Precision Franchising LLC v. Gatej
Filing
34
MEMORANDUM OPINION Re: 20 First MOTION to Dismiss for Lack of Jurisdiction by Catelin N. Gatej and 22 First MOTION to Dismiss for Failure to State a Claim by Catelin N. Gatej. Signed by District Judge James C. Cacheris on 5/23/2012. (stas)
IN THE UNITED STATES DISTRICT COURT FOR THE
EASTERN DISTRICT OF VIRGINIA
Alexandria Division
PRECISION FRANCHISING, LLC,
Plaintiff,
v.
CATALIN GATEJ,
Defendant.
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1:12cv158 (JCC/TCB)
M E M O R A N D U M
O P I N I O N
This matter is before the Court on Defendant Catalin
Gatej’s (“Defendant” or “Gatej”) Motion to Dismiss for Lack of
Subject Matter Jurisdiction [Dkt. 20] and Motion to Dismiss for
Failure to State a Claim [Dkt. 22] (the “Motions”).
Because the
Motions were filed after Defendant answered the Complaint, they
shall be treated as Motions for Judgment on the Pleadings.
For
the following reasons, the Court will deny Defendant’s Motions.
I. Background
This case involves the alleged breach of a Franchise
Agreement.
A.
Factual Background
Plaintiff Precision Franchising, LLC (“Plaintiff” or
“Precision Franchising”) is a Virginia limited liability company
with its principal place of business in Leesburg, Virginia.
(Compl. [Dkt. 1] ¶ 1.)
Precision Franchising is the licensor of
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the Precision Tune Auto Care® system and has licensed others to
operate automotive service businesses identified with the
Precision Tune Auto Care® service mark and other marks and logos
designated as part of the Precision Tune Auto Care® system (the
“Marks”).
(Compl. ¶ 6.)
The Marks are registered with the
United States Patent and Trademark Office.
(Compl. ¶¶ 7-8.)
Precision Franchising also alleges that it has acquired common
law rights with respect to the Marks and to trade dress common
to Precision Franchising locations.
(Compl. ¶ 9.)
Further,
Precision Franchising has allegedly provided trade secrets to
franchisees, including manuals and software, which are required
to be returned at the end of the franchise term.
(Compl. ¶ 11.)
Gatej, a citizen of Massachusetts, is party to a
Franchise Agreement (the “Agreement”) which requires the
operation of a Precision Tune Auto Care® Center (the “Center”)
in Tyngsborough, Massachusetts.
(Compl. ¶ 12.)
The term of the
Agreement was extended to June 6, 2015 pursuant to a renewal
letter dated April 11, 2005.
(Id.)
The Agreement requires
Gatej to pay Precision Franchising an operating fee equal to 7.5
percent of weekly gross sales.
(Compl. ¶ 13.)
The Agreement
also requires Gatej to pay Precision Franchising or its designee
or to spend as directed by Precision Franchising an advertising
fee equal to 9 percent of weekly gross sales.
(Compl. ¶ 14.)
Gatej was directed to pay 1.5 percent of weekly gross sales to
2
Precision Franchising and to spend the remaining amount on
advertising for Precision Franchising’s benefit.
(Id.)
The Agreement prohibits the transfer of substantially
all of the assets of the Center without Precision Franchising’s
prior consent and payment of a fee.
(Compl. ¶ 15.)
The
Agreement also requires that Precision Franchising be given a
right of first refusal prior to any such transfer.
16.)
(Compl. ¶
Lastly, under the terms of the Agreement, Defendant agreed
to pay Precision Franchising its reasonable attorneys’ fees in
the event of breach.
(Compl. ¶ 17.)
Precision Franchising alleges that Gatej breached the
Agreement by failing to spend the required amounts in
advertising.
(Compl. ¶ 19.)
According to Precision
Franchising, this amount is no less than $55,055.97.
(Id.)
Gatej also allegedly breached the Agreement by prematurely
ceasing operation of the Center on or about December 25, 2011,
and transferring all or substantially all of its assets to a
third party who is not operating the Center as a Precision Tune
Auto Care® Center.
(Compl. ¶ 20.)
Precision Franchising
alleges that it has suffered no less than $86,765.40 in lost
profits as a result of this premature cessation of operations.
(Id.)
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B.
Procedural Background
Plaintiff filed its Complaint in this Court on
February 16, 2012.
[Dkt. 1.]
Plaintiff’s sole claim is breach
of contract, on which it seeks damages of no less than
$141,821.37 and attorneys’ fees and costs.
the Complaint on April 6, 2012.
Defendant answered
[Dkt. 19.]
Then, on April 12,
2012, Defendant filed a Motion to Dismiss for Lack of Subject
Matter Jurisdiction [Dkt. 20] and a Motion to Dismiss for
Failure to State a Claim [Dkt. 22].1
Plaintiff filed an
opposition to both Motions on April 25, 2012 [Dkt. 30], to which
Defendant replied on May 11, 2012 [Dkt. 32].
Defendant’s Motions are before the Court.
II.
A.
Standard of Review
Motion for Judgment on the Pleadings
A motion for judgment on the pleadings may be made
after the pleadings are closed but early enough not to delay
trial.
Fed. R. Civ. P. 12(c).
To ensure that each litigant
receives a full and fair hearing, courts will not grant a Rule
12(c) motion unless the movant clearly establishes that no
material issue of fact remains to be resolved and that he is
entitled to judgment as a matter of law.
1
See O’Ryan v. Dehler
The Court notes that Defendant filed the Motions after answering the
Complaint. Because motions to dismiss pursuant to Rule 12(b) must be made
prior to the filing of a responsive pleading, Defendant’s motions will be
treated as motions for judgment on the pleadings under Rule 12(c). See
Edwards v. City of Goldsboro, 178 F.3d 231, 243 (4th Cir. 1999); Humphrey v.
Global Equity Lending, Inc., No. 2:08cv68, 2008 WL 5262769, at *3 (E.D. Va.
Dec. 17, 2008).
4
Mfg. Co., Inc., 99 F. Supp. 2d 714, 718 (E.D. Va. 2000)
(“Judgment should be entered when the pleadings, construing the
facts in the light most favorable to the non-moving party, fail
to state any cognizable claim for relief, and the matter can,
therefore, be decided as a matter of law.”) (citing Zeran v. Am.
Online, Inc., 129 F.3d 327, 329 (4th Cir. 1997)).
Where a Rule
12(c) motion is based on lack of subject matter jurisdiction and
failure to state a claim, the Court applies the standards
established by Rules 12(b)(1) and 12(b)(6), respectively.
See
Humphrey v. Global Equity Lending, Inc., No. 2:08cv68, 2008 WL
5262769, at *3 (E.D. Va. Dec. 17, 2008).
B.
Subject Matter Jurisdiction
Pursuant to Rule 12(b)(1), a claim may be dismissed
for lack of subject matter jurisdiction.
12(b)(1).
Fed. R. Civ. P.
Defendants may attack subject matter jurisdiction in
one of two ways.
First, defendants may contend that the
complaint fails to allege facts upon which subject matter
jurisdiction may be based.
See Adams v. Bain, 697 F.2d 1213,
1219 (4th Cir. 1982); King v. Riverside Reg’l Med. Ctr., 211 F.
Supp. 2d 779, 780 (E.D. Va. 2002).
In such instances, all facts
alleged in the complaint are presumed to be true.
Adams, 697
F.2d at 1219; Virginia v. United States, 926 F. Supp. 537, 540
(E.D. Va. 1995).
Alternatively, defendants may argue that the
jurisdictional facts alleged in the complaint are untrue.
5
Adams, 697 F.2d at 1219; King, 211 F. Supp. 2d at 780.
In that
situation, “the Court may ‘look beyond the jurisdictional
allegations of the complaint and view whatever evidence has been
submitted on the issue to determine whether in fact subject
matter jurisdiction exists.’”
Virginia v. United States, 926 F.
Supp. at 540 (quoting Capitol Leasing Co. v. FDIC, 999 F.2d 188,
191 (7th Cir. 1993)); see also Velasco v. Gov’t of Indonesia,
370 F.3d 393, 398 (4th Cir. 2004) (holding that “the district
court may regard the pleadings as mere evidence on the issue and
may consider evidence outside the pleadings without converting
the proceeding to one for summary judgment”) (citations
omitted).
In either circumstance, the burden of proving subject
matter jurisdiction falls on the plaintiff.
McNutt v. Gen.
Motors Acceptance Corp., 298 U.S. 178, 189 (1936); Johnson v.
Portfolio Recovery Assocs., 682 F. Supp. 2d 560, 566 (E.D. Va.
2009) (holding that “having filed this suit and thereby seeking
to invoke the jurisdiction of the Court, Plaintiff bears the
burden of proving that this Court has subject matter
jurisdiction”).
C.
Failure to State a Claim
Rule 12(b)(6) allows a court to dismiss those
allegations which fail “to state a claim upon which relief can
be granted.”
Fed. R. Civ. P. 12(b)(6).
A motion premised on
Rule 12(b)(6) tests the legal sufficiency of the complaint.
6
Giarratano v. Johnson, 521 F.3d 298, 302 (4th Cir. 2008).
In
considering such a motion, the court must accept well-pleaded
allegations as true and must construe factual allegations in
favor of the plaintiff.
See Randall v. United States, 30 F.3d
518, 522 (4th Cir. 1994).
The court must also be mindful of the
liberal pleading standards under Rule 8, which require only “a
short and plain statement of the claim showing that the pleader
is entitled to relief.”
Fed. R. Civ. P. 8.
While Rule 8 does
not require “detailed factual allegations,” a plaintiff must
still provide “more than labels and conclusions” because “a
formulaic recitation of the elements of a cause of action will
not do.”
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555-56
(2007) (citation omitted).
Rather, “a complaint must contain
sufficient factual matter, accepted as true, to ‘state a claim
to relief that is plausible on its face.’”
Ashcroft v. Iqbal,
556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 570).
“A
claim has facial plausibility when the plaintiff pleads factual
content that allows the court to draw the reasonable inference
that the defendant is liable for the misconduct alleged.”
Id.
“Threadbare recitals of the elements of a cause of action,
supported by mere conclusory statements, do not suffice” to meet
this standard, id., and a plaintiff’s “[f]actual allegations
must be enough to raise a right to relief above the speculative
level . . . .”
Twombly, 550 U.S. at 555.
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Moreover, a court “is
not bound to accept as true a legal conclusion couched as a
factual allegation.”
Iqbal, 556 U.S. at 678.
III. Analysis
First, Defendant argues that the Complaint should be
dismissed for lack of subject matter jurisdiction because it
fails to demonstrate that the amount in controversy exceeds the
jurisdictional minimum of $75,000.
Second, Defendant argues
that Precision Franchising is not a party to the Agreement and
therefore is not a proper plaintiff in this case.2
The Court
addresses each argument in turn.
A.
Amount in Controversy
District courts may exercise diversity jurisdiction
over a case where the amount in controversy exceeds $75,000,
exclusive of interest and costs, and where the case is between
citizens of different states.
28 U.S.C. § 1332.
Here,
Defendant concedes that he and Plaintiff are citizens of
different states, but argues that Plaintiff fails to demonstrate
that the amount in controversy exceeds $75,000.
This argument
is without merit.
In the Complaint, Plaintiff seeks damages in an amount
no less than $141,821.37.
$55,055.97 stems from Defendant’s
alleged failure to make advertising expenditures.
2
The remaining
Plaintiff did not include a copy of the Agreement as an exhibit to the
Complaint. Rather, the document was attached by Plaintiff to an unrelated
filing in this case. [Dkt. 17.] The Court may nevertheless consider the
Agreement since the document is integral to and explicitly relied on in the
Complaint and the parties do not challenge its authenticity. See Phillips v.
LCI Int'l Inc., 190 F.3d 609, 618 (4th Cir. 1999).
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$86,765.40 accounts for lost profits tied to Defendant’s alleged
premature cessation of operations.
Ordinarily, the “sum claimed
by the plaintiff controls the amount in controversy
determination.”
JTH Tax, Inc. v. Frashier, 624 F.3d 635, 638
(4th Cir. 2010) (quoting St. Paul Mercury Indem. Co. v. Red Cab
Co., 303 U.S. 283, 288 (1938)) (internal quotation marks
omitted).
“If the plaintiff claims a sum sufficient to satisfy
the statutory requirement, a federal court may dismiss only if
it is apparent, to a legal certainty, that the plaintiff cannot
recover the amount claimed.”
JTH Tax, 624 F.3d at 638 (emphasis
in original) (quoting St. Paul Mercury, 303 U.S. at 289)
(internal quotation marks omitted).
In other words, “[u]nless
the claim for an amount over the jurisdictional prerequisite is
made in bad faith, or unless it is plain from the complaint that
an amount less than the jurisdictional amount is all that is at
issue, the district court has jurisdiction over the case.”
Shanaghan v. Cahill, 58 F.3d 106, 112 (4th Cir. 1995).
Defendant fails to demonstrate that it is legally
certain Plaintiff will not recover the jurisdictional
prerequisite.
First, Defendant mischaracterizes the
$55,055.97 sought by Plaintiff in connection with Defendant’s
alleged failure to make advertising expenditures.
Defendant
assumes without basis that this amount constitutes an estimate
of advertising expenditures Defendant will fail to make in the
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future.
However, this amount is in fact linked to Defendant’s
alleged failure to make advertising expenditures in the past.
(Opp. [Dkt. 30] at 5.)
Indeed, contrary to Defendant’s
assertion otherwise, this follows from a fairly straightforward
reading of the Complaint.
(See Compl. ¶ 19 (“Defendant has
failed to expend the requisite amounts in advertising.”)
(emphasis added).)
In response, Defendant protests that the
Complaint is ambiguous “as to the timeline and the basis of this
alleged amount due.”
(Reply [Dkt. 32] at 4.)
Defendant’s
quibble does not, however, prove that it is legally impossible
for Plaintiff to recover the $55,055.97 or that Plaintiff’s
allegation is in bad faith.
See Germantown Copy Ctr., Inc. v.
ComDoc, Inc., No. DKC 10-2799, 2011 WL 1323020, at *3 (D. Md.
Apr. 1, 2011) (“A plaintiff’s allegation that the matter in
controversy exceeds the jurisdictional amount requirement, even
when it is in cursory form, has been held to be sufficient by a
significant number of federal courts.”) (quoting 14AA Charles
Alan Wright, et al., Federal Practice and Procedure § 3702 (4th
ed. 2011)).
Defendant also fails to demonstrate that it is legally
impossible for Plaintiff to recover $86,765.40 in lost profits
due to Defendant’s alleged premature cessation of operations.
In support of his argument, Defendant points to Section 3.2 of
the Agreement, which provides that the “Franchisee shall pay to
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Franchisor an operating fee equal to seven and one-half percent
(7.5%) of the weekly gross sales of the Franchised Business, but
not less than One Hundred Dollars ($100) each week.”
[Dkt. 17-1] § 3.2.)
(Agreement
Based on this provision, Defendant asserts
that he could be held liable for at most $100 per week beginning
on the date he ceased operations through the remaining term of
the Agreement.
Defendant calculates this amount as $17,900.3
However, it is anything but clear that Defendant is only
potentially liable for the minimum weekly fee.
Defendant’s
argument apparently assumes that he could, consistent with the
contract, close up shop.
But, as Plaintiff points out, the
Agreement requires that Defendant “operate an automotive service
business” for the duration of the term.
(Agreement § 1.1)
The
Agreement further provides that the Franchisee is in default if
he “without Franchisor’s prior written consent, ceases to
operate.”
(Agreement § 14.2.2.)
Thus, by the terms of the
contract, Defendant had an obligation to continue operating.
Plaintiff represents that its calculation of $86,765.40 in lost
profits is based on the average weekly fee of Defendant’s last
3
Defendant makes a similar argument with respect to Section 3.3 of the
Agreement, which provides that the “Franchisee shall pay Franchisor or its
designee an advertising fee equal to nine percent (9%) of the weekly gross
sales of the Franchised Business, but not less than One Hundred Dollars
($100) each week.” (Agreement § 3.3.). He likewise calculates Plaintiff’s
maximum recovery under this provision as $17,900. Notably, this figure is
based on Defendant’s failure to make advertising expenditures in the future,
and is independent of the $55,055.97 in damages Plaintiff has allegedly
sustained due to Defendant’s failure to make advertising expenditures in the
past. Based on Sections 3.2 and 3.3 of the Agreement, Defendant concedes for
purposes of this motion that Plaintiff could conceivably recover $35,800. It
is worth noting that this amount and the alleged $55,055.97 together exceed
the jurisdictional prerequisite.
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six months of reported operating revenue.
(Declaration of
Robert Falconi (“Falconi Decl.”) [Dkt. 31] ¶ 6.)
Given
Defendant’s obligation to remain open, Plaintiff’s calculation
of damages is clearly a legal possibility.
That Defendant might
dispute the mathematical accuracy of Plaintiff’s calculation
does not satisfy his required showing.
638.
See JTH Tax, 624 F.3d at
Thus, Plaintiff has adequately alleged the jurisdictional
prerequisite and diversity jurisdiction exists.
Defendant’s
Motion to Dismiss for Lack of Subject Matter Jurisdiction is
denied.
B.
Proper Plaintiff
Defendant asserts that because Precision Tune, Inc. is
the party to the Agreement, Precision Franchising is not the
proper plaintiff in this case.
Defendant also argues that any
assignment from Precision Tune, Inc. to Precision Franchising is
invalid because the Agreement is a non-assignable personal
services contract.
In opposition, Plaintiff explains that Precision
Franchising is the successor-in-interest to Precision Tune, Inc.
(Falconi Decl. ¶ 2.)
After the Agreement was executed,
Precision Tune, Inc. changed its name to Precision Tune Auto
Care, Inc.
(Id.)
(Id.)
Precision Franchising was formed thereafter.
Precision Tune Auto Care, Inc. later assigned all of its
rights in the Precision Tune Auto Care® system (including all
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intellectual property and all rights and duties under franchise
and related agreements) to Precision Franchising.
(Id.)
Precision Tune Auto Care, Inc. is the sole member of Precision
Franchising.
(Id.)
The Court first examines whether the assignment is
plausibly valid.
Under Virginia law, “the general rule is that
contracts are freely assignable unless the assignment is
prohibited by the terms of the Agreement, is barred by public
policy, or involves personal services.”4
Fransmart, LLC v.
Freshii Dev., LLC, 768 F. Supp. 2d 851, 859 (E.D. Va. 2011)
(citations omitted).
Here, the only prohibition on assignment
in the Agreement is the assignment by the Franchisee without the
Franchisor’s approval.
(Franchise Agreement § 15.1.)
Assignment by the Franchisor is not prohibited nor does such an
assignment contravene public policy.
In arguing that the Agreement is a personal services
contract, Defendant cites a provision which states that “the
rights and duties of Franchisee . . . are personal to
Franchisee” and that “Franchisor has granted this franchise in
4
As a federal court exercising diversity jurisdiction, the Court must apply
the choice of law rules of the forum state, i.e., Virginia. Klaxon Co. v.
Stentor Elect. Mfg. Co., 313 U.S. 487, 496-97 (1941). The Agreement contains
a choice-of-law provision which provides that it shall be interpreted and
construed under Virginia law (unless a provision is unenforceable in
Virginia, in which case the provision shall be interpreted and construed
under the laws of the state in which the Franchised Business is located).
(Agreement § 25.1.) Virginia law favors contractual choice of law
provisions, giving them full effect except in unusual circumstances, see Tate
v. Hain, 181 Va. 402, 410 (Va. 1943), none of which are present here.
Virginia law therefore governs.
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reliance on the business skill, financial capacity, and personal
character of Franchisee and Franchisee’s principals.”
(Id.)
This provision indicates that the Franchisee’s obligations under
the contract are personal in nature, and supports the
prohibition on assignment by the Franchisee, an individual.
The
same does not necessarily hold true for the Franchisor, a
corporation.
Indeed, the Agreement expressly provides that
“[a]ll or a portion of the obligations to be performed by
Franchisor may be performed on behalf of Franchisor by a third
party.”
(Franchise Agreement § 4.2.)
This language, combined
with the fact that the Franchisor is a corporation, weigh
against construing the Agreement as a personal services
contract.
See Fransmart, 768 F. Supp. 2d at 860 (finding
contract assignable where corporate entities were involved and
contract provided that obligations could be performed by anyone
in company).
In any event, even assuming the Agreement were
construed as a personal services contract, the assignment at
issue could still be valid, as “it is well-settled that a
partnership or corporate entity can assign contracts to a
successor entity if the successor entity is substantially the
same as the original entity.”
Id. at 863.
For these reasons,
the Court rejects Defendant’s argument that the Agreement is
non-assignable as a matter of law.
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Defendant next argues that Plaintiff should be
required to amend the Complaint and include allegations
regarding the assignment.
However, Defendant expressly
contracted with Precision Franchising when he renewed the
Agreement in 2005.
(Letter Agreement [Dkt. 17-1].)5
In fact,
the renewal letter states that Precision Franchising is
“successor to Precision Tune Auto Care, Inc.”
(Id.)
The
Complaint also makes plain the relationship between the two
entities in its very first paragraph, where it is stated that
Precision Franchising is wholly owned by Precision Tune Auto
Care, Inc.
(Compl. ¶ 1.)
Under these circumstances, the Court
is satisfied that Defendant possesses adequate information and
that amendment of the Complaint is unnecessary.
See Twombly,
550 U.S. at 555 (noting that Rule 8(a)(2) requires only “a short
and plain statement of the claim” in order to give the defendant
fair notice).
As such, Defendant’s Motion to Dismiss for
Failure to State a Claim is denied.
5
The renewal letter is not included as an exhibit to the Complaint, but may
be considered as it is explicitly relied on in the Complaint and the parties
do not challenge its authenticity. See Phillips v. LCI Int'l Inc., 190 F.3d
at 618.
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IV.
Conclusion
For these reasons, the Court will deny Defendant’s
Motions.
An appropriate Order will issue.
May 23, 2012
Alexandria, Virginia
/s/
James C. Cacheris
UNITED STATES DISTRICT COURT JUDGE
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