Dolphin Kickboxing Co. v. Franchoice, Inc.

Background

Dolphin Kickboxing Co. and Roger Gould sued Franchoice, Inc. and Tana Hutchinson. The original complaint included a common-law fraud claim alleging that the defendants knowingly made false representations to induce the plaintiffs to purchase an ILKB franchise. The proposed amended complaint kept the facts and fraud claim from the original complaint and added a claim for punitive damages.

The proposed punitive-damages claim alleged that the defendants deliberately disregarded the plaintiffs’ rights by representing that they had investigated and vetted the franchises they offered, that those franchises were high quality, and that they would provide information needed for an informed decision. The proposed complaint also alleged that the defendants knew about the ILKB founder’s bankruptcy history, failed to conduct serious due diligence, repeated ILKB’s representations without checking them, knew of illegal marketing techniques, disregarded complaints from franchisees, and made specific false representations about ILKB.

Legal standard

The court held that Federal Rule of Civil Procedure 15—not Minnesota Statutes section 549.191—governed the request to amend. Rule 15 generally favors allowing amendments, but a court may deny leave when the amendment would be futile. An amendment is futile if the proposed complaint could not survive a motion to dismiss for failure to state a claim.

Under Minnesota Statutes section 549.20, punitive damages require facts showing that the defendants knew of facts creating a high probability of injury, or intentionally disregarded such facts, and then acted consciously, intentionally, or indifferently toward that risk. Negligence or gross negligence alone is not enough. At the pleading stage, the court accepted well-pleaded factual allegations as true and asked whether they plausibly stated a claim.

Analysis

The court found that the allegations about the founder’s bankruptcy, unpaid federal taxes, and fraud accusations did not plausibly show that the defendants knew their conduct created a high probability of harm related to the plaintiffs’ later franchise purchase. The court also found that the alleged failure to conduct serious due diligence amounted at most to gross negligence, which could not support punitive damages.

The court found the allegations about illegal marketing techniques and disregarded franchisee complaints too conclusory to give the defendants adequate notice. The proposed complaint did not identify the marketing techniques, describe the complaints, or explain how the complaints related to the alleged harm to the plaintiffs.

The court did find a plausible punitive-damages claim based on the specifically alleged representations that ILKB franchise owners made more than $200,000 per year in profits and that this was normal; that Gould could increase his profits by buying three franchises; that an ILKB franchise was suitable for semi-absentee ownership; and that no ILKB franchises had closed. The court said that, if the defendants knew those representations were false and made them to entice the plaintiffs to invest, the allegations could show conscious or indifferent conduct creating a high probability of harm. The court emphasized that allowing the amendment under the pleading standard did not mean the plaintiffs were likely to win punitive damages.

Disposition

The court ordered that the plaintiffs’ Motion to Amend Complaint was granted in part and denied in part. The plaintiffs could file an amended complaint adding only the specified punitive-damages allegations concerning the four alleged representations. They were directed to file it by May 22, 2020, unless an appeal of the order was sought. The defendants were ordered to respond consistently with the Federal Rules of Civil Procedure.