Court Opinion

ID: 3192049
Source: CourtListenerOpinion
Date Created: 2016-04-07 00:00:51.751659+00
Date Added: 2024-06-11T12:20:37.332176
License: Public Domain

Case: 15-10508   Document: 00513454420        Page: 1   Date Filed: 04/06/2016

        IN THE UNITED STATES COURT OF APPEALS
                 FOR THE FIFTH CIRCUIT

                                    No. 15-10508                  United States Court of Appeals
                                                                           Fifth Circuit

                                                                         FILED
YUMILICIOUS FRANCHISE, L.L.C.,                                        April 6, 2016
                                                                    Lyle W. Cayce
             Plaintiff - Appellee                                        Clerk

v.

MATTHEW BARRIE; KELLY GLYNN; WHY NOT, L.L.C.; BRIAN GLYNN,

             Defendants - Appellants

                Appeal from the United States District Court
                     for the Northern District of Texas

Before REAVLEY, JOLLY, and ELROD, Circuit Judges.
JENNIFER WALKER ELROD, Circuit Judge:
      Yumilicious Franchise, L.L.C., a Texas frozen yogurt company, sued the
defendant-appellants, franchisees based in South Carolina, after the franchise
agreement between them soured. The franchisees responded with a
countercomplaint liberally sprinkled with counterclaims. In a series of rulings,
the district court granted partial summary judgment in favor of Yumilicious
and dismissed the remainder of the franchisees’ counterclaims with prejudice
for failure to state a claim under Rule 12(b)(6). Because the franchisees failed
to plead the required elements of their statutory claims, failed to introduce
facts suggesting non-economic injuries, failed to introduce evidence of
fraudulent inducement, and contractually waived their right to punitive and
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consequential damages, we AFFIRM the district court’s grant of partial
summary judgment and AFFIRM the dismissal of the franchisees’ remaining
counterclaims.
                                        I.
      Yumilicious is a growing company that franchises frozen yogurt
restaurants in Texas. In 2010, Matthew Barrie, Kelly Glynn, and Brian Glynn,
the principals of Why Not, L.L.C., entered into an agreement to franchise two
Yumilicious frozen yogurt locations in South Carolina. The franchise
agreements bound Yumilicious and Why Not. Barrie, Kelly Glynn and Brian
Glynn also personally guaranteed Why Not’s obligations under the franchise
agreements.
      Yumilicious filed this lawsuit against Why Not and the individual
defendants (collectively “Why Not”) alleging Why Not breached the franchise
agreement when it closed one of its stores without permission and failed to
make payments for royalties and products. Why Not counterclaimed asserting
breach of contract, fraud, fraudulent and negligent inducement, and violations
of the Texas Deceptive Trade Practices Act, the Business Opportunity Act of
Texas, and the Federal Trade Commission Act Disclosure Rules (the Franchise
Rule). Why Not alleged that Yumilicious induced it to enter the franchise
agreements by mentioning pending negotiations with national suppliers but
that the South Carolina stores were doomed from the start because
Yumilicious   did    not   conclude   those   supply   agreements.   Ultimately,
Yumilicious reached an agreement with a Texas regional supplier that would
only ship products to South Carolina by the pallet, a quantity too large for one
or two stores to use economically. Why Not also argued it was unable to obtain
product from a national supplier at prices similar to the amount paid by Texas
franchisees to the Texas regional supplier.

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      The district court first dismissed Why Not’s breach of contract, negligent
misrepresentation and fraud claims as inadequately pleaded and its Deceptive
Trade Practices Act, Federal Trade Commission Act and Business Opportunity
Act claims as time-barred. Yumilicious Franchise, L.L.C. v. Barrie
(Yumilicious I), No. 3:13-cv-4841-L, 2014 WL 4055475 (N.D. Tex. Aug. 14,
2014). Why Not amended its pleading by adding a fraudulent inducement
claim and asked for reconsideration of the time-barred claims. The district
court concluded the statutory claims were not time barred but failed as
inadequately pleaded. Yumilicious Franchise, L.L.C. v. Barrie (Yumilicious II),
No. 3:13-cv-4841-L, 2015 WL 1822877 (N.D. Tex. Apr. 22, 2015). The district
court also granted summary judgment for Yumilicious on Why Not’s
counterclaims based on fraud, negligent misrepresentation, and fraudulent
inducement and on its request for consequential and punitive damages and
attorneys’ fees. Yumilicious Franchise, L.L.C. v. Barrie (Yumilicious III), No.
3:13-cv-4841-L, 2015 WL 1856729 (N.D. Tex. Apr. 23, 2015). The district court
sua sponte directed the parties to address whether Why Not’s remaining claims
relating to the Franchise Disclosure Document failed as a matter of law or were
inadequately pleaded. After briefing, the district court concluded those claims
failed for lack of a private right of action under the Federal Trade Commission
Act and dismissed them with prejudice. Yumilicious Franchise, L.L.C. v. Barrie
(Yumilicious IV), No. 3:13-cv-4841-L, 2015 WL 2359504 (N.D. Tex. May 18,
2015). The district court also found for Yumilicious on its breach of contract
claims and ordered Why Not to pay damages. Why Not appeals the dismissal
of its counterclaims. It does not challenge the dismissal of its contract claims
or the finding in favor of Yumilicious on Yumilicious’s breach of contract claim.
                                       II.
      We review a district court’s dismissal for failure to state a claim de novo.
Reliable Consultants, Inc. v. Earle, 517 F.3d 738, 742 (5th Cir. 2008). We take
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all well-pleaded facts as true, viewing them in the light most favorable to the
plaintiff (or here, the counterclaimant), and ask whether the pleadings contain
“enough facts to state a claim to relief that is plausible on its face.” Bell Atlantic
Corp. v. Twombly, 550 U.S. 544, 570 (2007). “A claim has facial plausibility
when the plaintiff pleads factual content that allows the court to draw the
reasonable inference that the defendant is liable for the misconduct alleged.”
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009).
       We consider in turn each of Why Not’s claims that were dismissed under
Rule 12(b)(6).
                                              A.
       Why Not alleged that Yumilicious’s conduct in negotiating the franchise
agreements violated the Texas Deceptive Trade Practices Act (DTPA) and the
Texas and South Carolina Business Opportunity Acts (BOA). 1 The Texas
Business Opportunity Act explicitly states that violations of its terms give rise
to a deceptive trade practice claim under the DTPA but does not itself provide
a cause of action. Tex. Bus. & Com. Code § 51.302. Therefore, the Texas BOA
and Texas DTPA claims are properly considered a single claim under the Texas
DTPA. Why Not, therefore, has one Texas statutory claim for violations of the
Texas Deceptive Trade Practices Act’s ban on misrepresentation or omission.
Tex. Bus. & Com. Code §§ 17.46 (defining a deceptive trade practice), 17.50

       1  Why Not refers to the South Carolina Business Opportunity Act’s title in its
countercomplaint and its briefing on appeal, but at no point does Why Not provide any
citations to the relevant statutory provisions or to any cases applying the statutory provision.
Any argument based on that statute, therefore, is waived and the claim is abandoned. See
United States v. Scroggins, 599 F.3d 433, 446 (5th Cir. 2010) (“A party that asserts an
argument on appeal, but fails to adequately brief if, is deemed to have waived it.” (quoting
Knatt v. Hosp. Serv. Dist. No. 1, 327 F. App’x 472, 483 (5th Cir. 2009)); Fed. R. App. P.
28(a)(8)(A) (requiring parties to brief arguments “with citations to the authorities”); Estraude
v. Dept. of Agric., 166 F. App’x 712, 714 (5th Cir. 2006) (claim not adequately briefed is
abandoned).
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(creating a private cause of action for a consumer injured through detrimental
reliance on a deceptive trade practice).
      The Texas DTPA makes it illegal for a seller or franchisor to “represent[]
that goods or services have … characteristics [or] benefits … which they do not
have” or to “fail[] to disclose information concerning goods or services which
was known at the time of the transaction if such failure to disclose such
information was intended to induce the consumer into a transaction into which
the consumer would not have entered had the information been disclosed.” Tex.
Bus. & Com. Code §§ 17.46(b)(5), (b)(24). In short, § 17.46(b)(5) bans
misrepresentations made by a franchisor while § 17.46(b)(24) bans omissions
made by a franchisor.
      Why Not alleged that Yumilicious violated these provisions because:
(1) Yumilicious failed to provide updated disclosures or an updated Franchise
Disclosure Document (FDD) 2; (2) the FDD Yumilicious did provide did not
contain disclosures regarding approved vendors or distributors for required
products; (3) the information disclosed by Yumilicious in the FDD
underestimated start-up costs; and (4) the FDD included some but not all
financial performance information previously disclosed by Yumilicious.
      Why Not also alleged that Yumilicious’s CEO made statements to Why
Not indicating Yumilicious was preparing “to go national and supply products
to stores outside Texas” and gave repeated assurances that Yumilicious was in
the process of negotiating a contract with a national distributor who would
offer fair shipping costs.

      2  Why Not argues the FDD was not “updated” because Why Not received the document
in May 2010 but it was dated June 8, 2008. Why Not did not suggest that any of the actual
information in the FDD was erroneous or that Yumilicious omitted known material facts
form the FDD. Furthermore, Why Not did not allege that it detrimentally relied on any of
the disclosures in the FDD.
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      None of Why Not’s allegations satisfy the statutory requirements for a
private cause of action under § 17.50.           To begin, Why Not must allege
Yumilicious committed a deceptive trade practice as defined by § 17.46. Why
Not did not allege that Yumilicious knew any details about the start-up costs, 3
financial performance, or other items discussed in the FDD that it allegedly
failed to disclose. Furthermore, Why Not acknowledged that it knew
throughout negotiations that it would have to obtain supplies from the current
supplier in pallet-sized orders. Section 17.46(b)(24), however, “requires
intentional omission of a material fact by a Seller for the purpose of duping the
customer.” Sidco Prods. Mktg, Inc. v. Gulf Oil Corp., 858 F.2d 1095, 1100 (5th
Cir. 1988) (discussing then § 17.46(b)(23) which has since been renumbered
(24)). Because “one cannot be held liable under the DTPA for failure to disclose
facts about which he does not know,” Why Not did not allege any illegal
omissions. Robinson v. Preston Chrysler-Plymouth, Inc., 633 S.W.2d 500, 502
(Tex. 1982).
      Nor do the statements made by Yumilicious’s CEO constitute
misrepresentations under § 17.46(b)(5). Yumilicious’s CEO represented that
the company was in negotiations with a national supplier when the company’s
conversations with Why Not took place. The parties agree that Yumilicious
was in such negotiations at the time. The failure of those negotiations does not
make the prior statement false. Why Not did not allege that Yumilicious
promised to conclude an agreement with a national supplier. Without an
affirmative misrepresentation or material omission, Why Not’s claim did not
state a deceptive trade practice under § 17.46(b)(5).

      3 Why Not’s complaint acknowledges that start-up costs were inflated as a result of
errors made by other parties, rather than by Yumilicious.
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      Even if Yumilicious’s conduct during negotiations did constitute a
deceptive trade practice under the Texas DTPA, Why Not would also have to
show that: (1) Why Not is a consumer protected by the DTPA; (2) Why Not
relied on the information provided by Yumilicious in the Franchise Disclosure
Documents; and (3) Why Not suffered injury as a result of its reliance on the
information. Tex. Bus. & Com. Code § 17.50. Why Not pleaded none of these
elements required for a valid cause of action. Dismissal with prejudice was
appropriate.
                                      B.
      Why Not also counterclaimed that Yumilicious violated the Federal
Trade Commission’s Franchise Rule by making the same incomplete
disclosures that are the basis of Why Not’s Texas DTPA claim. The trial court
dismissed this counterclaim with prejudice.
      The Federal Trade Commission Act (FTC Act) does not provide for
private causes of action. Fulton v. Hecht, 580 F.2d 1243, 1248 n.2 (5th Cir.
1978). Why Not argues that the Texas BOA incorporates the FTC Act and the
rules promulgated by the Federal Trade Commission and that any violation of
an FTC rule is a per se violation of the Texas Business Opportunity Act and,
through the Texas DTPA, creates a cause of action. We disagree. The Texas
DTPA explicitly states that “a violation of a provision of law other than this
subchapter is not in and of itself a violation of this subchapter [unless it] is
declared by such other law to be actionable under this subchapter.” Tex. Bus.
& Com. Code § 17.43. The BOA explicitly states that failures to comply qualify
as deceptive trade practices and are actionable under the Texas DTPA, Tex.
Bus. & Com. Code § 51.302, but no provision of Texas or federal law declares
violations of the Franchise Rule are actionable deceptive trade practices under
the Texas DTPA. The Texas BOA and the Texas DPTA both instruct courts to
“follow the interpretations given by the Federal Trade Commission and the
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federal courts to Section 5(a)(1), Federal Trade Commission Act, and 16 CFR
Part 436.” Tex. Bus. & Com. Code §§ 51.004(b), 17.46(c)(1). These directives,
however, do not declare any violation of an FTC rule recoverable under Texas
law. They merely instruct Texas courts to conform their interpretation of Texas
law to the existing federal precedent to the extent that the two bodies of law
overlap.
      Because no provision of Texas law directly incorporates the requirements
of the FTC’s Franchise Rule, Why Not can only recover for any alleged violation
of the Franchise Rule to the extent that the alleged behavior violates some
other provision of Texas law. We have already concluded that Why Not failed
to plead an actionable claim under the Texas Deceptive Practices Act. Texas
law does not allow a claim arising from the same conduct based merely on the
FTC’s rules. Therefore the district court did not err when it dismissed Why
Not’s FTC claims based on allegedly incomplete disclosure in the FDD. Even if
violation of the Franchise Rule were a deceptive trade practice, Why Not’s
counterclaims would nevertheless be subject to dismissal because Why Not
failed to plead the other elements required by § 17.50, namely status as a
consumer, detrimental reliance, and injury.
                                      C.
      Why Not also argued that the district court erred when it dismissed Why
Not’s claims based on the Franchise Disclosure Documents with prejudice. We
review a district court’s denial of leave to amend for abuse of discretion.
Schiller v. Physicians Res. Group, Inc., 342 F.3d 563, 566 (5th Cir. 2003).
“Although leave to amend under Rule 15(a) is to be freely given, that generous
standard is tempered by the necessary power of a district court to manage a
case.” Id.
      Why Not stated its motion to amend in only a single sentence in its
response to Yumilicious’s second motion to dismiss. See United States ex rel.
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Willard v. Humana Health Plan of Texas, Inc., 336 F.3d 375, 387 (5th Cir.
2003) (“[A] bare request in an opposition to a motion to dismiss—without any
indication of the particular grounds on which the amendment is sought—does
not constitute a motion with the contemplation of Rule 15(a).” (citation
omitted) (quoting Confederate Mem’l Ass’n, Inc. v. Hines, 995 F.2d 295, 299
(D.C. Cir. 1993)). Why Not did not include its proposed amendment, as
required by the Northern District’s local rules, nor did it make an argument as
to why leave to amend was appropriate. When, after more than a year of
litigation, Why Not’s assorted claims melted down, the district court was under
no obligation to give Why Not leave to amend its countercomplaint. Given that
more than fifteen months elapsed between Yumilicious’s first motion to
dismiss the countercomplaint, which should have alerted Why Not to the
potential deficiencies in its pleadings, and the district court’s dismissal of Why
Not’s remaining claims, the district court did not abuse its discretion in
dismissing the remaining claims with prejudice.
                                       III.
      After the district court dismissed Why Not’s contract claims, Why Not
reframed the claims as torts on theories of fraud, negligent misrepresentation,
and fraudulent inducement. Yumilicious obtained summary judgment in its
favor on these tort counterclaims and on its own affirmative claims for breach
of contract and attorney’s fees. Why Not appeals the adverse summary
judgment on its counterclaims but does not challenge the ruling on
Yumilicious’s affirmative case.
      We review a grant of summary judgment de novo, applying the same
legal standards used by the district court. Apache Corp. v. W & T Offshore, Inc.,
626 F.3d 789, 793 (5th Cir. 2010). Summary judgment is proper if the
pleadings, the discovery and disclosure materials on file, and any affidavits
show that there is no genuine issue as to any material fact and that the movant
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is entitled to judgment as a matter of law. Fed. R. Civ. P. 56(a), (c); Little v.
Liquid Air Corp., 37 D.3d 1069, 1075 (5th Cir. 1994). “Where the non-moving
party fails to establish ‘the existence of an element essential to that party’s
case, and on which that party will bear the burden of proof at trial,’ no genuine
issue of material can exist.” Nichols v. Enterasys Networks, Inc., 495 F.3d 185,
188 (5th Cir. 2007) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986)).
                                       A.
      The district court concluded that Why Not’s tort claim of negligent
misrepresentation failed in part because Why Not introduced no evidence that
Yumilicious’s actions caused injury and in part because it was barred by the
economic loss rule. In Texas, the economic loss rule “generally precludes
recovery in tort for economic losses resulting from the failure of a party to
perform under a contract.” Lamar Homes, Inc. v. Mid–Continent Cas. Co., 242
S.W.3d 1, 12 (Tex. 2007). “In operation, the rule restricts contracting parties to
contractual remedies for those economic losses associated with the
relationship, even when the breach might reasonably be viewed as a
consequence of a contracting party’s negligence.” Id. at 12–13. Why Not’s fraud
and negligent misrepresentation claims are based on its franchise agreements
with Yumilicious. As the district court concluded, “[d]efendants’ fraud and
negligent misrepresentation claims are tied directly to the Franchise
Agreements and arise solely from the contractual relationship between the
parties.” Yumilicious III, 2015 WL 1856729, at *7. Therefore, the economic loss
rule dictates that any losses Why Not suffered as a result of the franchise
agreements give rise to claims sounding in contract, not tort.
      Why Not argues that Formosa Plastics Corp. v. Presidio Eng’rs and
Contractors, Inc., exempts its claims from the economic loss rule. 960 S.W.2d
41 (Tex. 1998) (rejecting the independent injury requirement for fraudulent
inducement claims). This argument fails—the district court relied on the
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economic loss rule only in relation to negligent misrepresentation claims, not
the fraud or fraudulent inducement claims. Because “[t]he Formosa opinion’s
rejection of the independent injury requirement in fraudulent inducement
claims does not extend to claims for negligent misrepresentation or negligent
inducement,” D.S.A., Inc. v. Hillsboro Ind. Sch. Dist., 973 S.W.2d 662, 663 (Tex.
1998), the district court did not err when it granted Yumilicious summary
judgment on Why Not’s negligent misrepresentation claim.
                                       B.
      Why Not alleged that it was fraudulently induced to enter the franchise
agreements by Yumilicious’s CEO, who assured Why Not that Yumilicious
could supply the South Carolina locations at prices identical to those paid by
the Texas locations. Why Not failed to introduce any evidence of the CEO’s
statements in the summary judgment record. To the extent these claims rely
on Yumilicious’s statements about negotiations with a national supplier, Why
Not has not introduced any evidence that Yumilicious made false statements
or material omissions. “[P]leadings are not summary judgment evidence.”
Wallace v. Tex. Tech Univ., 80 F.3d 1042, 1047 (5th Cir. 1996). Without
affidavits, declarations, depositions testimony or some other concrete evidence
in the record concerning the CEO’s statements or Yumilicious’s deliberate
misstatements about negotiations with suppliers, Why Not did not create a
triable issue of fact on its fraudulent inducement claims. Even if Why Not had
introduced evidence showing a triable issue of fact on whether Yumilicious
made misleading statements, the franchise agreement contains an explicit
clause stating that “Franchisee acknowledges that it has conducted an
independent investigation of the business venture contemplated by this
agreement” and explicitly disclaims reliance on any express or implied
statements about potential volume, profits or success of the business. Under
Texas law, a statement disclaiming reliance is sufficient to waive fraud-based
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claims. See Schlumberger Tech. Corp. v. Swanson, 959 S.W.2d 171, 181 (Tex.
1997) (“Reliance is an element of fraud …. [A] release that … disclaims reliance
on representations about specific matters in dispute, can preclude a claim of
fraudulent inducement.”).
                                      C.
      The individual counter-plaintiffs pleaded a claim for consequential and
punitive damages. The district court granted summary judgment in
Yumilicious’s favor based on the waiver agreements that Why Not’s principals
signed as part of their personal guarantee contracts. The individual counter-
plaintiffs argue they are not bound by the waiver clause in the franchise
agreements because they signed no documents containing any waiver.
      Kelly Glynn, as a principal of Why Not, executed the franchise
agreement that contained a section titled “XIX.K WAIVER OF PUNITIVE
DAMAGES.” This provision explicitly waives punitive damages and limits
each party in the agreement to “equitable relief and to recovery of any actual
damages it sustains.” The clause is in boldface and all capital letters. It
complies with Texas’s requirement that damages waivers be conspicuous. See
Dresser Indus., Inc. v. Page Petroleum, Inc., 853 S.W.2d 505, 511 (Tex. 1993)
(“A term or clause is conspicuous when it is so written that a reasonable person
against whom it is to operate ought to have noticed it. A printed heading in
capitals … is conspicuous.” (quoting Tex. Bus. & Com. Code § 1.201(10))). All
of the individual counter-plaintiffs executed personal guarantees containing a
clause in which they made “all of the covenants, representations, warranties
and agreements of the Principals set forth in the Franchise Agreement …
including … Section XIX.K.” The personal guarantee, therefore, binds the

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individual counter-plaintiffs to the damages waiver contained in the franchise
agreement and waives their claims for punitive and consequential damages. 4
                                            IV.
       This lawsuit between a frozen yogurt maker and its former franchisee
involves a large serving of claims and counterclaims piled precariously
together. This saccharine swirl of counterclaims suggests that litigants, like
fro-yo fans, should seek quality over quantity. Because Why Not failed to plead
the required elements of its statutory claims and failed to create a triable issue
of fact on its tort claims, we AFFIRM the district court’s judgment dismissing
Why Not’s claims and granting partial summary judgment to Yumilicious.

       4Why Not also argues the waiver clause does not restrict it from recovering attorneys’
fees but, as the district court tartly observed, Why not failed to argue an entitlement to
attorneys’ fees under any provision of Texas Law. Yumilicious is therefore entitled to
summary judgment on Why Not’s claim for attorneys’ fees.
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