Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D. Tex.: Yumilicious is semi-successful in avoiding “distasteful” counterclaims, (Aug 19, 2014)

By Greg Hammond, J.D.

Self-serve frozen yogurt franchisor Yumilicious Franchise, L.L.C. successfully obtained dismissal of a franchisee’s counterclaims that the company violated the Texas Deceptive Trade Practices Act (TDTPA) and breached a franchise agreement. In partially granting the franchisor’s motion to dismiss, the federal district court in Dallas determined that the TDTPA claim was time-barred and the franchisees failed to respond to the motion to dismiss the breach of contract claim (Yumilicious Franchise, L.L.C. v. Barrie, August 14, 2014, Lindsay, S.).

Background. Yumilicious is a Texas based self-serve frozen yogurt franchisor that opened its first store in 2008. In 2010, Why Not, L.L.C. and three individual principals entered into two franchise agreements with Yumilicious to open two yogurt shops in South Carolina. The individual principals signed a Principals’ 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.

However, 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 TDTPA, arguing that the two shops were “doomed from the beginning,” and that Yumilicious’ owner fraudulently induced Why Not to enter into the franchise agreements. Yumilicious moved to dismiss the counterclaims; moved for a more definitive statement; moved to strike defendants’ general denial; and moved to strike defendants’ jury demand.

Motion to dismiss. The court partially granted and partially denied Yumilicious’ motion to dismiss. Specifically, it found that: (1) the TDTPA claim was time-barred under the applicable two-year statute of limitations, as the franchise agreement was entered into in May 2010, and the defendants filed suit long after May 2012; (2) the defendants abandoned or waived their breach of contract claim by not responding to Yumilicious’ motion to dismiss; and (3) a request to void the franchise agreements is not a valid basis for declaratory judgment.

However, the court did find that the defendants stated valid fraud and negligent misrepresentation claims, as they alleged with sufficient particularity that: (1) Yumilicious made false statements regarding franchise costs and products suppliers to induce defendants into entering the franchise agreements and guaranty agreements and to open two yogurt stores in South Carolina; and (2) defendants relied on Yumilicious’ statements to their detriment in entering the franchise agreements and opening the two stores. Consequently, the fraud and negligent misrepresentation claims survived Yumilicious’ motion to dismiss.

Motion to strike. Yumilicious first moved to strike the defendants’ general denial for violating Fed. R. Civ. Proc. 8(b), which requires defendants to admit the part of the allegations that are true and deny the rest. The court determined that the defendants generally denied facts that formed the basis of their own counterclaims, and consequently granted the motion to strike, ordering defendants to file an amended answer. However, the court denied Yumilicious’ motion to strike the defendants’ jury demand, for failing to sufficiently address relevant waiver factors.

Motion for more definite statement. The franchisor’s motion for more definite statement was dismissed as moot, given the court’s ruling on the motion to dismiss the defendants’ counterclaims.

The case number is 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.

Companies: Yumilicious Franchise LLC

Cases: FranchisingDistribution StateUnfairTradePractices TexasNews