Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D. Tex.: No reconsideration of dismissal of franchisee’s deceptive trade practices counterclaims, (Apr 23, 2015)

By Linda O’Brien, J.D., LL.M.

In an action by a self-serve frozen yogurt franchisor against a former franchisee for breach of the franchise agreement, the federal district court in Dallas has denied reconsideration of its order dismissing the franchisee’s deceptive trade practices counterclaim (Yumilicious Franchise, L.L.C. v. Barrie, April 22, 2015, Lindsay, S.).

Yumilicious is a Texas-based self-serve frozen yogurt franchisor that opened its first store in 2008. In 2010, Why Not, LLC and three individual principals entered into two franchise agreements with Yumilicious to open two yogurt shops in South Carolina. The individual principals signed a guaranty and assumption agreement, in which they personally guaranteed to Yumilicious that Why Not would pay all of its obligations under the franchise agreements in a timely fashion.

Yumilicious filed suit, alleging that Why Not and its principals breached the franchise agreement by closing a yogurt store without prior authorization, failing to pay royalties, and failing to pay for yogurt products they ordered. The principals filed counterclaims for breach of contract, fraud, negligent misrepresentation, and violations of the Texas Deceptive Trade Practices Act (DTPA). The court dismissed the defendants’ DTPA counterclaim as time-barred. The defendants moved for reconsideration.

The court found that, while dismissal on statute of limitations grounds was inappropriate, the DTPA counterclaim failed for insufficient allegations to state a claim. The court noted that the defendants’ counterclaim was not time-barred under the state civil practice rules, which allow a counterclaim to be filed within 30 days after the date the party’s answer is due, even though the claim would be time-barred if filed as a separate action. However, the defendants’ counterclaim had to be dismissed for failure to show intentional misrepresentations by the franchisor and defendants’ reliance to their detriment on those misrepresentations.

According to the court, the defendants did not allege that assurances and omissions as to vendors and distributors were intentionally made by Yumilicious or that they detrimentally relied on or were induced into entering into the franchise agreements based on those representations. The defendants acknowledged that they were aware of certain product supply issues before entering into the agreements and entered into those agreements despite this knowledge. Furthermore, the defendants’ allegations that Yumilicious failed to provide certain financial performance disclosures was a technical violation of the FTC franchise rule and was insufficient alone to state a claim under the DTPA based on representations or omissions, the court concluded.

The case is No. 3:13-CV-4841-L.

Attorneys: Todd C. Donohue (The Wolf Law Firm, PC) for Yumilicious Franchise LLC. Gary E. Smith (Law Office of Gary E. Smith) for Matthew Barrie, Kelly Glynn, Brian Glynn, and Why Not, LLC.

Companies: Yumilicious Franchise, LLC

Cases: FranchisingDistribution StateUnfairTradePractices TexasNews