Hasko v. Franchoice, Inc.

Background

George Hasko and George Hasko Enterprises, Inc. moved to amend their complaint against FranChoice, Inc. and Careyann Golliver. The proposed second amended complaint largely repeated the existing factual allegations and fraud claim, which alleged that the defendants knowingly made false statements to induce the plaintiffs to purchase an ILKB franchise. The proposed amendment added Count V, a claim for punitive damages.

The proposed punitive-damages allegations asserted that the defendants deliberately disregarded the plaintiffs’ rights by claiming that they had investigated and vetted the franchises they recommended and would provide enough information for an informed decision. The allegations also referred to information about ILKB’s founder, the defendants’ investigation of ILKB, ILKB’s marketing practices, complaints from franchisees, and specific statements about the franchise’s financial prospects and suitability for absentee ownership.

Legal standard

The court held that Rule 15 of the Federal Rules of Civil Procedure, which generally allows amendments when justice requires, governed the motion instead of Minnesota Statutes section 549.191. Section 549.191 requires a party seeking to add punitive damages to submit affidavits and show initial evidence supporting the claim. The court concluded that Rule 15 answers the same procedural question as section 549.191 and that applying Rule 15 does not unlawfully change Minnesota’s substantive rules governing punitive damages.

Under Rule 15, an amendment may be denied as futile when the proposed complaint could not survive a motion to dismiss for failure to state a claim. The court therefore asked whether the proposed allegations contained enough factual matter to plausibly show that the defendants acted with “deliberate disregard” under Minnesota Statutes section 549.20. That standard requires allegations that the defendants knew facts, or intentionally disregarded facts, creating a high probability of injury and then acted consciously or indifferently despite that risk.

Analysis and ruling

The court found that the allegations about the ILKB founder’s bankruptcy, unpaid taxes, and accusations in bankruptcy proceedings did not plausibly show that the defendants knew there was a high probability that purchasing the franchise would harm the plaintiffs. The allegations that the defendants failed to conduct serious due diligence generally described, at most, negligence or gross negligence, which was insufficient for punitive damages.

The court also found that the allegations about illegal marketing techniques and complaints from franchisees were too vague because they did not identify the techniques or explain what the complaints involved and how they related to the alleged harm. Those allegations therefore did not give the defendants adequate notice of the proposed punitive-damages claim.

The court reached a different conclusion about five specific alleged representations: that the ILKB franchise was suitable for absentee ownership; that the concept was 93 percent successful; that ILKB had never had a closure; that the average net profit was about $10,000 per month; and that owners could easily expect a six-figure income. Accepting the allegations as true for purposes of the amendment motion, the court held that allegations that the defendants knowingly made these statements without investigating or verifying them plausibly suggested that the defendants consciously or indifferently provided inaccurate information to induce the plaintiffs to invest. The court rejected the argument that the use of “should have known” necessarily reduced the allegations to negligence because the complaint also alleged that the defendants knew the representations were false.

The court granted in part and denied in part the Motion to Amend Complaint. The plaintiffs were allowed to add a punitive-damages claim only insofar as it relied on the five specified representations. The motion was otherwise denied. The court cautioned that allowing the amendment under the pleading standard did not mean the plaintiffs were likely to prevail on punitive damages. The plaintiffs were ordered to file their second amended complaint by May 22, 2020, unless an appeal of the order was sought, and the defendants were directed to respond under the Federal Rules of Civil Procedure.