Business Law
Case Report – Meineke Franchisor SPV LLC v. CJGL
In Meineke Franchisor SPV LLC v. CJGL, INC., No. 2:23-CV-00374, 2024 WL 4004998 (C.D. Cal. July 24, 2024), the Central District granted Meineke’s motion for summary judgement on each of defendant’s nine counterclaims.
This is a cautionary tale for franchisee’s lawyers to plead all claims and to bring them early.
Background
Meineke1 sublet the franchised premises to the franchisee, who ultimately vacated the premises after Meineke opted not to renew the master lease and the franchisee was unable to secure a direct lease with the landlord.
Meineke had to settle a dispute with the landlord over the poor and unsafe condition of the premises after being vacated by the franchisee. Accordingly, Meineke filed suit against its franchisee for (1) breach Franchise Renewal Agreement; (2) breach of sublease; and (3) breach of personal guaranty.
The franchisee asserted that Meineke failed to support the franchisee because it chose not to renew the lease, failed to fulfill its promise to help the franchisee enter into a direct lease with the landlord (including by refusing to guarantee a direct lease to the franchisee) and induced the franchisee to sign a renewal agreement by promising to help the franchisee stay in the premises. Accordingly, the franchisee counterclaimed with (1) breach of the implied covenant of good faith and fair dealing; (2) intentional misrepresentation; (3) negligent misrepresentation; (4) fraudulent inducement of the Franchise Renewal Agreement; (5) rescission and restitution; (6) a violation of the California Franchise Investment Law; (7) intentional interference with prospective economic advantage; (8) negligent interference with prospective economic advantage; and (9) violations under California’s Unfair Competition Law.
At issue on summary judgment was only the franchisee’s counterclaims.
Claim #1: breach of the implied covenant of good faith and fair dealing – time barred.
The franchisee alleged that Meineke’s failure to renew the master lease breached the implied covenant because it prevented the franchisee from receiving the benefits of the sublease.
However, the franchisee knew of this well before the statute of limitations. It argued that the SOL did not begin to run until it experienced “actual and appreciable harm.” The Court, however, noted that the discovery rule is only an exception to the general rule that the cause of action accrues when it is complete with all of its elements, and that it typically does not apply to breach of contract claims unless the injury was difficult for the plaintiff to detect, or the defendant had reason to know the plaintiff was unaware of the breach. Here, the franchisee had already complained in writing to Meineke that it would not be able to, for example, transfer the franchise because it would have no value without a location. Thus, the franchisee was already aware of the harm. The franchisee may have continued to suffer subsequent injuries, but was not able to show the Court why those would have tolled the SOL.
The franchisee tried estopping Meineke from relying on the SOL by asserting that Meineke induced the delay. The Court, however, reasoned that even if Meineke promised to help the franchisee obtain a direct lease with the landlord, the franchisee’s discovery of that alleged misrepresentation was during the SOL period. Estoppel only works if the representation proved to be false after the SOL expired.
Claim #’s 2 and 4: fraudulent inducement/intentional misrepresentation—elements not met.
The franchisee alleged that Meineke’s promise to help the franchisee obtain a direct lease with the landlord amounted to fraudulent inducement to enter the franchise renewal agreement.
However, one of the elements of fraudulent inducement is intent—that the promise must have been made with no intention to perform. Mere nonperformance is not enough. Even if the evidence could have supported that Meineke’s representations were actual promises to secure and/or guarantee a direct lease for the franchisee, there was no evidence of an intent to defraud.
Claim #3: negligent misrepresentation—elements not met.
The franchisee brought this claim on the same factual basis as the fraudulent inducement claim. However, the court pointed out that a false promise is not the same as a false statement of material fact. The intent requirement of the former precludes the negligence requirement of the latter.
The franchisee pointed only to the alleged promise/did not point to any misrepresentation of a material fact. The Court found this to be fatal to its negligent misrepresentation claim because false promises are not actionable under negligent misrepresentation.
Claim #5: rescission and restitution—denied because there was no mistake and rescission was not promptly sought.
The franchisee sought rescission based on mistake in that there is generally a mutual understanding upon renewing franchise agreements that the franchisee will be able to remain on the premises. However, the evidence did not support mistake because the franchise had already known, before signing the franchise renewal agreement, that Meineke was not going to guarantee a direct lease.
And the franchisee’s delay in seeking rescission prejudiced Meineke because Meineke would have sought a replacement franchisee had it known the defendant franchisee was not going to keep the location open. Moreover, the franchisee had already operated under the renewal agreement for one year, so rescission was not timely.
Claim #6: violation of the California Franchise Investment Law—not all theories were pled in the counterclaim.
The franchisee argues two theories under the CFIL. First, that misrepresentations that the franchisee would be able to maintain the premises violated Section 31202, and second, that Meineke’s refusal to guarantee the proposed direct lease amounted to a unilateral modification of one of the terms in the franchise renewal agreement without the written disclosures required by
Section 31125.
The first theory was time barred. The second had not been pled in the counterclaim and therefore could not be argued on summary judgment.
Claim #7: intentional interference with prospective economic advantage—elements not met.
One of the elements of an IIPEA claim is that the defendant’s acts must have been wrongful beyond the mere fact of the interference itself.
The franchisee alleged that Meineke acted unlawfully when it failed to renew the master lease, engaged in material misrepresentations, and fraudulently induced the renewal agreement. However, these arguments already failed as described above.
The franchisee also alleged that Meineke’s failure to give notice of its intent not to renew the master lease was wrongful conduct. This argument failed because although it was a violation of Meineke’s own policy of giving one-year notice, it was not a violation of any law or determinable legal standard.
Claim # 8: negligent interference with prospective economic advantage—allegations did not show a failure to act with reasonable care.
The franchisee alleged that the pertinent relationship for its NIPEA claim was its relationship with prospective customers. However, the franchisee’s allegations did not point to facts showing that Meineke failed to act with reasonable care.
Instead, it merely argued that genuine disputes of material fact existed, which, without more, cannot avoid summary judgment.
Claim #9: violations under California’s Unfair Competition Law—unfairness was not pled.
The UCL not only prohibits practices that are unlawful or fraudulent, but also prohibits practices that are unfair.
Here, the franchisee merely framed its UCL claim as a derivative claim tied to its other claims, i.e. to the alleged unlawful and/or fraudulent acts. Because the franchisee’s countercomplaint failed to discuss Meineke’s conduct as “unfair,” i.e. failed to assert the UCL as a standalone claim, it necessarily failed when its underlying claims failed.
Disposition
The Court dismissed the franchisee’s countercomplaint in full.
1 The sublease was with a Meineke affiliate, but the franchising entity and the realty entity are discussed here (and by the Court) together as “Meineke.”