Johnson v. Franchoice, Inc.

Background

Plaintiffs Michael Johnson and Strong Life LLC moved for permission to amend their complaint. The proposed amended complaint retained the original facts and common-law fraud claim, which alleged that Franchoice, Inc. and Chris Cynkar knowingly made false statements to induce plaintiffs to purchase an ILKB franchise. The proposed amendment added a punitive-damages count under Minnesota law.

The proposed punitive-damages allegations included claims that defendants represented they had investigated and vetted the franchises they recommended, that ILKB was financially viable, and that the franchise could be operated by absentee owners. Plaintiffs also alleged that defendants knew about ILKB founder Michael Parrella’s earlier bankruptcy history, failed to conduct serious due diligence, relied on ILKB’s statements without verification, knew about illegal marketing techniques, and disregarded complaints from franchisees.

Legal standard

The parties agreed that Federal Rule of Civil Procedure 15, rather than Minnesota Statutes section 549.191, governed the request to add punitive damages. Rule 15 generally allows amendments when justice requires, but leave may be denied if the amendment would be futile. An amendment is futile if the proposed claim could not survive a motion to dismiss for failure to state a legally sufficient claim.

Under Minnesota Statutes section 549.20, punitive damages require allegations showing that defendants deliberately disregarded the rights or safety of others. That requires knowledge of facts creating a high probability of harm and deliberate action or indifference despite that risk. Negligence or gross negligence alone is not enough.

Analysis

The court found that the allegations about the 2003 bankruptcy, the 2008 revocation of the discharge, and accusations in bankruptcy proceedings did not plausibly show that defendants knew those facts created a high probability of harm from purchasing an ILKB franchise nearly a decade later.

The court also found that allegations about defendants’ lack of systematic investigation or reliance on ILKB’s statements amounted, at most, to negligence or gross negligence. The allegations about illegal marketing techniques and ignored franchisee complaints were too conclusory because the proposed complaint did not identify the techniques or explain the substance of the complaints and their connection to plaintiffs’ alleged harm.

The court reached a different conclusion about seven specific representations concerning the ILKB franchise: the required investment was $200,000; franchisees would break even in three months with 200 to 225 members; no ILKB franchise had closed; most franchisees owned four or more locations; ILKB had taken over all marketing; Johnson would earn about $10,000 per month in profit; and the franchise could be run by absentee owners. Accepting the allegations as true at the amendment stage, the court held that the claim was plausible because plaintiffs alleged that defendants knowingly made false statements about the franchise’s financial viability to induce the investment.

Disposition

The court granted in part and denied in part Plaintiffs’ Motion to Amend Complaint. It permitted plaintiffs to add a punitive-damages claim only insofar as it relied on the seven specifically identified representations. It otherwise denied the motion. The court ordered plaintiffs to file an amended complaint consistent with the order on May 22, 2020, unless an appeal was sought, and directed defendants to respond under the Federal Rules of Civil Procedure. Judge Elizabeth Cowan Wright emphasized that permission to amend under the liberal pleading standard did not imply that plaintiffs were likely to succeed on the punitive-damages claim.