Johnson v. Franchoice, Inc.

Background

Michael Johnson and Strong Life LLC sued Franchoice, Inc. and Chris Cynkar after Franchoice, a franchise broker, and Cynkar referred Plaintiffs to a franchise opportunity involving ILKB, LLC, the franchisor of “iLoveKickboxing.com” franchises. The original complaint included a common-law fraud claim. Plaintiffs later obtained permission to file an amended complaint adding a limited punitive-damages count, and Senior United States District Judge Michael J. Davis affirmed that ruling.

The present motion sought permission to file a further amended complaint. The proposed complaint deleted the existing punitive-damages count and instead proposed punitive damages under fraud and fraud-by-omission claims. The proposed amendments focused on statements Franchoice allegedly made about its screening and matching services, including statements that it pre-screened high-quality franchises, examined franchisors’ records, and provided information needed by potential franchisees. Plaintiffs also proposed additional allegations about why those statements were allegedly false.

Legal standard

The court applied Federal Rules of Civil Procedure 15 and 16 and Local Rule 16.3. Rule 15 generally allows amendments when justice requires, but Rule 16 requires good cause to modify a scheduling-order deadline. The court explained that diligence is the primary measure of good cause and that a party must show the existing schedule could not reasonably be met despite diligent efforts.

Analysis

The scheduling order set January 18, 2020 as the deadline for motions to amend the pleadings. Plaintiffs filed the present motion on August 17, 2020. Plaintiffs argued that they needed information obtained during a February 2020 deposition of Franchoice’s founder and chief executive officer, Jeff Elgin, before they could plead their fraud allegations with the particularity required by Rule 9(b), which requires fraud to be described in detail.

Defendants argued that Plaintiffs already had the relevant information by November 2019 through written discovery and Franchoice’s depositions. The court agreed. It found that Plaintiffs had information about Franchoice’s screening process, its evaluation of ILKB’s franchise disclosure document, and bankruptcy and litigation information before the amendment deadline. The court also found that many of the proposed allegations were based on information Plaintiffs possessed from the beginning of the case, including Johnson’s own observations and the way Plaintiffs characterized their claims.

The court further found that Plaintiffs’ decision to seek another amendment after arguments made in an earlier related case and after the court’s prior ruling on punitive damages did not demonstrate diligence or an extraordinary circumstance. Plaintiffs also did not explain why they waited until August 2020 to file the motion, even assuming they first obtained sufficient facts in February 2020. The court concluded that Plaintiffs lacked good cause under Rule 16 to amend after the deadline.

The court added that, even if Plaintiffs had shown good cause, the proposed punitive-damages claim would be futile. In the court’s view, the allegations about Franchoice’s screening services plausibly alleged at most gross negligence, which was insufficient to support punitive damages. The court also rejected the proposed punitive-damages theory based on alleged statements about franchisees for the reasons stated in its earlier order.

Disposition

United States Magistrate Judge Elizabeth Cowan Wright ordered that Plaintiffs’ Motion to Amend Complaint, Docket 65, is DENIED. The opinion does not state that the motion was denied with or without prejudice.