The Orange Rabbit, Inc. v. Franchoice, Inc.

Background

The plaintiffs, The Orange Rabbit, Inc. and Nicholas Giacopelli, sued Franchoice, Inc. (referred to as FCI) and Ray Fanning concerning FCI’s and Fanning’s referral of an iLoveKickboxing.com franchise opportunity. The complaint included a common-law fraud claim. After earlier amendments and a prior motion concerning punitive damages, plaintiffs filed this motion on June 25, 2020, seeking permission to file a proposed fourth amended complaint.

The proposed complaint would delete the existing punitive-damages count and instead assert punitive damages under the New York Franchise Sales Act and the common-law fraud claims. It also would more specifically characterize statements on FCI’s website and statements by Fanning as misrepresentations, and add allegations concerning the falsity of statements about the franchise opportunity and FCI’s services.

Applicable Standards

The court applied Federal Rules of Civil Procedure 15 and 16, along with Local Rule 16.3. Rule 15 generally allows amendments when justice requires, but leave may be denied for reasons including undue delay, unfair prejudice, or futility. Because plaintiffs filed their motion after the deadline in the scheduling order, Rule 16 required them to show good cause to modify that deadline. The court explained that the primary measure of good cause is the moving party’s diligence in trying to meet the existing schedule.

The scheduling order set January 18, 2020 as the deadline for motions to amend the pleadings. Fact discovery later closed on June 1, 2020, and dispositive motions were due October 6, 2020. Plaintiffs filed their motion to amend after the close of fact discovery and shortly before the summary-judgment deadline.

Court’s Analysis

Plaintiffs argued that they needed depositions of FCI’s founder and CEO, Jeff Elgin, and Fanning before they could plead the alleged fraud with the particularity required by Rule 9(b). Plaintiffs asserted that the February 2020 depositions showed that the statements about FCI’s services were outright false and known, or reasonably knowable, to be false.

The court rejected this explanation. It found that the website and Fanning’s statements were information in plaintiffs’ possession from the beginning because Giacopelli personally observed or received them. The court also found that the proposed allegations were not materially different from the existing allegations, aside from rephrasing the statements and expressly labeling the services-related statements as misrepresentations.

The court further concluded that plaintiffs had enough information about FCI’s screening process before the January 2020 deadline. In particular, November 2019 depositions provided information about FCI’s screening criteria, its review of franchise disclosure documents, its treatment of bankruptcy and litigation information, and the fact that such documents were not generally provided to consultants such as Fanning. The court also noted that relevant franchise disclosure documents, bankruptcy information, and litigation records were available before the deadline and that some of those matters were already referenced in the April 2019 Amended Complaint.

The court characterized the motion as reflecting a tactical decision to address arguments raised in a related case and to expand the theory of the alleged misrepresentations and punitive damages. It held that such a tactical decision after the amendment deadline did not establish diligence or good cause under Rule 16. The court also stated that, even accepting plaintiffs’ claim that they first obtained sufficient information in February 2020, plaintiffs did not explain why they waited until June 2020 to file the motion. Finally, the court found that the delay, after discovery had closed and near summary judgment, would unfairly prejudice defendants.

Disposition

Judge Elizabeth Cowan Wright denied Plaintiffs’ Motion to Amend Complaint. The opinion did not decide the merits of plaintiffs’ underlying fraud, franchise-law, or punitive-damages theories.