina Pham made statements that “convinc[ed] them that
Yumilicious could go national and supply products to stores outside Texas.” Defs.’ Counterclaim
¶ 6. Additionally, Defendants allege that Plaintiff provided “repeated assurance” that it was “in the
process of negotiating a contract with a national distributor . . . who would be able to provide
essential product[s] at a fair market price including shipping costs.” Id. ¶¶ 15-16. Defendants allege
that they relied on these assurances by Plaintiff in entering the franchise agreement for the second
yogurt store location in Lexington, South Carolina. According to Defendants’ pleadings, however,
Yumilicious did not ultimately consummate the deal with the national distributor and instead
“entered into an exclusive agreement with another regional distributor” in Texas. Id. ¶ 17.
Defendants’ DTPA claim therefore falls under 17.46(b)(5) and 17.46(b)(24) of the DTPA.
Section 17.46(b)(5) applies to affirmative representations by a seller to a consumer, whereas section
Memorandum Opinion and Order 7
17.46(b)(24) applies to omissions. See Tex. Bus. & Com. Code Ann. §§ 17.46(b)(5), (24) (West
2011). Section 17.46(b)(5) prohibits a seller from representing “that goods or services have
sponsorship, approval, characteristics, uses, benefits, or qualities which they do not have or that a
person has a sponsorship, approval, status, affiliation or connection which he or it does not.” Id. §
17.46(b)(5). Section 17.46(b)(24) applies to the failure “to disclose information concerning goods
or services which was known at the time of the transaction if such failure to disclose such
information was intended to induce the consumer into a transaction into which the consumer would
not have entered had the information been disclosed.” Id. § 17.46(24). The failure to disclose facts
by one who has no knowledge of those facts, however, is not a false, misleading, or deceptive act
or practice and cannot serve as a basis for liability under the DTPA. Robinson v. Preston
Chrysler–Plymouth, Inc., 633 S.W.2d 500, 502 (Tex. 1982). As explained by the Texas Supreme
court in Robinson v. Preston Chrysler–Plymouth, Incorporated, when a seller makes representations
to a buyer, the seller has a duty to know whether they are true, but no such duty exists when the seller
does not make representations and merely fails to reveal information it does not know. Id. Thus,
the failure to disclose facts about which the seller is unaware cannot give rise to liability under the
DTPA.
Based on the court’s reasoning in Robinson, the Fifth Circuit has similarly held that the
section of the DTPA relied on by Defendants “requires [an] intentional omission of a material fact
by a Seller for the purpose of duping the consumer.” Sidco Prod. M. Mktg., Inc. v. Gulf Oil Corp.,
858 F.2d 1095, 1100 (5th Cir. 1988). Thus, “[t]he seller must have known of the defect” or material
information at the time of the transaction and “must have intended to deceive the consumer” by not
disclosing the information. Id.; Century 21 Real Estate Corp. v. Hometown Real Estate Co., 890
Memorandum Opinion and Order 8
S.W.2d 118, 126 (Tex. App.—Texarkana 1994, writ denied ) (concluding that “[m]ere nondisclosure
of material information is not enough to establish an actionable DTPA claim. By definition, the
prohibition against failing to disclose material information requires a showing of intentional
misconduct.”). For DTPA claims under section 17.46, a consumer must have also relied to its
detriment on the seller’s acts or representations and such acts or representations must have been the
producing cause of the consumer’s damages. Tex. Bus. & Com. Ann. Code § 17.50(a).
1.
Vendors or Distributors of Yogurt Products
Defendants’ allegations regarding assurances and omissions as to vendors or distributors do
not satisfy the foregoing requirements for DTPA claims under section 17.46. Defendants do not
allege that Yumilicious’s statements that it “could go national and supply products to stores outside
Texas” and was in the process of negotiating a contract with a national distributor were knowingly
false when made or intentionally omitted material information that made the statements misleading
when made. Defs.’ Counterclaim ¶ 6 (emphasis added). While such representations indicate that
Yumilicious had the ability to go national and attempted to negotiate an agreement with a national
distributer, they are not sufficiently definite to have the meaning that Defendants seem to attribute
to them, which is that such statements constitute unqualified assurances by Yumilicious that it would
go national and make yogurt products available to Defendants through a national distributor at a
price lower than that charged by Yumilicious’s regional distributor.
Additionally, Defendants do not expressly allege that they detrimentally relied on or were
induced into entering the franchise agreements by the “could go national” representation or
Yumilicious’s failure to disclose distributor information, and, by alleging that these communications
took place before the franchise agreements were entered, Defendants essentially acknowledge that
Memorandum Opinion and Order 9
they were aware of the alleged product supply issue before entering the agreements, and entered the
agreements despite this knowledge. Defendants’ allegations with respect to subsequent assurances
that Plaintiff was in the process of negotiating a contract with a national distributer are likewise
insufficient. Although Defendants allege that they detrimentally relied on and were induced by these
assurances to enter the second franchise agreement, they acknowledge that they were aware from the
beginning or “[f]rom inception” that they would only be able to make purchases of yogurt products
in bulk pallet-sized quantities, and Defendants do not allege that Plaintiff told them that the switch
to a national distributor would obviate this requirement. Defendants’ allegations regarding alleged
representations and omissions with respect to vendors or distributors and supply of yogurt products
are therefore insufficient to state a claim upon which relief can be granted under section 17.46 of the
DTPA.
2.
Start-Up Costs
With respect to start-up costs, Defendants allege as follows in paragraph 27(d) of their
original pleadings:
There were numerous difficulties in the buildout and fixturing of the first
store as a result of mistakes made by the sole approved suppliers and approval
processes [Yumilicious] required (e.g. architect) which resulted in buildout costs that
were more than double the costs disclosed in Item 7 of the FDD and by
[Yumilicious’s] direct representation to [Defendant], Barrie. The estimated range
grossly underestimated predictable startup costs which was a crippling financial
blow, subsequently compounded by the exorbitant cost of proprietary products
required by Yumilicious.
Defs.’ Counterclaim ¶ 27(d). Again, Defendants do not allege that Plaintiff intentionally failed to
disclose material information or that Plaintiff knew its disclosures regarding franchise start-up costs
were false when made; nor do Defendants allege that they detrimentally relied on Plaintiff’s
Memorandum Opinion and Order 10
disclosures regarding franchise costs in entering the franchise agreements. Further, Defendants
concede that the unanticipated costs they incurred resulted in part from “mistakes” made by
Plaintiff’s suppliers rather than any intentional misrepresentations or omissions by Plaintiff.
Defendants have therefore failed to state a claim upon which relief can be granted under 17.46 of the
DTPA based on representations, omissions, or inaccurate disclosures pertaining to start-up costs.
3.
Financial Performance
Regarding financial disclosures, Defendants allege:
Contrary to the requirements of Item 19 of the FDD, [Defendants] were
provided with earnings financial performance representations (FPRs) on several
occasions, outside the four corners of the FDD, including on April 19, 2010, six
weeks before the date they ostensibly signed both franchise agreements.
Id. ¶ 28. By this, Defendants appear to contend that Plaintiff violated the Franchise Rule by not
including in the FDD all of the information previously provided to Defendants regarding
Yumilicious’s financial performance. Like the other alleged nondisclosures, Defendants do not
allege that Yumilicious intentionally withheld material information or made any statements that it
knew were false when they were made. Defendants also fail to allege that they detrimentally relied
on any representations or omissions by Plaintiff regarding Yumilicious’s financial performance or
suffered damages as a result. Thus, at most, Defendants’ allegations, if proved, would only establish
a technical violation of the Franchise Rule, which alone is insufficient to state a claim under section
17.46 of the DTPA. Defendants have therefore failed to state a claim upon which relief can be
granted under 17.46 of the DTPA based on representations or omissions as to Yumilicious’s
financial performance.
Memorandum Opinion and Order 11
4.
Updated Disclosures or FDD
Defendants acknowledge that they received an FDD before signing the franchise agreements
in May or June 2010, but they allege that the FDD was not current or “updated” as required by the
FTCA or Franchise Rule because it was dated June 8, 2008. In addition, Defendants allege that the
numerous inconsistencies throughout the FDD “indicated a failure to provide a timely and complete
updated FDD.” Defendants’ DTPA claim based on these allegations fails for the same reasons their
claim with respect to financial performance and start-up disclosures fails. Without more, technical
violations of the FTCA or Franchise Rule are insufficient to support a DTPA claim under 17.46
based on representations or omissions.
III.
Amendment
In conjunction with their motion for reconsideration, Defendants request that they be allowed
to amend their pleadings to cure any defects identified by the court. The deadline for amendment
of pleadings expired June 20, 2014. After Plaintiff filed its first motion to dismiss on January 8,
2014, Defendants, as a matter of course, could have amended their pleadings within 21 days under
Rule 15(a) to cure the deficiencies noted in the motion to dismiss, but they elected not to do so.
Further, in responding to Plaintiff’s motion to dismiss, Defendants did not address Plaintiff’s
contention that Defendants’ original pleadings are woefully deficient of facts that, if proved, would
show that: (1) the alleged representations or omissions by Plaintiff were intentionally and knowingly
false or misleading when made; (2) that Defendants relied to their detriment on any of alleged
representations or omissions; and (3) that Defendants’ alleged representations or omissions were the
producing cause of their damages. Defendants have instead steadfastly maintained in various filings
that a violation of the FTCA’s disclosure rule is a per se violation of the DTPA and sufficient,
Memorandum Opinion and Order 12
without more, to support a DTPA claim. Moreover, while Defendants requested in response to the
motion to dismiss to amend their pleadings, they did not explain how they would cure the
deficiencies noted in Plaintiff’s motion if allowed to replead. Likewise, in their motion for
reconsideration, Defendants continue to maintain that their original pleadings with respect to their
DTPA claim are sufficient and request that they be allowed to simply “re-state their FTC, DTPA,
TBOC and South Carolina claims” as originally pleaded.
Defendants also waited two months after the court dismissed their DTPA claim before
seeking reconsideration of the court’s decision, and they only sought reconsideration after Plaintiff
moved to dismiss their amended counterclaims. The court therefore concludes that Defendants have
not acted diligently, that they have pleaded their best case, and that granting them leave to amend
their DTPA claim would unnecessarily delay the resolution and trial of this case, which is currently
set on the court’s four-week docket beginning June 1, 2015. Defendants’ request to amend their
pleadings with respect to their DTPA claim is therefore denied.
IV.
Conclusion
For the reasons explained, the court concludes that while its dismissal of Defendants’
counterclaim under the DTPA on August 14, 2014, was not appropriate on statute of limitations
grounds, their DTPA claim fails for other reasons raised in Plaintiff’s original motion to dismiss, and
any attempts at further amendment would therefore unnecessarily delay the resolution and trial of
this case. Accordingly the court denies Counter-Plaintiff’s Motion for Reconsideration of Previous
Order and Motion to Amend (Doc. 26).
Memorandum Opinion and Order 13
It is so ordered this 22nd day of April, 2015.
_________________________________
Sam A. Lindsay
United States District Judge
Memorandum Opinion and Order 14
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