Yumilicious Franchise LLC v. Barrie et al
Filing
48
Memorandum Opinion and Order denying as moot 19 MOTION for Partial Dismissal of Counterclaims; granting 35 MOTION for Partial Summary Judgment. The court directs Defendants to respond and file a brief to show cause why their remaining counter claim alleging misrepresentations and omissions in the Franchise Disclosure Document should not be dismissed either for lack of a private right of action, or for failure to allege the counterclaim with sufficient particularity under Rule 9(b ) of the Federal Rules of Civil Procedure. This brief shall not exceed seven pages and must be filed on or before 5/4/2015. Yumilicious may file a reply not to exceed five pages on or before 5/11/2015. All remaining pretrial deadlines are hereby suspended pending further notice from the court. (Ordered by Judge Sam A Lindsay on 4/23/2015) (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 are: Plaintiff Yumilicious’s Motion for Partial Dismissal of Counterclaims
under Rule 12(b)(6) and Pursuant to Court Order, filed September 17, 2014 (Doc. 19); and Plaintiff
Yumilicious’s Motion for Partial Summary Judgment, filed February 17, 2015 (Doc. 35). After
carefully considering the motions, responses, replies, pleadings, record, and applicable law, the court
denies as moot Plaintiff Yumilicious’s Motion for Partial Dismissal of Counterclaims under Rule
12(b)(6) and Pursuant to Court Order, and grants Yumilicious’s Motion for Partial Summary
Judgment.
I.
Factual Background and Procedural History
The court has addressed this lawsuit in a prior opinion and need not repeat the background
facts and procedural history in detail.1 In brief, this lawsuit arises from a failed franchise
relationship between Plaintiff-Counterdefendant Yumilicious Franchise, L.L.C. (“Yumilicious”) and
Defendants-Counterplaintiffs Why Not, L.L.C. (“Why Not”), and its principals Matt Barrie, Kelly
1
See August 14, 2014 Memorandum Opinion and Order (Doc 17).
Memorandum Opinion and Order - Page 1
Glynn, and Brian Glynn (collectively, “Defendants”). Why Not entered into two franchise
agreements with Yumilicious that granted it the right to operate two self-serve frozen yogurt stores
in South Carolina in exchange for royalty fees. Matt Barrie, Kelly Glynn, and Brian Glynn (the
“Individual Defendants”) executed personal guaranties for Why Not’s obligations. After Why Not
fell behind on payments due and closed one location without Yumilicious’s consent, Yumilicious
brought this lawsuit alleging that Defendants failed to comply with their contractual obligations.
Yumilicious is seeking to recover damages for unpaid invoices, as well attorney’s fees, costs, and
prejudgment and postjudgment interest. Defendants have counterclaimed and allege numerous
problems with Yumilicious’s performance under the franchise agreements. In addition, Defendants
allege that Yumilicious fraudulently induced them into entering into the agreements by making false
statements regarding, among other things, franchise costs and product suppliers, upon which
Defendants relied to their detriment in entering into the agreements and opening the South Carolina
stores. Defendants allege they lost their investment in the franchise and other personal assets
because of their inability to obtain Yumilicious’s proprietary products at a fair market price.
Defendants further allege that the franchise agreements and franchise disclosure documents
contained misrepresentations and omissions upon which they relied to their detriment.
Yumilicious now moves for: (i) summary judgment on its affirmative claims for breach of
contract and attorney’s fees; and (ii) partial summary judgment on Defendants’ counterclaims for
fraud, negligent misrepresentation, fraudulent inducement, consequential and punitive damages, and
Memorandum Opinion and Order - Page 2
attorney’s fees.2 Yumilicious’s Motion for Partial Summary Judgment has been fully briefed and
is ripe for adjudication.
The court now sets forth the summary judgment evidence, viewed in the light most favorable
to Defendants, as the nonmovants, and draws all reasonable inferences in their favor. See Celotex
v. Catrett, 477 U.S. 317, 323 (1986).
Yumilicious is a franchisor of frozen yogurt stores. Pl.’s & Counterdef.’s Orig. Ans. to First
Am. Countercl. ¶ 1 (Doc. 22). Yumilicious and Why Not are parties to two Yumilicious Franchise
Agreements (“Franchise Agreements”), both dated June 1, 2010. Pl.’s App. 35-98, 109-70.
Pursuant to the Franchise Agreements, Yumilicious authorized Why Not to use its trademarks,
service marks, and proprietary system in connection with its operation of two South Carolina stores,
one in Forest Acres, South Carolina (the “Columbia Location”) and the other in Lexington, South
Carolina (the “Lexington Location”). Id.3 The Franchise Agreements also required Why Not to
make recurrent payments to Yumilicious for royalties, advertising, and other related fees. Under
the Franchise Agreements, Yumilicious was entitled to recover costs and attorney’s fees for
expenses incurred “in connection with Franchisee’s failure to pay when due amounts owed to the
Franchisor . . . or [failure to] otherwise comply with this Agreement[.]” Id. at 76 (Ex. B, Columbia
Franchise Agreement § XIX.H); id. at 149 (Ex. D, Lexington Franchise Agreement § XIX.N).
2
Defendants’ Original Answer, Counterclaim, and Jury Demand (Doc. 5) included counterclaims for breach
of contract, violations of the Texas Deceptive Trade Practices Act (“DTPA”), the Federal Trade Commission Act, and
the Texas and South Carolina Business Opportunities Acts, all of which the court has dismissed with prejudice. See Aug.
8, 2014 Mem. Op. & Ord. (Doc 17). To the extent Defendants seek to raise claims and defenses based on these
previously dismissed counterclaims, the court disregards these arguments.
3
Although Why Not appears to question whether it executed a second Franchise Agreement for the Lexington
Location, uncontroverted evidence shows that Why Not operated the Lexington Location as if the Franchise Agreement
for the Columbia Location controlled. Pl.’s App. 15-29 (Ex. A, Depo. of Kelly Glynn at 191:25 - 205:1); id. at 103-04
(Ex. C, Depo. of Bryan Glynn at 154:23 - 155:2). The Franchise Agreements are substantially similar, and the court
considers them together.
Memorandum Opinion and Order - Page 3
Yumilicious also provided Defendants with a Franchise Disclosure Document, as required by the
Federal Trade Commission. Defs.’ App. Ex. 2.
The Franchise Agreements deemed as overdue any payment not received on or before the
due date, and provided that “[a]ll unpaid obligations under this Agreement shall bear interest from
the date due until paid at the lesser of eighteen (18%) percent per annum, or the maximum rate
allowable by applicable law.” Pl.’s App. 43 (Ex. B, Columbia Franchise Agreement § IV.C.(1));
id. at 116 (Ex. D, Lexington Franchise Agreement § IV.C.(1)). On December 7, 2011, Matt Barrie
executed an additional agreement on behalf of Why Not that set revised payment terms for amounts
Why Not owed Yumilicious, including lowering the interest rate on sums due to ten percent (10%)
under certain circumstances. Id. at 184, 186-87 (Ex. F, Affidavit of Salina Pham ¶ 2 & Ex. 1); id.
at 177-79 (Ex. E, Depo. of Matt Barrie at 176:21 - 178:12).
The Individual Defendants, as principals of Why Not, entered into the Principals’ Guaranty
and Assumption Agreement (“Guaranty Agreement”), wherein they personally guaranteed Why
Not’s obligations under the Franchise Agreements. Id. at 30-31 (Ex. A, Depo. of Kelly Glynn at
211:17 - 212:1); id. at 101-03 (Ex. C, Depo. of Bryan Glynn at 152:4 - 155:2); id. at 173-74 (Ex. E,
Depo. of Matt Barrie at 109:18 - 110:16); id. at 83-84 (Ex. B, Columbia Franchise Agreement at
Attachment A); id. at 156-57 (Ex. D, Lexington Franchise Agreement at Attachment A).4
Both stores ultimately failed and closed. Yumilicious performed under the Franchise
Agreements, and Why Not breached the Franchise Agreements by, among other things, failing to
4
The Guaranty Agreement states that the Guarantors “hereby personally and unconditionally guarantee[] to
Franchisor . . . that Franchisee will punctually pay its obligations for initial franchise fees, royalties, advertising fund
contributions, and purchases of equipment, materials, supplies, and other amounts due under the Agreement[]” and
“render any payment or performance required under the Agreement upon demand if Franchisee fails or refuses punctually
to do so.” Pl.’s App. at 83-84 (Ex. B, Columbia Franchise Agreement at Attachment A); id. at 156-57 (Ex. D, Lexington
Franchise Agreement at Attachment A).
Memorandum Opinion and Order - Page 4
pay amounts owed for products shipped. Pl.’s App. 13 (Ex. A, Depo. of Kelly Glynn at 187:14-24).
At the time Why Not closed the stores, it owed Yumilicious approximately $60,000 under the terms
of the Franchise Agreements for products that Yumilicious shipped to South Carolina. Id. at 13-14
(Ex. A, Depo. of Kelly Glynn at 187:14 - 187:25). As of March 4, 2015, Defendants owed
Yumilicious $81,194 for products delivered under the Franchise Agreements, including interest as
provided in the parties’ agreements. Id. at 185, 188-208 (Ex. F, Affidavit of Salina Pham ¶ 3 & Ex.
2).
II.
Summary Judgment Standard
Summary judgment shall be granted when the record shows that there is no genuine dispute
as to any material fact and that the moving party is entitled to judgment as a matter of law. Fed. R.
Civ. P. 56(a); Celotex, 477 U.S. at 323-25; Ragas v. Tennessee Gas Pipeline Co., 136 F.3d 455, 458
(5th Cir. 1998). A dispute regarding a material fact is “genuine” if the evidence is such that a
reasonable jury could return a verdict in favor of the nonmoving party. Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 248 (1986). When ruling on a motion for summary judgment, the court is
required to view all facts and inferences in the light most favorable to the nonmoving party and
resolve all disputed facts in favor of the nonmoving party. Boudreaux v. Swift Transp. Co., Inc., 402
F.3d 536, 540 (5th Cir. 2005). Further, a court “may not make credibility determinations or weigh
the evidence” in ruling on a motion for summary judgment. Reeves v. Sanderson Plumbing Prods.,
Inc., 530 U.S. 133, 150 (2000); Anderson, 477 U.S. at 254-55.
Once the moving party has made an initial showing that there is no evidence to support the
nonmoving party’s case, the party opposing the motion must come forward with competent summary
judgment evidence of the existence of a genuine dispute of material fact. Matsushita Elec. Indus.
Memorandum Opinion and Order - Page 5
Co. v. Zenith Radio, 475 U.S. 574, 586 (1986). On the other hand, “if the movant bears the burden
of proof on an issue, either because he is the plaintiff or as a defendant he is asserting an affirmative
defense, he must establish beyond peradventure all of the essential elements of the claim or defense
to warrant judgment in his favor.” Fontenot v. Upjohn Co., 780 F.2d 1190, 1194 (5th Cir. 1986)
(emphasis in original). “[When] the record taken as a whole could not lead a rational trier of fact
to find for the nonmoving party, there is no ‘genuine [dispute] for trial.’” Matsushita, 475 U.S. at
587. (citation omitted). Mere conclusory allegations are not competent summary judgment
evidence, and thus are insufficient to defeat a motion for summary judgment. Eason v. Thaler, 73
F.3d 1322, 1325 (5th Cir. 1996).
Unsubstantiated assertions, improbable inferences, and
unsupported speculation are not competent summary judgment evidence. See Forsyth v. Barr, 19
F.3d 1527, 1533 (5th Cir. 1994).
The party opposing summary judgment is required to identify specific evidence in the record
and to articulate the precise manner in which that evidence supports his or her claim. Ragas, 136
F.3d at 458. Rule 56 does not impose a duty on the court to “sift through the record in search of
evidence” to support the nonmovant’s opposition to the motion for summary judgment. Id.; see also
Skotak v. Tenneco Resins, Inc., 953 F.2d 909, 915-16 & n.7 (5th Cir. 1992). “Only disputes over
facts that might affect the outcome of the suit under the governing laws will properly preclude the
entry of summary judgment.” Anderson, 477 U.S. at 248. Disputed fact issues that are “irrelevant
and unnecessary” will not be considered by a court in ruling on a summary judgment motion. Id.
If the nonmoving party fails to make a showing sufficient to establish the existence of an element
essential to its case and on which it will bear the burden of proof at trial, summary judgment must
be granted. Celotex, 477 U.S. at 322-23.
Memorandum Opinion and Order - Page 6
III.
Analysis
A.
Yumilicious’s Motion for Summary Judgment on its Affirmative Claims
Yumilicious moves for summary judgment on its affirmative claims as follows:
•Why Not’s liability for breach of contract associated with product and supplies that
were not paid for;
•Damages for breach of contract associated with the product and supplies delivered
to Why Not;
•Why Not’s liability to Yumilicious for attorneys’ fees pursuant to Chapter 38 of the
Tex. Civ. Prac. & Rem. Code and terms of the relevant contracts; and
•Individual Defendants Matt Barrie’s, Kelly Glynn’s and Brian Glynn’s liability
under the Principal’s Guaranty and Assumption Agreement.
Pl.’s Brief in Supp. of Mot. for Partial Summ J. 1.
In response, Defendants concede that they do not contest Yumilicious’s affirmative claims.
See Defs.’ Resp. to Mot. for Summ. J. ¶ 10 (“Counter-plaintiffs have never contested the validity
of [Yumilicious’s] case-in-chief except as to [counter-plaintiffs’] affirmative defenses and
counterclaims.”). Based on the uncontroverted summary judgment evidence, Yumilicious has
established beyond peradventure that Why Not breached the Franchise Agreements and the
Individual Defendants are liable under the Guaranty Agreements.5 Pl.’s App. 13-14 (Ex. A, Depo.
of Kelly Glynn at 187:14 - 187:25). Yumilicious has introduced unrefuted evidence that, as of
March 5, 2015, Why Not, and the Individual Defendants under the Guaranty Agreements, owe
Yumilicious the sum of $81,194, including interest, for delinquent payments due under the Franchise
Agreements. Id. at 185, 188-208 (Ex. F, Affidavit of Salina Pham ¶ 3 & Ex. 2). Yumilicious has
5
The elements of a breach of contract claim under Texas law are: “(1) the existence of a valid contract; (2)
performance or tendered performance by the plaintiff; (3) breach of the contract by the defendant; and (4) damages
sustained by the plaintiff as a result of the breach.” Smith Int’l, Inc. v. Egle Grp., LLC, 490 F.3d 380, 387 (5th Cir. 2007)
(citation omitted).
Memorandum Opinion and Order - Page 7
also demonstrated beyond peradventure that it is entitled to recover reasonable and necessary
attorney’s fees and costs from Why Not and the Individual Defendants under the Guaranty
Agreements. Id. at 76, 83-84 (Ex. B, Columbia Franchise Agreement § XIX.H and Guaranty
Agreement); id. at 149, 156-57 (Ex. D, Lexington Franchise Agreement § XIX.N and Guaranty
Agreement).
In sum, based on the uncontroverted summary judgment evidence, Yumilicious’s motion for
summary judgment on its affirmative claims for breach of contract and attorney’s fees will be
granted.
B.
Yumilicious’s Motion for Partial Summary Judgment on Counterclaims
Yumilicious has also moved for partial summary judgment on Defendants’ counterclaims
for fraud, negligent misrepresentation, fraudulent inducement, consequential and punitive damages,
and attorney’s fees.6 The court considers these arguments in turn.
1.
Fraud, Negligent Misrepresentation, and Fraudulent Inducement
Yumilicious has moved for partial summary judgment on Defendants’ counterclaims for
fraud, negligent misrepresentation, and fraudulent inducement. See Pl.’s Br. in Supp. of Mot. for
Partial Summ J. 6-17. Notably, Yumilicious has not moved for summary judgment on Defendants’
counterclaim based on alleged misrepresentations or omissions in the Franchise Disclosure
Document provided by Yumilicious. See, e.g., Reply Br. 2 (“Here, the Franchise Agreements allow
Defendants to rely upon representations contained in the Franchise Disclosure Document related to
its two South Carolina franchises.”); id. at 10 (“Yumilicious’s Motion for Partial Summary
6
Although Yumilicious also moved for summary judgment on Defendants’ civil conspiracy counterclaim,
Defendants have abandoned this claim. See Resp. to Mot. for Partial Summ. J. ¶ 6 (Doc. 42). Thus, this counterclaim
is no longer before the court.
Memorandum Opinion and Order - Page 8
Judgment should be granted and this case should be now focused solely on statements within the
Franchise Disclosure Document.”).
In support of its motion, Yumilicious argues that, to the extent based on alleged
misrepresentations and omissions made outside the Franchise Disclosure Document it provided to
Why Not, it is entitled to summary judgment because: (i) Defendants’ fraud and negligent
misrepresentation claims are barred by the economic loss doctrine,7 and (ii) Defendants waived
reliance on any representations made outside the Franchise Disclosure Document. Specifically with
regard to alleged misrepresentations contained in the Franchise Agreements, Yumilicious also
argues that these claims should be summarily adjudicated because Defendants have simply recast
their previously dismissed breach of contract counterclaim as a fraud claim. Further, in its reply
brief, Yumilicious points out that Defendants failed to file any summary judgment evidence to
support their allegations that Yumilicious’s Chief Executive Officer, Salina Pham, made
misrepresentations that fraudulently induced them to enter into the Franchise Agreements and open
two stores. As argued by Yumilicious: “The allegations, without support, have no value in the
summary judgment context.” Reply Br. 7. The court turns first to Yumilicious’s arguments
pertaining to alleged misrepresentations contained in the Franchise Agreements.
a.
Alleged Misrepresentations in the Franchise Agreements
Yumilicious argues that the reasoning in the court’s August 14, 2014 decision dismissing
Defendants’ breach of contract counterclaim with prejudice (Doc. 17), requires summary
adjudication of Defendants’ nearly identical allegations recast in the amended counterclaim as fraud
7
Yumilicious correctly notes that the economic loss doctrine does not apply to fraudulent inducement claims.
See Pl.’s Br. in Supp. of Mot. for Partial Summ J. 10-11 (citing Formosa Plastics Corp. v. Presidio Eng’rs and
Contractors, Inc., 960 S.W.2d 41 (Tex. 1998)).
Memorandum Opinion and Order - Page 9
and negligent misrepresentation. The court agrees and notes that Defendants did not respond to this
argument. The amended counterclaim alleges:
Misrepresentation in The Franchise Agreement(s)
46.
Fraudulent promises and statements were made in the Franchise
Agreement(s) by Yumilicious Franchisor as follows:
a.
Paragraph V.B. On Site Evaluation[s] were promised but
none was provided for either store.
b.
Paragraph V.F. Inspections and On Site Evaluations were
promised but none were conducted.
c.
Paragraph V.H. Operational Advice was promised but none
was provided when critical assistance was requested for
failing stores; wrong information was provided in operation
of franchisor mandated equipment; no help was provided for
inventory management and cash flow management in light of
constraints imposed as a consequence of having a sole
approved distributor for required product. All of these
constitute fraudulent omissions and misrepresentations of
fact.
d.
Paragraph VII. Proper and economically viable sourcing was
promised but the Franchisor failed to provide approved
suppliers capable of supplying Why Not with food and
beverage items on a basis that allows the stores to succeed.
Instead both stores were doomed to fail, and inevitably for
Counter-Plaintiffs to lose their investments and put personal
assets and the business relationships of other unrelated
businesses at risk.
Defs.’ Am. Ans., Countercl. & Jury Demand ¶ 46(a)-(d) (Doc. 18) (emphasis added).
In its August 14, 2014 order dismissing Defendants’ breach of contract counterclaim based
on nearly identical allegations, the court stated:
The only factual allegations that appear to support Defendants’ breach of contract
claim, based on the franchise agreements, are as follows:
Memorandum Opinion and Order - Page 10
The Franchise Agreement(s)
29.
Representative breaches of the Franchise Agreement(s) by
Yumilicious Franchisor include:
a.
Paragraph V.B. On Site Evaluation - none was
provided for either store.
b.
Paragraph V.F. Inspections and On Site Evaluations
- None were conducted.
c.
Paragraph V.H. Operational Advice - As examples:
None was provided when critical assistance was
requested for failing stores; wrong information was
provided in operation of franchisor mandated
equipment; no help was provided for inventory
management and cash flow management in light of
constraints imposed as a consequence of having a sole
approved distributor for required product.
d.
Paragraph VII. Sourcing - The Franchisor has failed
to provide approved suppliers capable of supplying
Why Not with food and beverage items on a basis that
allows the South Carolina stores to succeed. Instead
both stores were doomed to fail, and inevitably for
Counter-Plaintiffs to lose their investments and put
personal assets and the business relationships of other
unrelated businesses at risk.
***
It is unclear from Defendants’ sparse pleadings why they believe that
they suffered damages as a result of Plaintiff’s alleged failure to conduct
required site inspections and evaluations. Their contract claim based on these
alleged breaches of the franchise agreements is therefore insufficient as pleaded.
August 14, 2014 Mem. Op. and Order 11-12 (Doc 17) (emphasis added).
Turning first to allegations concerning onsite evaluations and inspections, Defendants have
simply taken their dismissed breach of contract counterclaim and recast it as a fraud and negligent
misrepresentation counterclaim. See Defs.’ Am. Ans., Countercl. & Jury Demand ¶ 46(a)-(d) (Doc.
Memorandum Opinion and Order - Page 11
18). Fraud and negligent misrepresentation claims, like breach of contract claims, require that the
alleged misrepresentations or omissions cause injury. See, e.g., Flaherty & Crumrine Preferred
Income Fund, Inc. v. TXU Corp., 565 F.3d 200, 212 (5th Cir. 2009) (stating that fraud claim under
Texas law requires that material misrepresentation cause injury); First Nat’l Bank of Durant v. Trans
Terra Corp. Int’l, 142 F.3d 802, 809 (5th Cir. 1998) (citing Federal Land Bank Ass’n of Tyler v.
Sloane, 825 S.W.2d 439, 442 (Tex. 1991)) (stating that negligent misrepresentation claim requires
a plaintiff to show that it suffered pecuniary loss). The court’s reasoning in its order dismissing the
breach of contract counterclaim (insufficient pleading of the essential element of damages), applies
with equal force to the fraud and negligent misrepresentation counterclaims premised on identical
allegations of failure to conduct on site evaluations or inspections. Accordingly, there is no genuine
dispute of material fact on the fraud and negligent misrepresentation claims, and Yumilicious is
entitled to judgment as a matter of law on these claims based on paragraph 46(a)-(b) of the amended
counterclaim.
With regard to operational advice and sourcing provisions, Defendants now allege that
operational advice and sourcing provisions in the Franchise Agreements amount to fraud or
negligent misrepresentation. See Defs.’ Am. Ans., Countercl. & Jury Demand ¶ 46(c)-(d) (Doc. 18).
In dismissing these same allegations when Defendants previously alleged them as a breach of
contract counterclaim, the court held:
The Columbia franchise agreement, however, does not require Yumilicious to
provide Defendants with access to proprietary products at a low cost or fair market
price; nor does it guarantee Defendants will earn a certain amount of profit as
Yumilicious franchisees. As a result, Defendants’ damages could not have been
caused by Plaintiff’s alleged breaches of the franchise agreement(s) pertaining to
product sourcing or advice regarding product sourcing. Defendants’ contract claim
on this basis therefore fails as a matter law.
Memorandum Opinion and Order - Page 12
August 14, 2014 Mem. Op. and Order 13 (Doc 17). The contract terms are not actionable under a
fraud or negligent misrepresentation theory any more than they were under a contract theory.
Alternatively, the court agrees with Yumilicious that Defendants’ fraud and negligent
misrepresentation claims premised on the terms of the Franchise Agreements are barred by the
economic loss doctrine. Under Texas law, the economic loss rule “generally precludes recovery in
tort for economic losses resulting from the failure of a party to perform under a contract.” Lamar
Homes, Inc. v. Mid–Continent Cas. Co., 242 S.W.3d 1, 12 (Tex. 2007). Thus, tort damages are
generally not recoverable if a defendant’s conduct “would give rise to liability only because it
breaches the parties’ agreement.” Southwestern Bell Tel. Co. v. DeLanney, 809 S.W.2d 493, 494
(Tex. 1991). Tort damages are recoverable, however, if a defendant’s conduct “would give rise to
liability independent of the fact that a contract exists between the parties.” Id. In Jim Walter
Homes, Inc. v. Reed, 711 S.W.2d 617 (Tex. 1986), a negligent supervision case, the Texas Supreme
Court explained: “The nature of the injury most often determines which duty or duties are breached.
When the injury is only the economic loss to the subject of a contract itself, the action sounds in
contract alone.” Id. at 618; DeLanney, 809 S.W.2d at 494 (“When the only loss or damage is to the
subject of the contract, the plaintiff’s action is ordinarily on the contract.”).
In this case, Defendants’ fraud and negligent misrepresentation claims are tied directly to the
Franchise Agreements and arise solely from the contractual relationship between the parties.
Defendants have not shown that they suffered any loss independent of the Franchise Agreements.
That Defendants’ injuries can only be characterized as contractual is illustrated by the fact that, in
the amended counterclaim, Defendants simply recast their previously dismissed breach of contract
claim as a claim for fraud and negligent misrepresentation. Compare Defs.’ Am. Ans., Countercl.
Memorandum Opinion and Order - Page 13
& Jury Demand ¶ 46(a)-(d) (Doc. 18) with Defs.’ Orig. Ans., Countercl. & Jury Demand ¶ 29(a)-(d)
(Doc. 5).8
In sum, the court grants judgment as a matter of law in Yumilicious’s favor on Defendants’
claims of fraud and negligent misrepresentation based on terms within the Franchise Agreements
for the same reasons it previously dismissed with prejudice Defendants’ breach of contract
counterclaim based on these same allegations. See August 14, 2014 Mem. Op. and Order 11-12
(Doc 17). Alternatively, Yumilicious is entitled to judgment as a matter of law on these
counterclaims based on the economic loss doctrine. In light of its ruling, the court need not consider
Yumilicious’s alternative argument that Defendants disclaimed any reliance on representations
outside the Franchise Disclosure Document.
The court now turns to Yumilicious’s arguments pertaining to alleged misrepresentations
made by Salina Pham, Chief Executive Officer of Yumilicious.
b.
Misrepresentations of Salina Pham
Defendants’ fraud-based counterclaims are based in large part on a number of alleged
statements by Salina Pham, Yumilicious’s CEO, including that she could supply the customized and
proprietary components of Yumilicious’s yogurt to the two South Carolina franchise locations at the
same price Yumilicious sold these proprietary components to Texas franchisees. See Defs.’ Am.
Ans., Countercl. & Jury Demand ¶ 28 (Doc. 18). According to Defendants, these representations,
as well as others, were false, and Defendants relied upon these statements to their detriment.
8
The economic loss doctrine, however, does not bar Defendants’ fraud and negligent misrepresentation claims
related to representations and omissions in the Franchise Disclosure Document, as these alleged injuries preceded the
contractual relationship, and do not arise solely from the parties’ contractual relationship.
Memorandum Opinion and Order - Page 14
In response to Yumilicious’s motion for partial summary judgment concerning alleged
misrepresentation made by Salina Pham, Defendants have failed to provide the court with any
evidence to support their allegations that Salina Pham made any representations, either prior to the
parties entering into the Franchise Agreements, or during the term of the Franchise Agreements.
Absent deposition testimony, affidavits, declarations, or other summary judgment-type evidence,
the court is only left with allegations, which have no import at the summary judgment phase of the
proceeding. See Fed. R. Civ. P. 56(c). Accordingly, the court concludes that Yumilicious is entitled
to judgment as a matter of law with regard to fraud, negligent misrepresentation, and fraud in the
inducement counterclaims based on any alleged statements by Salina Pham.
2.
Consequential and Punitive Damages
Defendants seek consequential and punitive damages. See Defs.’ First Am. Orig. Answer,
Countercl. & Jury Demand ¶¶53, 55 (Doc. 18). Yumilicious moves for summary judgment on its
affirmative defense of waiver, arguing that Why Not waived its right to consequential and punitive
damages by agreeing to a damages waiver provision in the Franchise Agreements, and the Individual
Defendants are bound by the waiver under the Guaranty Agreements. Pl.’s Br. in Supp. of Mot. for
Partial Summ. J. 18-19 (Doc. 37). In response, Defendants argue that the damages waiver provision
does not apply to the Individual Defendants because: (i) Yumilicious has not alleged that any
documents signed by the Individual Defendants contained a damages waiver and has not included
any such documents in its summary judgment appendix; (ii) the damages waiver provision is not
conspicuous; and (3) the Individual Defendants are not parties to the Franchise Agreements. Resp.
to Mot. for Partial Summ. J. ¶¶ 17-20 (Doc. 42). For the reasons that follow, the court concludes
that Yumilicious is entitled to summary judgment on its affirmative defense that Why Not waived
Memorandum Opinion and Order - Page 15
the right to recover consequential and punitive damages, and that the Individual Defendants are
bound by the waiver.
Section XIX.K of the Franchise Agreements contains the parties’ agreement to waive
punitive and consequential damages, and provides in relevant part:
K.
WAIVER OF PUNITIVE DAMAGES.
. . . FRANCHISOR, FRANCHISEE, AND FRANCHISEE’S PRINCIPALS
WAIVE TO THE FULLEST EXTENT PERMITTED BY LAW ANY RIGHT
TO OR CLAIM FOR ANY PUNITIVE DAMAGES OR EXEMPLARY
DAMAGES AGAINST THE OTHER AND AGREE THAT, IN THE EVENT
OF A DISPUTE BETWEEN FRANCHISOR AND FRANCHISEE, THE
PARTY MAKING A CLAIM WILL BE LIMITED TO EQUITABLE RELIEF
AND TO RECOVERY OF ANY ACTUAL DAMAGES IT SUSTAINS.
Pl.’s App. 76 (Ex. B, Columbia Franchise Agreement § XIX.K) (original typeface); id. at 149 (Ex.
D, Lexington Franchise Agreement § XIX.K) (original typeface). The Franchise Agreement is
executed by Kelly Glynn, a principal of Why Not, who also signed the Guaranty Agreements.
Under the Guaranty Agreements, the Individual Defendants personally guaranteed Why
Not’s obligations under the Franchise Agreements. Id. at 30-31 (Ex. A, Depo. of Kelly Glynn at
211:17 - 212:1); id. at 101-03 (Ex. C, Depo. of Bryan Glynn at 152:4 - 155:2); id. at 173-74 (Ex. E,
Depo. of Matthew Barrie at 109:18 - 110:16). The Guaranty Agreements additionally provide that:
“Each Guarantor also makes all of the covenants, representations, warranties and agreements of
the Principals set forth in the Franchise Agreement and is obligated to perform thereunder,
including, without limitation[] . . . under Section XIX.K. Id. at 83-84 (Ex. B, Columbia Franchise
Agreement at Attachment A) (emphasis added); id. at 156-57 (Ex. D, Lexington Franchise
Agreement at Attachment A) (emphasis added). Section XIX.K., quoted above, is the damages
waiver provision.
Memorandum Opinion and Order - Page 16
On this evidence and having considered the parties’ briefing, the court concludes that
Defendants have failed to raise a genuine dispute of material fact as to the enforceability of the
damages waiver provision. Contrary to Defendants’ assertion, the Franchise Agreements and
Guaranty Agreements are contained in Yumilicious’s summary judgment materials. Id. at 76, 83-84,
149, 156-57. Further, even assuming that Defendants are correct that a damages waiver provision
is subject to the same requirements of conspicuousness as a general release of liability clause, the
court rejects Defendants’ contention that the damages waiver provision is not conspicuous and
therefore void. As stated by the Texas Supreme Court, “‘[w]hen a reasonable person against whom
a clause is to operate ought to have noticed it, the clause is conspicuous. For example, language in
capital headings [and] language in contrasting type or color . . . is conspicuous.” Dresser Indus.,
Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 511 (Tex. 1993). Here, the damages waiver provision
has a heading in all capitals in bold, underlined typeface — K.WAIVER OF PUNITIVE
DAMAGES. — and the text of the provision also appears in all capital letters in boldface type. See
Pl.’s App. 76 (Ex. B, Columbia Franchise Agreement § XIX.K); id. at 149 (Ex. D, Lexington
Franchise Agreement § XIX.K). The damages waiver provision also states in all capital letters and
boldface type that it applies not only to Franchisee, but also the “Franchisee’s Principals,” Matt
Barrie, Kelly Glynn, and Brian Glynn. Kelly Glynn, a principal and guarantor, signed both the
Franchise Agreement and Personal Guaranty. The two-page Guaranty Agreement is attached as
Exhibit A to each Franchise Agreement and draws the attention of its signatories to the damages
waiver provision in the Franchise Agreement by specific section and subheading (XIX.K). Id. at
83-84 (Ex. B, Columbia Franchise Agreement at Attachment A); id. at 156-57 (Ex. D, Lexington
Franchise Agreement at Attachment A). Further, the guarantors’ agreements to obligate themselves
Memorandum Opinion and Order - Page 17
to Why Not’s “covenants, representations, warranties and agreements,” specifically including
Section XIX.K (the damages waiver provision), appear on the same page and only twelve lines
above the signature block in the Guaranty Agreements. Id. at 84, 157.
The court concludes as a matter of law that the combination of typeface and location,
coupled with the fact that Why Not principal Kelly Glynn signed the Franchise Agreement and
Personal Guaranty, is sufficient to satisfy the standard articulated in Dresser, supra. Otherwise
stated, a “reasonable person” in the position of the Individual Defendants, as Franchisee’s Principals,
“ought to have noticed” the damages waiver provision, and noticed that, as personal guarantors of
Why Not’s obligations, they were bound by Why Not’s consequential and punitive damages waiver
at Section XIX.K of the Franchise Agreement. See Dresser, 853 S.W.2d at 511. Defendants offer
no other argument or evidence supporting their position that the damages waiver provision is
unenforceable. Because Yumilicious has conclusively established the applicability of the damages
waiver provision, and its affirmative defense of waiver, and Defendants have failed to raise a
genuine dispute of material fact as to the waiver’s enforceability, the court will grant summary
judgment in Yumilicious’s favor on its affirmative defense that Defendants waived any entitlement
to consequential and punitive damages.
3.
Attorney’s Fees
Yumilicious argues that it is entitled to summary judgment on Defendants’ request for
attorney’s fees. Pl.’s Br. in Supp. of Mot. for Partial Summ. J. 26 (Doc. 37) (“Here there is no
statutory authority, contractual authorization or special circumstances that would authorize an award
of attorney’s fees to Why Not.”). In response, Defendants contend that there is no evidence they
Memorandum Opinion and Order - Page 18
have waived attorney’s fees. Resp. to Mot. for Partial Summ. J. ¶ 5 (Doc. 42). The court agrees
with Yumilicious.
In a diversity case, state law controls whether attorney’s fees are recoverable and reasonable.
See, e.g., Mathis v. Exxon Corp., 302 F.3d 448, 461 (5th Cir. 2002). Texas law permits an award
of attorney’s fees only if authorized by statute or contract. See, e.g., Intercontinental Group P’ship
v. KB Home Lone Star L.P., 295 S.W.3d 650, 653 (Tex. 2009). In this case, Defendants have failed
to provide any statutory or contractual basis for an award of attorney’s fees. Accordingly,
Yumilicious is entitled to judgment as a matter of law on Defendants’ claim of entitlement to
attorney’s fees.
IV.
Conclusion
A.
Ruling on the Motions
For the reasons herein stated, the court grants Plaintiff Yumilicious’s Motion for Partial
Summary Judgment (Doc. 35), and dismisses with prejudice Why Not, L.L.C’s, Matt Barrie’s,
Kelly Glynn’s, and Brian Glynn‘s counterclaims for fraud, negligent misrepresentation, and
fraudulent inducement (except insofar as the counterclaims are based on alleged misrepresentations
or omissions in the Franchise Disclosure Document), consequential and punitive damages and
attorney’s fees. Further, the court denies as moot Plaintiff Yumilicious’s Motion for Partial
Dismissal of Counterclaims under Rule 12(b)(6) and Pursuant to Court Order (Doc. 19), as the
court’s ruling on Yumilicious’s Motion for Partial Summary Judgment moots all issues therein
presented.
Memorandum Opinion and Order - Page 19
B.
Court’s Sua Sponte Motion
The sole claim remaining is Why Not, L.L.C’s, Matt Barrie’s, Kelly Glynn’s, and Brian
Glynn‘s counterclaim based on alleged misrepresentations and omissions in the Franchise Disclosure
Document. See Defs.’ Am. Ans., Countercl. & Jury Demand ¶¶ 44-45 (Doc. 18). While
Yumilicious did not move for summary judgment on this counterclaim, the court’s independent
research indicates that these claims may be subject to dismissal.
The Federal Trade Commission (“FTC”) has promulgated regulations titled “Disclosure
Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures,” 16
C.F.R. § 436 (2013), commonly known as the “Franchise Rule.” See generally John Boudreau, et
al., 62B Am. Jur. 2d Private Franchise Contracts § 26 (2d ed. 2014). Before selling a franchise, the
Franchise Rule requires a franchisor to provide a prospective franchisee with a detailed disclosure
statement, also known as a franchise disclosure document, that contains certain prescribed
information about the business opportunity being offered, including current financial condition and
the track record of any other franchisee. Id.; see also 16 C.F.R. §§ 436.2, 436.5. The disclosure
requirements in the Franchise Rule are “designed to protect prospective purchasers from the
financial hardships that arise when they purchase franchises . . . without essential, reliable
information about them.” Boudreau, supra, ¶ 26. The FTC can bring suit to enjoin a franchisor’s
failure to furnish a prospective franchisee with the specified information, but no private right of
action is available to franchisees under these regulations. Id.; see also A Love of Food I, LLC v.
Maoz Vegetarian USA, Inc., __ F. Supp. 3d __, 2014 WL 4852095, at *2 (D.D.C. 2014) (no private
right of action is available to franchisee for franchisor’s failure to furnish required information under
Franchise Rule) (collecting cases); Robinson v. Wingate Inns Int’l, Inc., 2013 WL 6860723, at *2
Memorandum Opinion and Order - Page 20
(D.N.J. Dec. 20, 2013) (“It is well-settled that there in no private cause of action for violation of the
FTC franchise disclosure rules.”) (citations omitted); Vino 100, LLC v. Smoke on the Water, LLC,
864 F. Supp. 2d 269, 281 (E.D. Pa. 2012) (same).
In light of the foregoing, the court sua sponte raises this issue for summary judgment.
Accordingly, the court directs Defendants to respond and file a brief to show cause why their
remaining counterclaim alleging misrepresentations and omissions in the Franchise Disclosure
Document (see Defs.’ Am. Ans., Countercl. & Jury Demand ¶¶ 44-45 (Doc. 18)) should not be
dismissed either for lack of a private right of action, or for failure to allege the counterclaim with
sufficient particularity under Rule 9(b) of the Federal Rules of Civil Procedure.9 This brief shall not
exceed seven pages and must be filed on or before May 4, 2015. Yumilicious may file a reply not
to exceed five pages on or before May 11, 2015.
All remaining pretrial deadlines are hereby suspended pending further notice from the court.
It is so ordered this 23rd day of April, 2015.
_________________________________
Sam A. Lindsay
United States District Judge
9
While the court previously found that Defendants had satisfied Rule 9(b)’s heightened pleading requirement,
the court’s determination was limited to paragraphs six, and thirteen through twenty-two of Defendants’ Original
Answer, Counterclaim and Jury Demand (fraud and negligent misrepresentation allegations arising from statements made
by Yumilicious’s CEO Salina Pham), and the court did not consider whether allegations pertaining to misrepresentations
and omissions in the Franchise Disclosure Document satisfied Rule 9(b)’s heightened pleading requirement. See Aug.
14, 2014 Mem. Op. and Order 9-10 (Doc. 17).
Memorandum Opinion and Order - Page 21
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