Its Just Lunch International LLC v. Island Park Enterprise Group Inc, No. 5:2008cv00367 - Document 69 (C.D. Cal. 2008)

Court Description: ORDER GRANTING IN PART AND DENYING IN PART COUNTERDEFENDANTS' MOTION TODISMISS by Judge Virginia A. Phillips: the Court denies the Motion as to fourth claim and grants the Motion as to the seventh claim, without leave to amend. (am)

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Its Just Lunch International LLC v. Island Park Enterprise Group Inc Doc. 69 1 2 3 4 5 6 7 8 UNITED STATES DISTRICT COURT 9 CENTRAL DISTRICT OF CALIFORNIA 10 11 IT'S JUST LUNCH INTERNATIONAL LLC, a 12 Nevada Corporation, Case No. EDCV 08-367-VAP (JCRx) 13 [Motion filed on August 20, 2008] 14 15 16 17 18 19 20 21 22 23 24 25 26 27 ) ) ) ) Plaintiff, ) ) ) v. ) ISLAND PARK ENTERPRISE ) GROUP, INC., a New York ) ) Corporation, ) Defendants. ) ________________________ ) ) ISLAND PARK ENTERPRISE ) GROUP, INC., a New York ) ) corporation, and ) JOANNE BLOOMFIELD, an ) individual, ) ) Counterclaimants, ) ) v. ) ) IT’S JUST LUNCH ) INTERNATIONAL, LLC, a Nevada limited liability ) company, DANIEL DOLAN, ) an individual, and IRENE ) LACOTA, an individual, ) ) Counterdefendants. ) ________________________ ) ORDER GRANTING IN PART AND DENYING IN PART COUNTERDEFENDANTS' MOTION TO DISMISS 28 Dockets.Justia.com 1 Counterdefendants' Motion to Dismiss came before the 2 Court for hearing on September 15, 2008. After reviewing 3 and considering all papers filed in support of, and in 4 opposition to, the Motion, as well as the arguments 5 advanced by counsel at the hearing, the Court GRANTS IN 6 PART Counterdefendants' Motion to Dismiss. 7 8 9 I. BACKGROUND Plaintiff It's Just Lunch International, LLC 10 ("Plaintiff" or "IJL") filed this action. On April 17, 11 2008, Defendant Island Park Enterprise Group, Inc. 12 ("Island Park") filed a Counterclaim ("Countercl."). 13 14 After various amendments, the pleadings now stand in 15 the following position: IJL, the sole named plaintiff, 16 brings suit against Island Park and Joanne Bloomfield 17 ("Bloomfield") as Defendants. Island Park and 18 Bloomfield, who are referred to collectively here as 19 "Counterclaimants," have filed a counterclaim against 20 IJL, Daniel Dolan, and Irene LaCota, collectively 21 referred to here as "IJL." The Complaint alleges 22 Defendant and franchisee Island Park failed to pay 23 required franchise fees and otherwise perform under two 24 franchise agreements with Plaintiff, franchisor It's Just 25 Lunch. 26 27 28 2 1 On August 20, 2008, IJL filed a Motion to Dismiss 2 ("Mot.") the fourth claim (violation of California and 3 New York franchise practice acts) and the seventh claim 4 (California Business and Professions Code § 17200) of 5 the First Amended Counterclaim. IJL also filed a 6 supporting Memorandum of Points and Authorities. 7 Mem. P. & A.") ("IJL Counterclaimants filed Opposition to the 8 Motion to Dismiss on September 2, 2008. ("Opp'n".) IJL 9 filed a Reply in Support of the Motion to Dismiss on 10 September 8, 2008. ("Reply".) 11 12 13 II. LEGAL STANDARD Under Rule 12(b)(6), a party may bring a motion to 14 dismiss for failure to state a claim upon which relief 15 can be granted. As a general matter, the Federal Rules 16 require only that a plaintiff provide "'a short and plain 17 statement of the claim' that will give the defendant fair 18 notice of what the plaintiff's claim is and the grounds 19 upon which it rests." Conley v. Gibson, 355 U.S. 41, 47 20 (1957) (quoting Fed. R. Civ. P. 8(a)(2)); Bell Atlantic 21 Corp. v. Twombly, 550 U.S. __, 127 S. Ct. 1955, 1964 22 (2007). In addition, the Court must accept all material 23 allegations in the complaint -- as well as any reasonable 24 inferences to be drawn from them -- as true. See Doe v. 25 United States, 419 F.3d 1058, 1062 (9th Cir. 2005); ARC 26 Ecology v. U.S. Dep't of Air Force, 411 F.3d 1092, 1096 27 (9th Cir. 2005). 28 3 1 "While a complaint attacked by a Rule 12(b)(6) motion 2 to dismiss does not need detailed factual allegations, a 3 plaintiff's obligation to provide the 'grounds' of his 4 'entitlement to relief' requires more than labels and 5 conclusions, and a formulaic recitation of the elements 6 of a cause of action will not do." 7 Ct. at 1964-65 (citations omitted). Bell Atlantic, 127 S. Rather, the 8 allegations in the complaint "must be enough to raise a 9 right to relief above the speculative level." Id. at 10 1965. 11 12 Although the scope of review is limited to the 13 contents of the complaint, the Court may also consider 14 exhibits submitted with the complaint, Hal Roach Studios, 15 Inc. v. Richard Feiner & Co., 896 F.2d 1542, 1555 n.19 16 (9th Cir. 1990), and "take judicial notice of matters of 17 public record outside the pleadings," Mir v. Little Co. 18 of Mary Hosp., 844 F.2d 646, 649 (9th Cir. 1988). 19 20 III. DISCUSSION This dispute involves a franchise agreement with a 21 choice of law provision requiring application of Nevada 22 law. (IJL Mem. P. & A. 2.) IJL urges enforcement of the 23 choice of law provision and asserts that Counterclaimants 24 fail to state a claim upon which relief can be granted 25 under Nevada law, or, if the choice of law provision is 26 not enforced, under California law. 27 2-3.) 28 4 (IJL Mem. P. & A. 1 2 Counterclaimants argue (1) the choice of law 3 provision should not be enforced, and (2) they state 4 claims under California and New York law. (Opp'n 5, 14.) 5 6 A. Choice of Law 7 Both parties agree that California choice of law 8 analysis should govern the enforcement of the choice of 9 law provision. (IJL Mem. P. & A. 8; Opp'n 5-6.) 10 California uses the test set forth in Nedlloyd Lines B.V. 11 v. Superior Court to determine whether to enforce a 12 choice of law provision. 3 Cal. 4th 459 (1992). This 13 test draws heavily on section 187 of the Restatement 14 Second of Conflict of Laws ("Restatement"). Id. at 464- 15 66. 16 17 Under Nedlloyd, California will apply the law 18 indicated by the choice of law provision where: 19 "[1] the chosen state has a substantial relationship to 20 the parties or their transaction," or where "[2] there is 21 any other reasonable basis for the parties' choice of 22 law." Id. at 466. "If neither of these tests is met, 23 that is the end of the inquiry, and the court need not 24 enforce the parties' choice of law." Id. at 466. 25 26 Where either test is met, the court proceeds to the 27 second step and "determine[s] whether the chosen state's 28 5 1 law is contrary to a fundamental policy of California." 2 Id. at 466. Once the party who seeks application of the 3 choice of law provision demonstrates a substantial 4 relationship, the party who would avoid the choice of law 5 provision bears the burden of showing that the California 6 law embodies a fundamental policy. See id. at 471. 7 8 Where "there is a fundamental conflict with 9 California law," the court proceeds to the third step and 10 "determine[s] whether California has a materially greater 11 interest than the chosen state in the determination of 12 the particular issue. If California has a materially 13 greater interest than the chosen state, the choice of law 14 shall not be enforced, for the obvious reason that in 15 such circumstance we will decline to enforce a law 16 contrary to this state's fundamental policy." Id. at 466 17 (internal citations and quotations omitted). 18 19 1. 20 Applying the Nedlloyd test here, the court must first Substantial Relationship 21 determine "whether the chosen state has a substantial 22 relationship to the parties or their transaction . . . ." 23 Nedlloyd, 3 Cal. 4th at 466. This requirement is easily 24 satisfied: Plaintiff has a substantial relationship with 25 Nevada because IJL is a Nevada limited liability company. 26 (Countercl. ¶ 3; see Nedlloyd, 3 Cal. 4th at 467.) 27 28 6 1 2. Fundamental Policy 2 As a substantial relationship exists, the court next 3 "determine[s] whether the chosen state's law is contrary 4 to a fundamental policy of California" or that of a third 5 state. Id. at 466, 467 n.5. Where enforcement of the 6 choice of law provision would run counter to a 7 fundamental policy of California or a third state, then 8 the court must refuse to enforce the choice of law 9 provision if it finds that "California has a 'materially 10 greater interest than the chosen state in the 11 determination of a particular issue . . . .'" Id. at 12 466. 13 There is no bright-line definition of a "fundamental 14 policy." Restatement § 187 comment g. A fundamental 15 policy must be "substantive," and "may be embodied in a 16 statute which makes one or more kinds of contracts 17 illegal or which is designed to protect a person against 18 the oppressive use of superior bargaining power." Id. 19 20 Here Counterclaimants' fourth claim is based on the 21 California Franchise Investment Law ("CFIL"), or, in the 22 alternative, on the New York Franchise Sales Act; their 23 seventh claim is based on California Business and 24 Professions Code section 17200. (Countercl. ¶ 72, 75, 25 88-93.) The CFIL has been found to embody a fundamental 26 California policy, while the Courts have split over the 27 question of whether section 17200 does. 28 7 1 The CFIL protects franchisees against franchisors who 2 may have superior bargaining power. See Cal. Corp. Code 3 § 31001 (CFIL enacted to address losses suffered by 4 franchisees due to franchisor failure to provide complete 5 information); Restatement comment g (fundamental policies 6 may "protect a person against the oppressive use of 7 superior bargaining power"). The California legislature 8 described the provisions and intent of the CFIL as 9 follows: 10 11 12 13 14 15 16 17 It is the intent of this law to provide each prospective franchisee with the information necessary to make an intelligent decision regarding franchises being offered. Further, it is the intent of this law to prohibit the sale of franchises where the sale would lead to fraud or a likelihood that the franchisor's promises would not be fulfilled, and to protect the franchisor and franchisee by providing a better understanding of the relationship between the franchisor and franchisee with regard to their business relationship. 18 Cal. Corp. Code § 31001. At least two courts have read 19 the CFIL as constituting an important protection for 20 franchisees. America Online, Inc. v. Superior Court, 90 21 Cal. App. 4th 1, 11 (2001) (CFIL "enacted to protect the 22 statute's beneficiaries from deceptive and unfair 23 business practices"); Cottman Transmission Systems LLC v. 24 Kershner, 492 F. Supp. 2d 461, 467-70 (E.D. Pa. 2007). 25 26 In Cottman, a Pennsylvania district court found that 27 California and New York's protections of franchisees 28 8 1 "express[ed] a clear policy to provide a heightened 2 degree of protection to prospective franchisees regarding 3 misrepresentations about a franchise system." 4 Supp. 2d at 467. 492 F. Here, the Court finds that the CFIL and 5 New York laws express fundamental policies because 6 Counterclaimants are franchisees who claim the need for 7 protection against a franchisor's misrepresentations and 8 other unfair practices. 9 10 The authorities are more conflicting as to whether 11 section 17200 embodies a fundamental policy of 12 California. The language of the statute, which forbids 13 unlawful, unfair or fraudulent business practices, hews 14 close to the spirit of a fundamental policy as described 15 in Restatement 187 comment g. 16 17200. Cal. Bus. & Prof. Code § The Restatement comment defines a fundamental 17 policy as one that "makes one or more kinds of contracts 18 illegal or which is designed to protect a person against 19 the oppressive use of superior bargaining power." Courts 20 have differed on whether section 17200 embodies a 21 fundamental policy, depending on the underlying 22 violation. See Cardonet, Inc. v. IBM Corp., 2007 WL 23 518909, *5 (N.D. Cal.)1 Here Counterclaimants allege 24 1 For example, the Cardonet court at *5 noted that section 17200 was found to embody a fundamental 26 California policy when applied to a dispute about a covenant not to compete in Application Group, Inc. v. 27 Hunter Group Inc., 61 Cal. App. 4th 881, 907-08 (1998). In a different dispute cited by the Cardonet court, (continued...) 28 25 9 1 that all of IJL's actions constituted illegal trade 2 practices in violation of section 17200. (Countercl. ¶ 3 90.) 4 To recap, IJL has demonstrated a substantial 5 relationship with Nevada law, satisfying the first step 6 in the Nedlloyd test. As Counterclaimants seek to avoid 7 application of the choice of law provision, under 8 Nedlloyd, Counterclaimants bear the burden of 9 demonstrating that section 17200 embodies a fundamental 10 policy. See Nedlloyd, 3 Cal. 4th at 471. Neither IJL 11 nor Counterclaimants cite any authority to support their 12 positions on this question. (IJL Mem. P. & A. 9, Reply 13 6-7; Opp'n 6.) As Counterclaimants bear the burden here, 14 and fail to state with any precision which actions or 15 violations they seek to address with the section 17200 16 claim, the Court declines to find that section 17200 17 embodies a fundamental policy in California as used here. 18 19 20 21 1 (...continued) 22 Nibeel v. McDonald's Corp. 1998 WL 547286 *11 (N.D. Ill. 1998), section 17200 was not found to embody a 23 fundamental policy because the protections afforded by California law and those of the state selected by the 24 choice-of-law clause were similar. Mere differences between California law and that of the state selected by 25 the choice-of-law provision, however, do not transform the California law into one embodying a fundamental 26 policy. MediaMatch v. Lucent, 120 F. Supp. 2d 842, 862 (N.D. Cal. 2000). Counterclaimants' seventh claim cannot 27 neatly be categorized because they allege that all of IJL's actions violate section 17200. (Countercl. ¶ 90.) 28 10 1 In sum, the Court finds that the law on which 2 Counterclaimants base claim four embodies a fundamental 3 California policy, but that the laws on which 4 Counterclaimants base claim seven do not embody such a 5 policy. 6 7 3. Materially Greater Interest 8 Having determined that the California franchise law 9 expresses fundamental policy, the Court considers whether 10 California or New York have materially greater interests 11 than Nevada in enforcing their laws. The Cottman court 12 considered a similar situation and found that California 13 and New York had materially greater interests than did 14 Pennsylvania, the state identified in a choice-of-law 15 clause, in enforcing its laws. 16 17 In Cottman, the franchisor was headquartered in 18 Pennsylvania and sought to enforce a choice of law clause 19 requiring application of Pennsylvania law. 20 F. Supp. 2d at 467-68. Cottman, 492 The facts here are similar to 21 those before the Cottman court; Counterdefendant IJL is 22 incorporated in Nevada but resides in California while 23 Counterdefendants Daniel Dolan and Irene LaCota reside in 24 California. (Countercl. ¶¶ 3-5.) 25 reside in New York. (Id. ¶¶ 1-2.) Counterclaimants Nevada's interest 26 here in enforcing its laws, compared to the interests of 27 California and New York, therefore seems equivalent to 28 11 1 Pennsylvania's interest in Cottman. There, the 2 franchisor was headquartered in Pennsylvania and sought 3 to enforce Pennsylvania law; here, the franchisor is 4 incorporated in Nevada and seeks to enforce Nevada law. 5 (Countercl. ¶¶ 2-5); see Cottman, 492 F. Supp. 2d at 4676 68.2 IJL fails to support its position that California 7 and New York do not have materially greater interests in 8 enforcing their laws. (IJL Mem. P. & A. 9; Reply 7.) 9 This Court therefore declines to enforce the choice of 10 law provision as to claim four.3 11 B. Fourth Claim 12 IJL argues Counterclaimants' claim under the CFIL 13 fails because the franchise was located in New York, not 14 California, and California Corporations Code section 15 31105 therefore bars it. (IJL Mem. P. & A. 4; Cal. Corp. 16 17 2 "There is no franchise disclosure law in Nevada, and, thus, to enforce the choice of law provision in this 18 case would defeat the strong fundamental policy of 19 California's law." Cottman, 492 F. Supp. 2d at 468 citing Chong v. Friedman, 2005 WL *4 (Cal. Ct. App.) 20 (unpublished). 21 22 23 24 25 26 27 28 3 Other courts have refused to enforce the same choice of law provision using different reasoning. See Order Denying Counterdefendants' Motion to Dismiss, Mar. 8, 2007 (It's Just Lunch Int'l LLC v. Nichols, Case No. ED CV 06-01127-SGL); It's Just Lunch Int'l LLC v. Polar Bear Inc., 2004 WL 3406117 (unpublished). These authorities read Restatement section 187 to allow an allegation of fraud regarding the contract as a whole to prevent enforcement of the choice of law claim. This Court reads Restatement section 187 to require an allegation of fraud regarding the choice of law claim itself to obtain the same effect. As Counterclaimants do not allege fraud in the inclusion of the choice of law claim, (see Counterclaim ¶¶ 58-66), the choice of law analysis above is necessary. 12 1 Code § 31105.) Section 31105 of the California 2 Corporations Code provides: 3 4 5 6 7 8 9 Any offer, sale, or other transfer of a franchise, or any interest in a franchise, to a resident of another state or any territory or foreign country, shall be exempted from the provisions of Chapter 2 (commencing with Section 31110) of this part, if all locations from which sales, leases or other transactions between the franchised business and its customers are made, or goods or services are distributed, are physically located outside this state. 10 Counterclaimants' franchise is located out-of-state 11 and Counterclaimants allege claims under section 31110 12 and 31111 in their fourth claim. (Countercl. ¶¶ 73-74.) 13 Thus, on its face, section 31105 appears to require 14 dismissal of the fourth claim. A closer reading of 15 section 31105, however, reveals that such a superficial 16 reading of the statute is flawed. 17 18 Section 31105 only precludes claims under Part 2, 19 Chapter 2, of the California Corporations Code. 20 Counterclaimants, however, rely on sections outside of 21 Part 2, Chapter 2, including sections 31201 and 31220. 22 (Countercl. ¶ 77.) Accordingly, insofar as IJL relies on 23 the provisions of section 31105, the dismissal of 24 Counterclaimants' fourth claim is unwarranted. 25 26 Finally, IJL contends the Court should dismiss the 27 CFIL claim on the basis of the parol evidence rule. 28 13 (IJL 1 Mem. P. & Am. 5-6.) According to IJL, the Franchise 2 Agreement signed by Counterclaimants contains an 3 enforceable integration clause (Compl. Ex. 1 ¶ 19(f); Ex. 4 2 ¶ 19(f)), and application of the parol evidence rule 5 will bar the evidence necessary to sustain 6 Counterclaimants' allegations of violations of the CFIL. 7 8 This argument lacks merit. Counterclaimants have 9 alleged that IJL made unregistered earnings claims, 10 including fraudulent statements, in connection with 11 offering and selling of a franchise, and that this 12 violated franchise laws. (Countercl. ¶¶ 71, 73-74.) The 13 fourth claim, which addresses franchise laws, 14 incorporates the paragraphs of the second claim (for 15 fraud and deceit). (Countercl. ¶¶ 71-72.) The second 16 claim alleges that It's Just Lunch and Dolan made 17 fraudulent statements orally and/or in writing about the 18 actual or potential level of income or sales for 19 franchise locations before the franchise agreements were 20 signed. (Countercl. ¶¶ 58-60, 74.) These statements 21 include that certain locations would be profitable, that 22 the franchise system as a whole was profitable, and that 23 a location had never been closed. 24 71-72.) (Countercl. ¶¶ 58-66, Read together, the Counterclaim alleges that IJL 25 made specific fraudulent oral statements about earnings 26 in conjunction with the offer and sale of a franchise. 27 28 14 1 Defendants rely on the parol evidence rule to compel 2 dismissal of the seventh claim. The rule barring 3 reliance on parol evidence when the parties enter into a 4 contract with an integration clause does not apply where 5 fraud is alleged sufficiently. See Cal. Code Civ. P. § 6 1856(g); see also Polar Bear, WL 3406117. Here, as 7 discussed above, Counterclaimants have alleged fraud in 8 connection with the sale of franchises. The Court now 9 turns to whether those allegations were made with 10 sufficient detail. 11 12 Fraud allegations must "be specific enough to give 13 defendants notice of the particular misconduct so that 14 they can defend against the charge and not just deny that 15 they have done anything wrong." Vess v. Ciba-Geigy Corp. 16 USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (internal 17 quotations omitted). To meet this standard, the pleading 18 must allege "the who, what, when, where, and how of the 19 misconduct charged." Id. (citations and quotations 20 omitted). A plaintiff alleging fraud under state law 21 before a federal court must plead with sufficient 22 particularity to satisfy Fed. R. Civ. P. 9(b). Id. at 23 1103. A plaintiff must set forth "what is false or 24 misleading about a statement and why it is false." Id. 25 at 1106 (citations and quotations omitted). 26 Counterclaimants have met this standard because they have 27 identified who (IJL and Dolan), when (prior to the 28 15 1 franchise agreements), how (over the telephone and face 2 to face), and which specific fraudulent statements were 3 made in conjunction with the sale of a franchise. 4 Countercl. ¶¶ 59-60, 71-74.) (See They have also shown what 5 is false about these statements by giving the true facts 6 about the franchise system at paragraph 60 of the 7 Counterclaim. 8 9 C. 10 Seventh Claim The seventh claim is based on California Business and 11 Professions Code section 17200 and alleges IJL engaged in 12 illegal, fraudulent, and unfair business practices in 13 connection with its dealings with its franchisees. 14 (Countercl. ¶¶ 88-93.) Defendants' primary basis for 15 arguing that the seventh claim should be dismissed is its 16 contention that Nevada law governs the dispute between 17 the parties. As the court enforces the choice of law 18 clause as to section 17200, it grants the Motion to 19 Dismiss the seventh claim, without leave to amend. 20 21 IV. CONCLUSION For the reasons set forth above, the Court denies the 22 Motion as to fourth claim and grants the Motion as to the 23 seventh claim, without leave to amend. 24 25 Dated: October 21, 2008 26 27 VIRGINIA A. PHILLIPS United States District Judge 28 16

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