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E&I Holdings, Inc. v. Coral Springs Egg And I, LLC

United States District Court, D. Colorado

September 28, 2018

E&I HOLDINGS, INC., Plaintiff,
v.
CORAL SPRINGS EGGS AND I, LLC, POMEGRANATE, INC., JUAN HERNANDEZ, and RIHANEH ODDE-RIVERA, Defendants.

          ORDER GRANTING IN PART AND DENYING IN PART PLAINTIFF'S MOTION TO DISMISS DEFENDANTS' COUNTERCLAIMS

          William J. Martínez United States District Judge.

         This is a franchisor/ franchisee dispute between Plaintiff E&I Holdings, Inc. (“Plaintiff”) and Defendants Coral Springs Egg and I, LLC, Pomegranate, Inc., Juan Marin Hernandez, and Rihaneh Odde-Rivera (jointly, “Defendants”). In their Complaint (ECF No. 1) (“Complaint”), Plaintiffs seek injunctive relief and damages for trademark infringement, unfair competition, breach of contract, and breach of guarantees. Defendants filed Counterclaims (ECF No. 26) (“Counterclaims”), alleging breach of contract, fraud in the inducement, violations of Florida tort law, and violation of the Colorado Consumer Protection Act.

         Now before the Court is Plaintiff's Motion to Dismiss Defendants' counterclaims. (ECF No. 33) (“Motion”). Defendants filed a Response Brief in Opposition to Plaintiff's Motion to Dismiss Counterclaims (ECF No. 34) (“Response”) and Plaintiff filed a Reply in Further Support of its Motion to Dismiss Defendants' Counterclaims (ECF No. 35) (“Reply”). For the reasons set forth below, Plaintiff's Motion is denied with respect to Defendants' breach of contract counterclaim and granted with respect to all of Defendants' other counterclaims.

         I. BACKGROUND

         The following facts are undisputed unless attributed to a party or otherwise noted.

         Plaintiff is the franchisor of the Egg & I restaurants located throughout the United States. (ECF No. 26 at 5, ¶ 12.) On April 30, 2013, Plaintiff entered into a written franchise agreement with Defendant Pomegranate, Inc., guaranteed by Defendants Hernandez and Odde-Rivera. (Id. at 8-9, ¶¶ 20, 22.) On July 18, 2014, Plaintiff entered into a written franchise agreement with Defendant Coral Springs Egg and I, LLC, guaranteed by Defendant Hernandez. (Id., ¶¶ 21, 22.) These are separate franchise agreements involving different, but related, entities. However, the terms, undertakings, and covenants set forth in the franchise agreements are identical. (ECF No. 26 at 9, ¶ 23.) The parties' briefs suggest that the franchise agreements give rise to identical claims, against all Defendants, and counterclaims. Thus, the Court will refer to Defendants collectively and will proceed with its analysis as though there is only one franchise agreement at issue.

         Defendants agreed to operate their franchised restaurants in accordance with the Franchise Agreement for the Franchise Agreement's full ten-year term. (Id. at 9, ¶ 23.) Defendants also agreed to pay Plaintiff a monthly royalty of four and a half percent of each restaurant's gross sales, as well as an advertising contribution up to two percent of each restaurant's gross sales. (Id. at 9-10, ¶ 25.) The Franchise Agreement expressly provides for termination in the event that the franchisee ceases to operate or otherwise abandons the franchised restaurant, or upon repeated noncompliance, especially if the franchisee defaults after having received one prior notice of default within a twelve month period. (Id. at 10-11, ¶¶ 27-28.)

         On May 18, 2017, Plaintiff sent notices of default to Defendants based on their failure to pay Plaintiff the contractually owed royalties and advertising fees. (Id. at 14, ¶ 36.) Defendants were asked to pay all amounts due within ten days of receipt and informed them that failure to cure within that period could result in termination. Id. By September 15, 2017, Plaintiff had terminated the Franchise Agreement. (Id. at 14-15, ¶¶ 38, 40.) But, Plaintiff says, Defendants continue to operate at least one restaurant as if still a franchisee good standing. Plaintiff therefore brings this lawsuit.

         Defendants assert that in early April 2013, Plaintiff, through its representatives, “upsold [Defendant Hernandez], using deceptive false sense of urgency sales tactics, falsely telling [Defendant Hernandez] that open territories were scarce and insisting that he buy a 12-store development agreement to develop and open Egg & I franchised restaurants.” (Id. at 37, ¶ 5.) Defendants allege that Plaintiff provided them “with a franchise disclosure document which severely understated and misrepresented the costs of operating and building out the franchised restaurants, and [Plaintiff] understated and misrepresented rent costs.” (Id.) Defendants claim that Plaintiff knew that the area being developed, Palm Beach County, “had very expensive rent, build out and labor costs, which were higher than and not consistent with the unsubstantiated cost, rent and labor cost estimates represented by [Plaintiff].” (Id.)

         Defendants further claim that Plaintiff “knew but failed to disclose the material fact that its internal policies and procedures would cause it to disapprove proposed restaurant and development sites with rent of $30 per square foot or more.” (Id. at 37-38, ¶ 6.) Defendants allege that Plaintiff “knew but failed to disclose that, in light of that policy, it would be impossible for Defendants to meet the requirement of the Development Agreement to open 12 stores in only a few years in a very expensive area like Palm Beach County, Florida.” (Id. at 38, ¶ 6.) According to Defendants, this “hidden policy forced Defendants to open their first store in the unsuitable Boynton Beach area, which is a sketchy and depressed low-rent, crime-ridden area without the proper demographics to support an upscale family brunch restaurant concept like Egg & I.” (Id.)

         Additionally, Defendants claim that when Plaintiff “was bought by and merged into competing breakfast chain First Watch in 2015, [Plaintiff] adopted a policy against opening new Egg & I restaurants, and informed Defendants that they would not approve any new Egg & I restaurants for at least a year due to the acquisition.” (Id. at 39, ¶ 11.) Defendants claim that because First Watch has ten First Watch company stores in Palm Beach County, First Watch is “strongly opposed” to the eleven new competing Egg & I franchises that Defendants' development agreement requires. (Id.) Defendants also claim that “[a]s part of its plan to abandon and sabotage the Egg & I brand, restaurants, franchises and developers in light of the First Watch acquisition, [Plaintiff] has intentionally watered down and undermined the quality of the Egg & I brand, menu, system and restaurants by stripping out, removing and changing many of the system's most profitable and most popular menu items.” (Id. at 41, ¶ 18.)

         Defendants raise five counterclaims. First, they claim that Plaintiff “materially breached the Development Agreement and the franchise agreements by terminating them without cause and/ or for false and pretextual reasons . . . and also by weakening, watering down and abandoning the Egg & I brand, menu, system, franchisees and developers.” (Id. at 42, ¶ 23.) Second, Defendants claim that “[Plaintiff] committed fraud in the inducement against Defendants” by making “false, unsubstantiated, unrealistic and overstated profit and earnings claims orally and through the marketing decks which grossly overstated the profits and [return on investment] actually experienced.” (Id. at 46, ¶ 35, Id. at 44, ¶ 28.) Third, Defendants argue that “[Plaintiff's] misconduct violated the Florida Franchise Act, FSA Section 817.416, by intentionally misrepresenting the prospects and chances for success of the Defendants' franchises, misrepresenting and failing to disclose the total required franchise investment, and misrepresenting and failing to disclose efforts to establish more franchises than Palm Beach County is likely to sustain or support.” (Id. at 49, ¶ 51.) Fourth, Defendants allege that this “misconduct constituted unconscionable, unfair and deceptive trade practices in violation of the Florida Unfair and Deceptive trade practices Act. (Id. at 53, ¶ 68.) Fifth, and finally, Defendants claim they are entitled to recover $20 million in treble damages and their reasonable attorneys' fees pursuant to the Colorado Consumer Protection Act, because Plaintiff's “misrepresentations and failures to disclose were intentional and [Plaintiff] committed them intentionally and in bad faith as part [of] its effort to injure, cheat and defraud the Defendants and devalue their restaurants.” (Id. at 57, ¶ 86.)

         Plaintiff moves to dismiss all counterclaims pursuant to Federal Rule of Civil Procedure 12(b)(6). (ECF No. 33.)

         II. LEGAL STANDARD

         In reviewing a Motion to Dismiss under Rule 12(b)(6) the Court will “assume the truth of the plaintiff's well-pleaded factual allegations and view them in the light most favorable to the plaintiff.” Ridge at Red Hawk, LLC v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007). Thus the Court “must accept all allegations as true and may not dismiss on the ground that it appears unlikely the allegations can be proven.” Robbins v. Oklahoma, 519 F.3d 1242, 1247 (10th Cir. 2008). “[A] well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of those facts is improbable, and that a recovery is very remote and unlikely.” Id. (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 556 (2007) (“Twombly”)).

         “[T]o withstand a motion to dismiss, a complaint must contain enough allegations of fact ‘to state a claim to relief that is plausible on its face.'” Robbins, 519 F.3d at 1247 (quoting Twombly, 550 U.S. at 570). This means that “[t]he burden is on the plaintiff to frame a ‘complaint with enough factual matter (taken as true) to suggest' that he or she is entitled to relief. ‘Factual allegations must be enough to raise a right to relief above the speculative level.'” Robbins, 519 F.3d at 1247 (quoting Twombly, 550 U.S. at 545 & 556). Plaintiff “does not need detailed factual allegations” but must plead more than merely “labels and conclusions” or “a formulaic recitation of the elements of a cause of action.” Id.

         III. ANALYSIS

         The Court will consider Plaintiff's Motion with respect to each counterclaim in turn.

         A. Defendants' Breach of Contract Counterclaim

         Defendants claim that Plaintiff “materially breached the Development Agreement and the franchise agreements by terminating them without cause and/or for false and pretextual reasons such as favoring and protecting the First Watch company stores, brand and system, and also by weakening, watering down and abandoning the Egg & I brand, menu, system, franchisees and developers.” (ECF No. 26 at 42, ¶ 23.) Defendants elaborate that Plaintiff “materially breached and violated the implied covenant of good faith and fair dealing in the Development Agreement and franchise agreements by intentionally removing the most popular and profitable menu items to weaken Egg & I as a ...


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