United States District Court, D. Colorado
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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