Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—EDVa: Terminated Franchisee Was Not Entitled to Withdraw Deemed Admissions and Substitute Untimely Responses to Franchisor’s Requests for Admissions; Summary Judgment to Franchisor, (Dec 12, 2012)

By Peter Reap, J.D., LLM

A terminated automotive service business franchisee, Catalin Gatej, was not entitled to withdraw his deemed admissions and substitute his untimely responses to franchisor Precision Franchising, LLC’s requests for admissions in the parties’ dispute because allowing the withdrawal would prejudice Precision, the federal district court in Alexandria, Virginia, has decided (Precision Franchising, LLC v. Catalin Gatej, December 11, 2012, Cacheris, J.). Thus, Precision was entitled to summary judgment on its breach of contract claim against Gatej and an award of damages in the amount of $148,491.

Precision brought suit against Gatej, alleging that he breached the parties agreement by: (1) failing to spend the required amounts in advertising; and (2) prematurely ceasing operation of the franchised business and transferring all or substantially all of its assets to a third party who is not operating the Center as a Precision Tune franchise. In its Complaint, Precision brought a sole claim of breach of contract, and also sought recovery of its attorney fees and costs.

Precision argued that Gatej admitted—via his failure to timely deny Precision’s requests for admission—that he breached the franchise agreement by failing to expend required funds on advertising during the last five years and by prematurely terminating the agreement by ceasing to operate the franchised auto center, resulting in a total of at least $148,491 of damages. Precision asserted that summary judgment was appropriate based on the uncontroverted facts established by these admissions, Precision’s other evidence, and Gatej’s sole produced document, a chart of advertising expenses.

Gatej failed to respond to Precision’s Requests for Admission by the August 28, 2012 extended deadline, the court noted. As a result, Precision’s requests for admissions automatically were admitted at that time. In addition, Gatej did not file a motion for an extension of time to respond or a motion to withdraw the deemed admissions and to file an untimely response. Gatej did, however, file an untimely response to Precision’s Requests for Admissions on October 25, 2012.

The Fourth Circuit approved of the position taken by a number of other circuit courts that a late response was the equivalent of a motion to withdraw or amend a response, and that amendment could be allowed when the opposing party suffered no prejudice by the amendment. As a result, Gatej’s untimely response would be treated as a motion to withdraw or amend his deemed admissions.

As such, the court was required to consider the discretionary factors set out in Rule 36(b) of the Federal Rules of Civil Procedure to determine whether to accept or disregard Gatej’s untimely response. Rule 36 limited the district court’s discretion regarding the withdrawal or amendment of admissions: “Once made, an admission may be withdrawn only if: a) the withdrawal would promote the presentation of the merits of the action, and b) allowing the withdrawal would not prejudice the party that obtained the admission.”

The first factor, the presentation of the merits factor, weighed in favor of allowing Gatej to change his admissions, the court ruled. In assessing whether withdrawal and amendment would promote the presentation of the merits of the action, courts looked at whether the proposed amendments would facilitate the development of the case in reaching the truth, as in those cases where a party’s admissions were inadvertently made. Courts found that this prong was met when, as here, the deemed admissions effectively resolved the case and thus upholding the admissions would eliminate any need for a presentation on the merits, the court observed.

In the instant case, the moving party filed its summary judgment motion based substantially on the defendant’s deemed admissions. The deemed admissions completely resolved Precision’s claim for future lost profits from Gatej’s premature cessation of operating the franchise. The admissions established that the franchise agreement continued to June 6, 2015, that Gatej knew premature abandonment of the franchise would give rise to a contract claim for future lost profits, and that this premature cessation of operation would result in damages. The deemed admissions also resolved that “[Gatej] has failed to expend the requisite amounts in advertising under the Franchise Agreement.” As a result, upholding these deemed admissions would eliminate a need for presentation on the merits of Precision’s claim. The first Rule 36(b) factor therefore supported allowing Gatej to withdraw and amend his deemed admissions with his untimely filed admissions.

The second prong (prejudice to the party relying on the admissions), however, weighed against allowing Gatej to change his admissions, the court held. In analyzing this factor, courts considered the difficulty the party opposing the motion to withdraw would face as a result of the sudden need to obtain evidence to prove the matter it had previously relied upon as answered.

Courts found that the following factors indicated that a withdrawal of admissions would result in sufficient prejudice to a relying party: (1) a number of months had passed after the deadline to respond to requests for admissions; (2) it was near or after the close of discovery; (3) the relying party had foregone some discovery based on the admissions; (4) the opposing party repeatedly had failed to respond to discovery requests or communications; and/or (5) the opposing party had received some notice from the relying party or the court of the consequences of failing to respond to discovery requests.

All of these pertinent factors were present in the instant case and therefore allowing Gatej to withdraw and amend his deemed admissions with his untimely responses would result in prejudice to Precision, the court determined. First, Gatej did not submit his untimely response to Precision’s requests until October 24, 2012, over three months past the original deadline to respond and over two months beyond the extended deadline which Precision granted Gatej upon his request.

Second, this significant delay was part of a larger pattern of general unresponsiveness and repeated delinquency by Gatej during the overall discovery process and litigation. Third, at this point, discovery was nearly over as it was set to end on December 14, 2012, only few days after the issuance of this opinion. Fourth, Gatej has had notice of the potential consequences of failing to respond to discovery requests since the court’s September 28, 2012, Order which “warned [him] that failure to comply with this order may result in sanctions, including default judgment.”

As a result, Precision reasonably relied on Gatej’s deemed admissions in determining how to pursue discovery and summary judgment and therefore would be prejudiced if it could not rely on them, the court held. Gatej did not meet the Rule 36(b) test for withdrawal and thus would not be permitted to substitute his untimely responses for his deemed admissions.

Taking the admissions into account, the undisputed facts showed that Gatej was legally obligated to operate a franchise business through June 6, 2015, to pay an operating fee of 7.5 percent of weekly gross sales, and to pay an advertising fee of 9 percent of weekly gross sales or expend a portion of such on advertising. It was undisputed that Precision fully performed its obligations under the franchise agreement and that Gatej breached these obligations. It was also undisputed that Gatej’s breaches resulted in no less than $148,491 of damages to Precision.

Finally, the terms of the agreement provided for an award of “all costs and expenses, including reasonable legal and accounting fees, incurred by Franchisor in connection with obtaining damages or injunctive or other relief for the enforcement of any provisions of this Agreement.” The court ordered Precision to submit a petition for reasonable attorney fees.

The case is No1:12cv158 (JCC/TCB).

Constantinos George Panagopoulos (Ballard Spahr LLP) for Precision Franchising LLC. Catalin N. Gatej, pro se.

Cases: FranchisingDistribution VirginiaNews