Business Law

Case Report – August 2022

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Full Tilt Boogie, LLC v. Kep Fortune, LLC, 2022 U.S. Dist. LEXIS 135419, Case No. 2:19-cv-09090-ODW (KESx) (C.D. Cal.) Decided July 29, 2022

The Court granted in part and denied in part cross-motions for summary judgment between plaintiff-franchisee Full Tilt Boogie, LLC (“Full Tilt”), and defendants/franchisors KEP Fortune, LLC (“KEP”), Jeroen Bik, and Miray Bik (“the Biks”).            

Factual and Procedural Overview

KEP is a franchisor operating under the name Klein Epstein & Parker, whose stores sell made-to-measure clothing.  KEP’s business model is to operate and sell the right to operate the stores, as KEP does not manufacture its own inventory and instead obtains it from third-party suppliers. 

In 2017, Full Tilt was considering purchasing a KEP franchise. KEP provided Full Tilt with its FDD, and Item 8 disclosed certain legally required information, including prohibiting KEP from “deriving any revenue” from purchases that KEP would require of Full Tilt.

In August 2017, Full Tilt purchased a KEP franchise, paying a $49,000 franchise fee.  In December 2017, Full Title opened its store at Caesar’s Palace in Las Vegas, where Full Tilt operated until 2019, when it moved nearby to the Palazzo.  Under the FA, Full Tilt was not permitted to market its store on the internet. KEP operated the website for all franchised stores, but KEP did not update the website to show Full Tilt’s new location. KEP did not fulfill Full Tilt’s inventory orders on time and increased prices on inventory it required Full Tilt to purchase from KEP and on shipping costs it required Full Tilt to pay.  Full Tilt became suspicious of these markups and, although KEP prohibited it, contacted KEP’s third party suppliers and learned that KEP had increased its prices to Full Tilt without a corresponding increase in KEP’s costs, such that KEP was charging Full Tilt more for required inventory than KEP paid, and more than KEP charged other KEP-owned stores for the same inventory. KEP also charged Full Tilt more for shipping than KEP paid. 

When Full Tilt began challenging KEP’s business practices, KEP withheld Full Tilt’s inventory shipments and locked Full Tilt out of the internal computer system for the franchise.  On October 24, 2019, Full Tilt sent KEP a Notice of Rescission and around the same time filed this action, asserting claims against KEP and/or the Biks for: (1) fraudulent misrepresentation, (2) fraudulent omission, (3) negligent misrepresentation, (4) violation of the California Franchise Investment Law (“CFIL”), (5) breach of contract, (6) breach of the covenant of good faith and fair dealing, (7) unjust enrichment, (8) unfair business practices, (9) rescission, (10) violation of the Nevada Deceptive Trade Practices Act (“NDTPA”), and (11) intentional interference with contractual relations.  KEP counterclaimed against Fill Tilt and its principal, asserting claims for: (1) breach of contract, (2) accounting, (3) declaratory relief, (4) injunctive relief, (5) unfair competition, and (6) breach of the covenant of good faith and fair dealing.

KEP and the Biks moved for summary judgment as to all of Full Tilt’s claims, and Full Tilt moved for summary judgment on its first nine claims and on all of KEP’s counterclaims. Prior to the cross-motions for summary judgment being filed, the Court sanctioned KEP and the Biks, and their former counsel, for various discovery misconduct, with the result that Full Tilt’s Requests for Admissions propounded to defendants were deemed admitted, and KEP was prohibited from introducing certain evidence and seeking certain damages. 

KEP’s Motion for Summary Judgment (“MSJ”) Based on CFIL Preemption

KEP argued the California Franchise Investment Law (“CFIL”) preempted claims 1-3 (fraudulent misrepresentation, fraudulent omission, and negligent misrepresentation).  Corporations Code section 31306 provides that “Except as explicitly provided [under the CFIL], no civil liability in favor of any private party shall arise against any person by implication from or as a result of the violation of any provision of this law or any rule or order hereunder.” The Court concluded the misrepresentations and omissions, which all predated execution of the FA, exclusively fell within the scope of Sections 31200 (concerning misleading statements filed with the Commissioner of Corporations) and Section 31201 (misleading statements other than those contained in document filed with the Commissioner) and therefore were preempted by the CFIL. 

KEP made the same CFIL preemption argument as to claims 5-10 (breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, unfair business practices, rescission, and violation of the NDPTA.) Full Tilt alleged KEP breached the FA by forcing Full Tilt to pay for goods it did not order and withholding future shipments of goods.  Full Tilt alternatively alleged that KEP has been unjustly enriched by such acts. Full Tilt alleged KEP breached the implied covenant by soliciting one of Full Tilt’s employees and by failing to advertise Full Tilt’s new location after it moved to the Palazzo. The Court found these allegations differed materially from those underlying the fraud claims and therefore found no CFIL preemption. 

Full Tilt’s unfair business practices claim was based on KEP including a non-competition clause in the FA, in contravention of California Business and Professions Code section 16600.  Since this claim was based on Section 16600 and not the CFIL, the Court found the CFIL did not preempt it.  As for Claim 9, rescission, the Court found it was a remedy and not an independent cause of action. 

Full Tilt alleged KEP violated the NDTPA by failing to comply with the FTC Franchise Rule regarding required disclosures in the FDD. Full Tilt did not oppose KEP’s CFIL preemption argument as to this claim, so the Court granted the motion as to the NDTPA.  For the last claim, interference with contract, Full Tilt failed to address KEP’s arguments and therefore the Court granted the motion as to that claim.

KEP’s Motion for Summary Judgment Based on Statute of Limitations

KEP sought summary judgment on the basis that the statute of limitations (“SOL”) had run on the CFIL claim both under the CFIL.  Full Tilt alleged KEP violated Section 31110 of the CFIL by selling a franchise using an FDD that did not comply with federal law or the CFIL, and that KEP violated Sections 31200 and 31202 by failing to disclose material facts and making untrue statements of material fact in the FDD.  The Court stated Corporations Code section 31303 governed the CFIL claims, and that the parties’ execution of the FA was the “act or transaction constituting the violation.”  Section 31303 provided for a four-year period of time in which to file suit or a one-year statute of limitations from date of discovery of the facts constituting a violation, whichever is shorter.  The parties executed the FA August 28, 2017, and Full Tilt filed suit on October 22, 2019.  Therefore, the four-year period had not run. As for the one-year discovery period, Full Tilt had submitted evidence that KEP concealed pricing data from Full Tilt and that Full Tilt only learned of the concealment upon contacting KEP’s vendors in 2019. 

KEP argued the SOL had run on Claims 5-8, breach of contract, breach of the implied covenant, unjust enrichment, and unfair business practices, relying on the one-year SOL in the FA.  The Court stated parties may agree to a shorter contractual SOL, if it is reasonable, and noted that no party had contended that the one-year SOL was unreasonable.  Even so, the Court concluded the parties’ briefing on this issue was “deficient and inadequate for the Court to conclude the limitations period is reasonable as a matter of law.”  And the Court ruled disputed facts existed as to when Full Tilt discovered the facts underlying these claims.  

KEP’s Motion for Summary Judgment Based on the General Release in the FA

KEP sought summary judgment on the CFIL claim and Claims 5-8 on the basis of the general release contained in the FA.  For Claims 5-8 (breach of contract, breach of the implied covenant, unjust enrichment, and unfair business practices), the Court concluded the claims did not rest upon allegations of fraud in the inducement and therefore the general release would not apply.  And for the CFIL claim, the Court determined the non-waiver statute in the CFIL, Corps. Code section 31512 “that voids provisions in a franchise agreement purporting to waive any of the protections under the CFIL,” would void the general release, as it pertained to the CFIL claim.

KEP’s Motion for Summary Judgment Limiting Damages

KEP argued the FA limited Full Tilt’s damages to a refund of royalty and franchise fees.  Full Tilt countered that under the CFIL, it is not limited to the damages permitted in the FA.  The Court agreed with Full Tilt.    

Full Tilt’s Motion for Summary Judgment on Its Claims.

Full Tilt moved for summary judgment on Claim Four (violation of CFIL) and Nine (Rescission) pursuant to CFIL Section 31300.  The Court concluded Full Tilt had submitted evidence showing that KEP affirmatively represented in the FDD that KEP would not derive revenue from purchases it required of Full Tilt under the FA, and that this representation was false, because KEP consistently generated revenue from Full Tilt’s required purchases. In opposition, KEP relied on their SOL argument and did not otherwise oppose or even respond to the merits of Full Tilt’s argument.  The Court granted Full Tilt’s MSJ against KEP as to the CFIL claim.  The Court also granted the MSJ as to the Biks, finding the Biks liable as the franchisor or as persons who control the franchisor pursuant to Corps. Code section 31302.

The Court denied Full Tilt’s MSJ as to the rescission claim.  In order to be entitled to rescission under the CFIL, the franchisee must establish that the franchisor “willfully” made the untrue statement or omission.  The Court noted that “willful” in this context means that a person acts with a purpose or willingness to commit the act. The Court concluded that Full Tilt had the initial burden of establishing that KEP acted willfully, and it had failed to meet that burden.  Therefore, the Court denied Full Tilt’s MSJ as to its rescission claim.

The Court denied Full Tilt’s MSJ as to Claim 5 (breach of contract), Six (breach of the implied covenant, and Eight (unfair business practices), determining that these claims depended on the existence of a valid contract and therefore depended on resolution of Full Tilt’s rescission claim. 

KEP’s Counterclaims

Full Tilt sought summary judgment on all of KEP’s substantive counterclaims—breach of contract, unfair competition, and breach of the implied covenant—on the basis that KEP could not establish its claims for breach of contract or unfair competition because KEP lacks the necessary evidence (presumably because of the discovery sanctions) and that KEP’s breach of the implied covenant claim is based on the same allegations as the breach of contract claim.  KEP did not oppose Full Tilt’s motion as to these counterclaims.  And the Court found the other counterclaims—for an accounting, declaratory relief, and injunctive relief—were remedies, not causes of action.  Therefore, the Court granted Full Tilt’s MSJ as to KEP’s counterclaims.  

David M. Greeley, Esq. of Greeley Thompson, LLP prepared this Case Report. Mr. Greeley’s practice focuses on representing franchisors and franchisees in disputes. He may be reached at 

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