Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D.D.C.: Restaurant franchisor’s delay fatal to its attempt to add affirmative defense, (Jul 24, 2013)

By Peter Reap, J.D., LL.M.

Restaurant franchisor Maoz Vegetarian USA, Inc.’s contention that it should be given leave to amend its pleadings to include a fifth affirmative defense in its dispute with franchisee A Love of Food I, LLC, because the franchisor forgot to add that defense in the first instance, or presumably at any time over the preceding two years, constituted neither diligence nor good cause, the federal district court in Washington D.C. has decided (A Love of Food I, LLC v. Maoz Vegetarian USA, Inc., July 22, 2013, Jackson, K.). Therefore, the franchisor’s motion to amend its answer was denied.

The parties’ dispute arose out of their 2007 franchise agreement. The franchisee initiated suit against the franchisor on August 25, 2010.

The franchisor filed the current motion to amend its answer after the close of discovery (which concluded on November 21, 2011,) and almost two years after the court’s deadline for filing an amended answer. The franchisor’s motion to amend also comes after motions to dismiss and motions for summary judgment were adjudicated in part. Further, the amendment to the answer that the franchisor now requested—“to be allowed to assert the additional affirmative defense that the parties agreed to bring any claims arising out of the contract within one year of knowledge of the facts giving rise to such claim—is based on a provision in the franchise agreement that is the backbone of this entire lawsuit,” the court noted.

The franchisee asserted in its opposition that the court should apply the “good cause” standard of Rule 16 of the Federal Rules of Civil Procedure to the motion to amend. The franchisor’s reply did not oppose the franchisee’s argument that Rule 16 applied; indeed, the franchisor apparently conceded that the Rule 16 good cause standard is applicable in this situation because the reply directly addressed whether there was “good cause” to amend the answer in this case.

Rule 16 applied, according to the court. Although the D.C. Circuit had not addressed the issue, district court case law made clear that once the court enters a scheduling order, that schedule can only be modified with the court’s consent and with good cause shown.

The primary factor in determining whether good cause exists is the diligence of the party: the court’s inquiry must focus on the reasons the moving party has given for his delay instead of the substance of the proposed amendment. In addition to diligence, the movant should also show lack of prejudice to the opposing parties.

The sole explanation that defendant provided for the delay in seeking to amend the answer to include the contractual statute of limitations affirmative defense was “oversight.” But mere oversight was not even sufficient to show excusable neglect, and “good cause” required a greater showing than excusable neglect, according to the court.

The fact that the franchisor mentioned this affirmative defense in summary judgment briefing over a year ago—but did not seek to amend the answer at that time—merely underscored the inadequacy of the “oversight” explanation, the court determined. Yet even after the court ruled on the parties’ cross-motions for summary judgment and transferred the case to this district, the “oversight” continued: the franchisor let another full year pass before moving to amend the answer.

While it was true that this case has been essentially “dormant” for the past year, this inactivity extended to all aspects of the case and, in any event, it provided no excuse, the court explained. This was not a situation in which a new affirmative defense arose after the scheduling order had passed due to a change in law or newly discovered evidence. And because the statute of limitations defense stemmed from the language of the franchise agreement that is at the heart of this dispute, the amendment that the franchisor now wished to make was available when the franchisor first answered the amended complaint two years ago, and it has remained at the franchisor’s disposal throughout the pendency of this case.

Although the franchisor argued that “good cause is met by the need for an informed and reasoned decision,” the court’s good cause inquiry must focus on the franchisor’s reason for the delay, not the anticipated results of granting the motion. Here, the franchisor failed to show that it acted diligently; thus, the inquiry ended, regardless of whether the amendment would assist the factfinder or result in prejudice to the franchisee.

The case is Civil Action No. 1:12-CV-1117(KBJ).

Attorneys: Steven K. Fedder (Fedder & Janofsky LLC) for A Love of Food I, LLC. Raymond Thomas McKenzie , Jr. (Law Office of Raymond T. Mckenzie) for Maoz Vegetarian USA, Inc.

Companies: A Love of Food I, LLC; Maoz Vegetarian USA, Inc.

Cases: FranchisingDistribution DistrictofColumbiaNews