United States District Court, S.D. New York
May 19, 2004.
G&R MOOJESTIC TREATS INC., GEORGE LISI, ROSEMARIE LISI, WATARU IWATA, JI INTERNATIONAL, LLC, and JUN IWATA, Plaintiffs
MAGGIEMOO'S INTERNATIONAL, Defendant
The opinion of the court was delivered by: ROBERT SWEET, Senior District Judge
Defendant MaggieMoo's International, LLC ("MMI"), has moved to stay,
dismiss and/or transfer the claims of plaintiffs G&R Moojestic Treats,
Inc. ("G&R"), George Lisi, Rosemarie Lisi, JI International, LLC, Jun
Iwata and Wataru Iwata (collectively, "`Franchisee Plaintiffs") and to
dismiss the claims of plaintiff Wataru Iwata for failure to state a claim
upon which relief may be granted pursuant to Fed.R. Civ. P.l2(b)(6), and
for attorney's fees. All plaintiffs have moved to stay or dismiss the
suit brought by MMI in the District of Maryland.
MMI is a Delaware limited liability company with its principal offices
in Columbia, Maryland. MMI is a franchisor of specialty ice cream stores.
G&R is a New York corporation with its principal offices in Syracuse,
New York. George Lisi and Rosemarie Lisi are citizens of New York and are
the sole shareholders and officers of G&R. On April 10, 2001, a
Franchise Agreement was executed between MMI and G&R (the UG&R
Jun Iwata resides in Pennsylvania and is a member of JI International,
LLC ("JI"), a Pennsylvania limited liability company with its principal offices in Pennsylvania. On March 25, 2002, a
Franchise Agreement was executed between MM I and Jun Iwata, `on behalf
of an entity to be later named (the "JI Franchise Agreement"). The entity
to be later named was JI. JI is an intended beneficiary of the Franchise
Wataru Iwata, a citizen of New York, is the brother of Jun Iwata and is
alleged by Plaintiffs to be the provider of funds for the purchase of the
franchise by Jun Iwata and a "silent partner" in the franchise, although
his name is not on the JI Franchise Agreement.
On December 11, 2003, Plaintiffs filed an action in this Court alleging
that MMI breached both Franchise Agreements, committed fraud, breached an
implicit covenant of good faith, caused Plaintiffs not to pursue other
business opportunities, and violated the Federal Trade Commission Rule on
Franchising, the Sherman Anti-Trust Act, the Clayton Act, the
Robinson-Patman Act arid the Racketeer Influenced and Corrupt
In addition, G&R, George Lisi, and Rosemarie Lisi allege that MMI
violated Article 33 of the New York State General Business Laws. JI, Jun
Iwata, and Wataru Iwata allege that MMI violated the Maryland Franchise
Registration and Disclosure law. On February 13, 2004, MMI commenced separate actions in the United
States District Court for the District of Maryland' to compel mediation
pursuant to identical mediation clauses in the Franchise Agreements of
both sets of Plaintiffs, captioned Maqqiemoo's International, LLC v. G&R
Moojestic Treats Inc., et. al., WMN-04-392, and Maggiemoo's
International. LLC v. JI Interna-tional, Inc., et. al., WMN-04-393,
respectively. On March 8, 2004, the Honorable William M. Nickerson of the
District of Maryland ordered that:
In the interests of judicial economy, I will delay the
scheduling of a hearing concerning MMI's Motion(s) to
Compel Mediation until after Judge Robert Sweet of the
Southern District of New York has had a chance to hear
arguments and make rulings on related motions before
him on March 31st, 2004.
On March 22, 2004, Judge Nickerson denied the motion of MMI to reconsider
the March 8 Order.
On February 28, 2004, Plaintiffs filed an amended complaint. Following
the filing of the amended complaint, MMI then filed amended versions of
its briefs in support of its two motions. On March 26, 2004, MMI' s
interim motion to stay discovery pending the determination of the instant
motions was denied.
Following the submission of briefs, oral argument on the motion was
heard on March 31, 2004. On April 26, 2004, MMI's motion to supplement
its memorandum of law in support of the motion to stay, dismiss or transfer the action was granted, at which time
the motion was deemed fully submitted.
The following facts are drawn from Plaintiffs' amended complaint (the
"Amended Complaint") and accompanying exhibits and do not constitute
findings of fact by the Court.
The Amended Complaint alleges that after G&R entered the Franchise
Agreement with MMI, MM I rejected more than fifteen sites that were
submitted by G&R, George Lisi and Rosemarie Lisi to open the franchise,
effectively taking their money and refusing to allow an opening of a
franchise. Because another ice cream specialty store subsequently signed
a lease for one of the spots they had chosen, Plaintiffs claim that the
competitive nature of the business was forever altered, damaging their
ability to successfully introduce MMI's franchise system in the area.
The Amended Complaint also alleges that MMI intended to deceive Jun
Iwata with a misleading Uniform Franchise Offering Circular ("UFOC"), and
intended to deceive any lenders Jun Iwata would employ, such as Wataru
Iwata. Further, the lack of support from MMI in granting approval for a
site led to another specialty ice cream store signing a lease for the
site chosen by JI, thereby damaging Plaintiffs' ability to successfully
introduce MMI's franchise system in the area. Upon executing a lease at another
location, JI claims that losses were incurred in the amount* of rental
payment made during months when construction of the store could not begin
due to MMI's actions and that construction estimates were more than 51%
higher than MMI's UFOC had disclosed, forcing them to terminate the
Paragraph 24.2 of both the G&R and the JI Franchise Agreements
provides that "all controversies, disputes, and claims arising out of or
related to this Agreement (including any claim that the Agreement or any
of its provisions is invalid, illegal, or otherwise voidable or void)
. . . shall first be subject to non-binding mediation."
Paragraph 24.4 of both the G&R and the JI Franchise Agreements
provide that, "Any legal action brought by Franchisee against Franchisor
in any forum or court, whether federal or state, shall be brought
exclusively in the federal district court covering the location at which
Franchisor has its principal place of business at the time of the
MMI's Motion to Stay, Dismiss and/or Transfer the Claims of G&R, George
Lisi, Rosemarie Lisi, JI and Jun Iwata
MMI has moved to stay the instant litigation or to dismiss the claims
on the basis of the mediation clauses in both the G&R and the JI
Franchise Agreements. However, because of the pending actions in the District of Maryland and the forum selection
clause providing that all litigation between MM I and the Franchisee
Plaintiffs must be brought in that District, MMI's motion to dismiss or
transfer pursuant to the forum selection clause will be considered first.
The Forum Selection Clause is Enforceable
Forum selection clauses are prima facie valid and should be enforced
unless enforcement is shown by the resisting party to be unreasonable
under the circumstances. See The Bremen v. Zapata Off-Shore Co.,
407 U.S. 1, 10 (1972). This rule has been extended to diversity and other
non-admiralty cases. See Jones v. Weibrecht, 901 F.2d 17 (2d Cir. 1990);
Karl Koch Erecting Co. v. New York Convention Center Dev. Corp.,
838 F.2d 656, 659 (2d Cir. 1988). "The Second Circuit, moreover, has a
`strong policy' in favor of giving effect to such a clause." Sun Forest
Corp. v. Shvili, 152 F. Supp.2d 367, 380-81 (S.D.N.Y. 2001) (citing Weiss
v. Columbia Pictures Sys. of America, 801 F. Supp. 1276, 1278 (S.D.N.Y.
Forum selection clauses are considered "unreasonable" (1) if their
incorporation into the agreement was the result of fraud or overreaching,
(2) if the complaining party "will for all practical purposes be deprived
of his day in court," due to the grave inconvenience or unfairness of the
selected forum, (3) if the fundamental unfairness of the chosen law may deprive the plaintiff of a
remedy, or (4) if the clauses contravene a strong public policy of the
forum state. See Roby v. Corporation of Lloyd's, 996 F.2d 1353, 1363 (2d
Cir. 1993) (citations omitted).
The Franchisee Plaintiffs have not challenged the forum selection
clause on the basis of hardship and contest only the first factor of the
reasonableness test, claiming that they were fraudulently induced into
accepting the forum selection clauses, that the forum selection clause is
unconscionable and unenforceable, and that all plaintiffs were coerced
into accepting the forum selection clause. Amended Complaint, ¶¶ 13-16,
90-93. In addition, the Franchisee Plaintiffs argue that the entire
Franchise Agreement is a contract of adhesion.
A "forum-selection clause in a contract is not enforceable if the
inclusion of that clause in the contract was the product of fraud or
coercion." Scherk v. Alberto-Culver Co., 417 U.S. 506, n.14 (1974)
(citing Prima Paint Corp. v. Flood & Conklin Mf g. Co., 388 U.S. 395,
(1967). In other words, " [a] claim of fraud in the inducement of a
contract is insufficient to invalidate a forum selection . . . clause
found in that contract. Rather, it is the inclusion of those specific
clauses plaintiffs seek to avoid that must have been induced by fraud."
Stamm v. Barclays Bank of New York, 960 F. Supp. 724, 729 (S.D.N.Y.
1997). The party seeking to invalidate a forum selection clause on
grounds of fraud or coercion "must specifically prove that but for the drafter's misconduct,
it would not have been included in the agreement." `Sun Forest, 152 F.
Supp.2d at 381.
The forum selection clause in both Franchise Agreements is labeled
"Applicable Law, " and is set apart in a separate numbered paragraph. The
language of the clause itself provides that "any legal action . . . shall
be brought exclusively in the federal district court covering the
location at which Franchisor has its principal place of business at the
time of the action." Plaintiffs have made no claim that they were not on
notice as to the provision.
The Franchisee Plaintiffs have not made the "strong showing" required
to prove that the forum selection clause was the result of fraud or
coercion. The Bremen, 407 U.S. at 12. Rather, Plaintiffs have made
conclusory allegations of fraud and coercion. Such bare bones allegations
are insufficient to invalidate the forum selection clause. See, e.g.,
National School Reporting Services, Inc. v. National Schools of
California, Ltd., 924 F. Supp. 21, 24 (S.D.N.Y. 1996) ("conclusory
statements of duress are insufficient to show fraud or overreaching in
agreeing to the forum selection clause"); Composite Holdings v.
Westinghouse Elec. Corp., 992 F. Supp. 367, 371 (S.D.N.Y. 1988) (refusing
to invalidate forum selection clause where allegation of fraud "is
entirely conclusory No . . . facts are set forth that logically give rise
to an inference of fraudulent intent, particularly given that the designated
forum is [where defendant] is headquartered and thus a quite natural
selection for entirely ordinary reasons.")).
The Franchisee Plaintiffs' arguments that the forum selection clause is
unconscionable and that it is a contract of adhesion may be taken
together. "An unconscionable bargain is one which no man in his senses
and not under delusion would make on the one hand, and . . . no honest
and fair man would accept on the other." Doctor's Associates, Inc. v.
Jabush, 89 F.3d 109, 113 (2d Cir. 1996) (quoting Hume v. United States,
132 U.S. 406, 411 (1889)). The fact that the Franchise Agreement was
presented on a take it or leave it basis and was not subject to
negotiation renders it neither a contract of adhesion nor
unconscionable. See, e.g., Novak v. Overture Services, Inc., CV 02-5164,
2004 WL 613001 (E.D.N.Y. Mar. 25, 2004) ("An `agreement cannot be
considered procedurally unconscionable, or a contract of adhesion, simply
because it is a form contract.'") (quoting Rosenfeld v. Port Authority of
New York and New Jersey, 108 F. Supp.2d 156, 164 (E.D.N.Y. 2000));
Stamm, 960 F. Supp. at 733 (finding forum selection clause not
unconscionable despite the fact that the clause is "now disadvantageous
to Plaintiffs" and that it was presented to plaintiffs on a take it or
leave it basis).
The Franchisee Plaintiffs also argue that even if the forum selection
is enforceable, the clause does not cover their non-contractual claims. The clause states that "any legal action
brought by Franchisee against Franchisor" is subject to the clause.
Reading this broad clause to apply at least to actions arising from the
Franchise Agreement, non-contractual claims are deemed to arise from the
agreement for the purposes of the forum selection clause. See Sense
v. Interstate Battery System of America, Inc., 683 F.2d 718, 720 (2d
Cir. 1982) (holding that plaintiff's action arises from the agreement
"although the complaint was brought pursuant to federal antitrust law,
the gist of [plaintiff's] claim is that [defendant] wrongfully terminated
the agreement, thereby damaging [plaintiff]."). In Young Women's
Christian Ass'n of U.S., Nat. Bd. v. HMC Entertainment, Inc., 91
Civ. 7943, 1992 WL 279361, at *4 (S.D.N.Y. Sept. 25, 1992), the court
found that plaintiff's claims for a declaratory judgment with respect to
defendant's potential unfair competition, trademark infringement,
misappropriation and implied contract claims arose pursuant to the
contract, and were therefore within the scope of the forum selection
clause because u[a]ny determination with respect to plaintiff's claims
will require consideration of the contract and of the parties' respective
rights pursuant to the contract." The Franchisee Plaintiffs have conceded
that the causes of action in "the Amended Complaint that concern the
defendant's breach of contract are inextricably woven with the other
actions of defendant." Franchise Plaintiff's Mem. of Law in Opposition to
Def.'s Motion to Stay, Dismiss and/or Transfer at 6. It is therefore
determined that the forum selection clause agreed to by the Franchisee
Plaintiffs (other than Waturu Iwata) is enforceable and that each of Plaintiffs' claims is within
the scope of the clause.
The Franchisee Plaintiffs Claims are Transferred to the District
Having found the forum selection clause enforceable as to Plaintiffs'
claims, it remains to decide whether to dismiss the case pursuant to the
forum selection clause or to transfer it pursuant to
28 U.S.C. § 1404(a).*fn1 "A district court may `dismiss on the grounds
that the parties have agreed in advance that some other forum is the more
convenient location for resolution of the dispute.'" GMAC Commercial
Credit, LLC v. Dillard Dep't Stores, Inc., 198 F.R.D. 402, 405 (S.D.N.Y.
2001) (quoting Ulysses Cruises, 131 F. Supp. at 408). Resolution of this
issue shall be determined by "weigh[ing] in each case whether dismissal
or transfer is the most efficient and just means of enforcing the
clause." Ulysses Cruises*A, 131 F. Supp.2d at 409. The forum selection
clause in this case specifies that any litigation between franchisee and franchisor shall be brought in the "federal district court" where
franchisor has its place of business, which is the District' of Maryland.
JI and G&R Franchise Agreements, ¶ 24.2. Transfer of the claims
of the Franchisee Plaintiffs to the District of Maryland is therefore the
most "appropriate remedy for effectuating [the] forum-selection clause."
Ulysses Cruises, 131 F. Supp.2d. at 407.
An enforceable forum selection clause is "not dispositive as to
transfer under § 1404(a)", Falconwood Financial Corp. v. GriffinA,
838 F. Supp. 836, 840 (S.D.N.Y. 1993) (citing Stewart Organization, Inc.
v. Ricoh Corp., 487 U.S. 22, 29-30 (1988)), and "the court must still
`take account of factors other than those that bear solely on the
parties' private ordering of their affairs, `such as the convenience of
the witnesses and . . . other factors . . ." Mpower Communications Corp.
v. Voipld.com, Inc., 304 F. Supp.2d 473, 475 (W.D.N.Y. 2004) (quoting
Stewart, 487 U.S. at 30). However, "it is clear that such clauses are not
lightly disregarded; a party opposing enforcement of a forum selection
clause must "demonstrate exceptional facts explaining why he should be
relieved from his contractual duty." Id. (quoting Weiss, 801 F. Supp. at
1278); see also Stewart, 487 U.S. at 33 ("a valid forum-selection clause
[should be] given controlling weight in all but the most exceptional
cases") (Kennedy, J., concurring)). The Franchisee Plaintiffs have not
shown any exceptional facts, arguing only that the plaintiffs' choice of
forum is entitled to deference. As the Franchise Agreements show,
however, the Franchisee Plaintiffs' contractual choice of forum is the District of Maryland. Accordingly, the
claims of the Franchisee Plaintiffs will `be transferred there.
MMI's Motion to Dismiss the Claims of Wataru Iwata
Because Waturu Iwata was not a party to a Franchise Agreement, his
claims are not bound by the terms of the forum selection clause. MM I has
not moved to transfer Waturu Iwata's claims to the District of Maryland
and has instead moved to dismiss under Fed.R.Civ.P. 12(b)(6).
In reviewing a 12(b)(6) motion, courts must "accept as true the factual
allegations of the complaint, and draw all inferences in favor of the
pleader." Mills v. Polar Molecular Corp., 12 F.3d 1170, 1174 (2d Cir.
1993) (citing IUE AFL-CIO Pension Fund v. Herrmann, 9 F.3d 1049, 1052 (2d
Cir. 1993). However, "legal conclusions, deductions or opinions couched
as factual allegations are not given a presumption of truthfulness."
L'Europeenne de Bangue v. La Republica de Venezuela, 700 F. Supp. 114,
122 (S.D.N.Y. 1988). The complaint may only be dismissed when "it appears
beyond doubt that the plaintiff can prove no set of facts in support of
his claim which would entitle him to relief." Conley v. Gibson,
355 U.S. 41, 45-46 (1956); see also Berheim v. Litt, 79 F.3d 318, 321 (2d
Cir. 1996). Review must be limited to the complaint and documents attached or
incorporated by reference thereto. Kramer v. Time Warner, Inc.,
937 F.2d 767, 773 (2d Cir. 1991). In this context, the Second Circuit has
held that a complaint is deemed to "include . . . documents that the
plaintiffs either possessed or knew about and upon which they relied in
bringing the suit." Rothman v. Gregor, 220 F.3d 81, 88 (2d Cir. 2000).
Choice of Law
As an initial matter, it must be determined what law applies to Waturu
Iwata's state law claims for breach of contract, breach of an implied
contract of good faith and fair dealing, and fraud. MMI's briefs cite to
New York law without addressing the issue. Waturu Iwata is a resident of
New York. However, the parties to the contract, JI and MMI, are residents
of Pennsylvania and Maryland, respectively, and the proposed franchise
location is in Pennsylvania.
A federal court sitting in diversity must apply the choice-of-law rules
of the forum state, in this instance New York. See Klaxon Co. v. Stentor
Elec. Mfg. Co., 313 U.S. 487, 496-97, 61 S.Ct. 1020, 85 L.Ed. 1477
(1941). "The first step in any case presenting a potential choice of law
issue is to determine whether there is an actual conflict between the
laws of the jurisdictions involved. Where no [such] conflict exists
. . . there is no reason to engage in a choice of law analysis." Smith v. Mitlof,
148 F. Supp.2d 279, 285 (S.D.N.Y. 2001) (quoting Elson v. Defren,
283 A.D.2d 109, 114, 726 N.Y.S.2d 407, 411 (1st Dep't 2001)). The
elements of a contract claim are the same in Pennsylvania, New York and
Maryland, see Morgan Stanley High Yield Securities v. Seven Circle Gaming
Corp., 269 F. Supp.2d 206, 213 (S.D.N.Y. 2003); J.F. Walker Co., Inc. v.
Excalibur Oil Group, Inc., 792 A.2d 1269, 1272 (Pa. Super. 2002); Yousef
v. Trustbank Sav., F.S.B., 568 A.2d 1134, 1137 (Md. App. 1990), and in
each jurisdiction a claim for breach of an implied duty of good faith
cannot be brought in the absence of an underlying contract. See Sheth v.
New York Life Ins. Co., 273 A.D.2d 72, 73, 709 N.Y.S.2d 74 (1st Dep't
2000); Landmesser v. United Air Lines, Inc., 102 F. Supp.2d 273, 280
(E.D. Pa. 2000); Swedish Civil Aviation Admin, v. Project Mgmt. Enters.,
Inc., 190 F., Supp.2d 785, 794 (D. Md. 2002). In the absence of a
conflict, New York law will be applied to the contract claims.
Without comparing the substantive doctrine with respect to common law
fraud claims in the various jurisdictions, New York law applies because
"fraud claims are governed by the laws of the
jurisdiction where the injury is deemed to have
occurred which usually is where the plaintiff is
located." Pinnacle Oil Co. v. Triumph Oklahoma, L.P.,
93 Civ. 3434, 1997 WL 362224, at *1 (S.D.N.Y. Jun.
27, 1997) (citing Sack v. Low, 478 F.2d 360, 366 (2d
Cir. 1973) (Friendly, J.)); Cooney v. Osgood March.,
Inc., 81 N.Y.2d 66, 72, 595 N.Y.S.2d 919, 612 N.E.2d 277
(1993) ("If conflict-regulating laws are at issue, the
law of the jurisdiction where the tort occurred will
generally apply because that jurisdiction has the greatest interest in regulating
behavior within its borders."). Indeed, "[t]he
traditional view has been that . . . when a person
sustains loss by fraud, the place of wrong is where
the loss is sustained, not where fraudulent
misrepresentations are made." Sack, 478 F.2d at 366
PPI Enterprises (U.S.), Inc. v. Del Monte Foods Co., 99 Civ. 3794, 2003
WL 22118977, at *17 (S.D.N.Y. Sept. 11, 2003). Because Waturu Iwata is a
New York resident, any alleged loss was sustained in New York, making New
York law applicable.
A. Breach of Contract
In order to recover on a claim for breach of contract, Waturu Iwata
must allege, among other elements, the existence of a valid contract. See
Morgan Stanley High Yield Securities v. Seven Circle Gaming Corp.,
269 F. Supp.2d 206, 213 (S.D.N.Y. 2003). The relevant contract is the JI
Franchise Agreement. Although a copy of the Agreement was not attached to
the Amended Complaint, it is clearly incorporated by reference, and may
be considered on a motion to dismiss. See Rothman, 220 F.3d at 88. On
March 25, 2002, MMI entered into the Franchise Agreement with Jun Iwata
on behalf of an entity to be named later. See Declaration of Gregg
Rubenstein, Exhibit 1. That entity is JI. Waturu Iwata is not a party to
the JI Franchise Agreement, although he is alleged to be Jun Iwata's
lender, and to have reviewed and relied upon the information in the
UFOC. Amended Complaint ¶ 99. The Amended Complaint alleges, however,
that Waturu Iwata is a "silent partner," and "is more than simply a provider of funds for the purchase of
the franchise." Id. at ¶¶ 100, 101. As a silent partner, Waturu Iwata is
alleged to be "the equivalent of an owner of the franchise," and to have
the "equivalent of a contractual relationship" with MMI and "the
equivalent of a direct relationship" with MMI. Id. at ¶¶ 102-104.
The allegations in the Amended Complaint are insufficient to establish
that there was a valid contract between Waturu Iwata and MMI. The term
"silent partner" is not defined in the complaint, but there is no
allegation that a contractual relationship was formed. Nor does the
allegation that Waturu Iwata and MMI had "the equivalent of a contractual
relationship" give rise to a legally recognizable relation. In his brief,
Waturu Iwata argues that he "had the same possibility of loss due to an
improper action or inaction on the part of" MMI as Jun Iwata. Memorandum
of Waturu Iwata in Opposition to Defendant's Motion to Dismiss, at 3.
Such a theory of contract liability would give standing to sue for breach
of contract to every creditor to a party to a contract. Waturu Iwata has
cited no caselaw to support his theory. Accordingly, the breach of
contract claim is dismissed.
B. Breach of Implicit Covenant of Good Faith
In the absence of a valid contract, Waturu Iwata's claim for a breach
of an implied covenant of good faith must also be dismissed. See Sheth v. New York Life Ins. Co., 273A.D.2d 72, 73,
709 N.Y.S.2d 74 (1st Dep't 2000) ("cause of action for breach of the
implied covenant of good faith and fair dealing . . . may not be used as
a substitute for a nonviable claim of breach of contract."); Lakeville
Pace Mech., Inc. v. Elmar Realty Corp., 276 A.D.2d 673, 676,
714 N.Y.S.2d 338 (2d Dep't 2000) ("there can be no covenant of good faith
and fair dealing implied where there is no contract").
C. Claim for Violation of the Maryland Franchise Registration and
Waturu Iwata has alleged that MMI violated the Maryland Franchise
Registration and Disclosure Law ("MFRDL"). See Md. Bus. Reg. Code Ann. §§
14-201 to 14-233. Section 14-227(a)(1) of the MFRDL provides that "A
person who sells or grants a franchise is civilly liable to the person who
buys or is granted a franchise if the person who sells or grants a
franchise offers to sell or sells a franchise . . ." There is no
allegation in the Amended Complaint that Waturu Iwata was sold or granted
a franchise by MMI. Accordingly, this claim is dismissed for lack of
standing. See In re Matterhorn Group, Inc., 2000 WL 1174215 (Bankr.
S.D.N.Y. Aug. 17, 2000) ("The plain language of the [MFRDL] grants a
civil remedy only to purchasers and grantees . . . The `purchase'
requirement simply recognizes that a non-purchaser does not rely on an
unregistered or fraudulent prospectus, and hence, does not suffer the
type of injury that Maryland franchise law, and similar laws in other states, are designed to prevent."); Flynn v. Everything Yogurt,
C.A. No. HAR92-3421, 1993 WL 454355, at *4-5 (D. Md. Sept. 14, 1993)
(dismissing MFRDL claim by plaintiff whose "only connection with the
circumstances that gave rise to the matter at bar is his pledge of
certain security in connection with the loan obtained by [franchisees] to
purchase the franchise.").
D. Lost Opportunities
Waturu Iwata has alleged a claim for lost opportunities. Waturu Iwata
has not cited any caselaw supporting the existence of a distinct claim
for lost opportunities. Accordingly, the claim for lost opportunities is
MMI argues that the fraud claim can be dismissed because, under New
York law, tort claim liability based solely on economic loss is limited
to those in privity with the alleged tortfeasor. Because Waturu Iwata has
no direct relationship to the defendant, MMI argues, he is not entitled
to relief on his fraud claim. While "it is well-established under New
York law that, where a plaintiff alleges only economic damage resulting
from a defendant's alleged negligence, defendants owe no duty to
plaintiffs with whom they are not in contractual privity," The Jordan
(Bermuda) Inv. Co., Ltd. v. Hunter Green Invs. Ltd. 00 Civ. 9214, 2003 WL
1751780, at *11 (S.D.N.Y. Apr. 1, 2003) (quoting Land Mine Enters, v. Sylvester
Builders. Inc. 74 F. Supp.2d 401, 407 (S.D.N.Y. 1999), aff'd, 234 F.3d 1262
(2d Cir. 2000)), the doctrine does not extend to tort claims for fraud.
See Metral v. Horn, 213 A.D.2d 524, 526, 624 N.Y.S.2d 177 (2d Dep't 1995)
("a cause of action sounding in fraud does not require the existence of a
relationship of privity or something close to privity between the
parties.") (citing Credit Alliance Corp. v. Andersen & Co., 65 N.Y.2d 536,
547, 493 N.Y.S.2d 435, 483 N.E.2d 110 (1985)); Shafran v. Kule,
159 A.D.2d 263, 265, 552 N.Y.S.2d 263 (1st Dep't 1990) ("Lack of privity
is not a viable defense to fraud.").
MMI also argues that Waturu Iwata fails to allege a viable fraud
claim. To state a claim for fraud under New York law, a plaintiff must
allege: "(1) a misrepresentation or a material omission of fact which was
false and known to be false by defendant; (2) made for the purpose of
inducing the other party to rely upon it; (3) justifiable reliance of the
other party on the misrepresentation or material omission; and (4)
injury." Flash Electronics, Inc. v. Universal Music & Distribution
Corp., CV01-979, 2004 WL 764584, at *19 (E.D.N.Y. Mar. 31, 2004) (citing
AUSA Life Ins. Co. v. Ernst and Young, 206 F.3d 202, 208 (2d Cir. 2000).
Under Fed.R.Civ.P. 9(b), "the circumstances constituting fraud shall be
stated with particularity." However, "malice, intent, knowledge, and
other condition of mind may be averred generally." Id. "To satisfy Rule
9(b)'s particularity require-merit, a plaintiff's complaint must: " (1) specify the statements that the
plaintiff contends were fraudulent, (2) identify the speaker, (3) state
where and when the statements were made, and (4) explain why the
statements were fraudulent.'" Flash Electronics, 2004 WL 764584, at *20
(quoting Stevelman v. Alias Research Inc., 174 F.3d 79, 84 (2d Cir.
Drawing all inferences in favor of Waturu Iwata, the Amended Complaint
states a valid claim for fraud. The alleged fraudulent misrepresentation
made by MMI was the inaccurate estimates of construction and equipment
costs for the operation of the franchise, and was made in the UFOC
provided to Jun Iwata on January 19, 2002 at MMI headquarters. Amended
Complaint ¶¶ 145-48. The fact that the representation was not made
directly to Waturu Iwata is not fatal to the claim because he has alleged
"that he relied upon it to his detriment, and that the defendant 
intended the misrepresentation to be conveyed to him." Cement & Concrete
Workers Dist. Council Welfare Fund v. Lallo, 148 F.3d 194, 196 (2d Cir.
1998) (quoting Rosen v. Spanierman, 894 F.2d 28, 33 (2d Cir. 1990)); see
also Eaton, Cole & Burnham Co. v. Avery, 83 N.Y. 31, 33-34 (1880) ("it
is not essential that a representation should be addressed directly to
the party who seeks a remedy for having been deceived and defrauded by
means thereof."). The Amended Complaint also alleges that MMI knew that
Jun Iwata was going to finance the purchase of the franchise and that the
lender would review the information in the UFOC. Amended Complaint ¶¶ 95,
97. It is also alleged that MMI knew the UFOC to be inaccurate, and intended to deceive
any lenders reviewing the information. Id. at ¶¶ 96, 165-66. Finally, it
is alleged that Waturu Iwata reviewed and relied on the information, and
that he was injured as a result. Id. at ¶¶ 99, 168.
F. Claim for Violation of Federal Trade Commission Rules
Waturu Iwata alleges that MMI violated Federal Trade Commission ("FTC")
regulations, in particular the "Disclosure Requirements and Prohibitions
Concerning Franchising and Business Opportunity Ventres,"
16 C.F.R. § 436.1-438.10, promulgated pursuant to the Federal Trade
Commission Act ("FTCA"), 15 U.S.C. § 41-58, by failing to provide
accurate information in the UFOC. The FTC disclosure requirements provide
that "it is an unfair or deceptive act or practice" to fail to furnish
any prospective franchisee with accurate information related to the terms
of the franchise agreement and the financial condition of the
franchisor. 16 C.F.R. § 436.1. However, there is no private right of
action to enforce the Disclosure Requirements of § 436, or any other
regulation promulgated under the Federal Trade Commission Act. See Alfred
Dunhill Ltd. v. Interstate Cigar Co., 499 F.2d 232, 237 (2d Cir. 1974)
("Nowhere does the [FTCA] bestow upon either competitors or consumers
standing to enforce its provisions."); Brill v. Catfish Shaks of
America, Inc., 727 F. Supp. 1035, 1041 (E.D. La. 1989) ("there is no
private right of action for violation of the FTC's franchise disclosure rules") (citing Freedman v. Meldy's, Inc.,
587 F. Supp. 658 (E.D. Pa. 1984)).
In the brief by the Franchisee Plaintiffs in opposition to MMI's motion
to stay, dismiss and/or transfer, it is argued that plaintiffs are not
alleging that they can sue for violation of FTC regulations, but the
allegation is made to provide "information to the Court" to show that MMI
committed fraud by failing to follow the rule's requirements. While the
existence of the FTC regulations is hereby noted, Waturu Iwata's claim
for violation of the rule is dismissed for failure to state a claim.
G. Claims for Violations of Antitrust Laws
Waturu Iwata has alleged violations of the Section Two of the Sherman
Act, 15 U.S.C. § 2, the Clayton Act, 15 U.S.C. § 14 and 15, and the
Robinson-Patman Act, 15 U.S.C. § 13. Waturu Iwata has alleged that he
provided substantial funding to JI and that the damages sustained by JI
"are the equivalent of losses sustained by . . . Waturu Iwata." Amended
Complaint ¶¶ 108, 110.
The Second Circuit has held that "merely derivative injuries sustained
by . . . creditors of an injured company do not constitute antitrust
injury sufficient to confer antitrust standing." G.K.A. Beverage Corp.
v. Honickman, 55 F.3d 762, 766-67 (2d Cir. 1995); see also Schwimmer
Corp. v. Sony Corp. of America, 637 F.2d 41, 46-47 (2d Cir. 1980) ("it is recognized that treble damage
actions, effective and attractive as they are in deterring violations of
the federal antitrust laws, must have some boundaries. Consequently, the
standing requirement is designed, in essence, to limit access to treble
recovery to a target of the anticompetitive conduct. Thus, the standing
rules exclude a non-target whose damages are more difficult to prove
and, in all likelihood, highly speculative."). Each of Waturu Iwata's
antitrust claims must be dismissed because he has failed to plead a
direct injury or to show that he was a target of anticompetitive
conduct, and therefore lacks standing under the antitrust laws.
H. RICO Claims
Waturu Iwata has alleged that defendants violated the Racketeer
Influenced and Corrupt Organizations ("RICO") Act, 18 U.S.C. § 1961,
To state a RICO claim under § 1962(b) and (c), a
plaintiff must plead seven elements: " (1) that the
defendant (2) through the commission of two or more
acts (3) constituting a `pattern' (4) of `racketeering
activity' (5) directly or indirectly invests in, or
maintains an interest in, or participates in (6) an
`enterprise' (7) the activities of which affect
interstate or foreign commerce."
The Jordan (Bermuda) Inv. Co., Ltd. v. Hunter Green Invs. Ltd,
154 F. Supp. 682, 690 (S.D.N.Y. 2001) (quoting Moss v. Morgan Stanley,
Inc., 719 F.2d 5
, 17 (2d Cir. 1983). Moreover, "RICO is a specialized statute requiring a particular configuration of elements.
These elements cannot be incorporated loosely from a previous narration,
but must be tightly particularized and connected in a complaint.
Parroting statutory language while generally referring the reader back to
the previous 100 paragraphs in a complaint is inadequate." Lesavoy v.
Lane, 304 F. Supp.2d 520, 532 (S.D.N.Y. 2004) (quoting Zaro Licensing,
Inc. v. Cinmar, Inc., 779 F. Supp. 276
, 284 (S.D.N.Y. 1991)).
Waturu Iwata's RICO allegations are insufficient to state a valid
claim. No particularized allegation is made. Instead, the factual
information is incorporated by reference from the previous paragraphs in
the complaint, and the enumeration of the statutory elements are
conclusorily alleged. The entities alleged to have conspired with MMI are
not named, the predicate acts alleged to form the basis of the claim are
not specified, and it is not alleged that "the predicate acts are related
and that they amount to, or pose a threat of, continuing criminal
activity." GICC Capital Corp. v. Technology Fin. Group, Inc., 67 F.3d 463,
465 (2d Cir. 1995). Accordingly, Waturu Iwata's RICO claim is dismissed.
MMI's Motion for Attorney's Fees is Denied
MMI argues that it should be awarded attorney's fees for responding to
Waturu Iwata's complaint. Federal Rule of Civil Procedure 11 has been
violated, and sanctions are appropriate "where it is patently clear that a claim has absolutely no chance of
success under the existing precedents, and where no reasonable argument
can be advanced to extend, modify or reverse the law as it stands."
Eastway Constr. Corp. v. City of New York, 762 F.2d 243, 254 (2d Cir.
1985). While several of Waturu Iwata's claims have been dismissed for
failure to state a claim upon which relief can be granted, his fraud
claim has been validly pleaded. MMI's motion for attorney's fees is
Plaintiffs' Motion to Stay or Order Defendant to Dismiss Suits Brought in
the District of Maryland
The plaintiffs argue that MMI may not institute new actions duplicating
existing litigation and that the actions in federal court in Maryland
should therefore be stayed and MMI should be ordered to dismiss the
Maryland actions. No adequate basis for a stay has been submitted, and
the request is accordingly denied.
MMI's motion to transfer the claims of the Franchisee Plaintiffs to the
United States District Court for the District of Maryland is granted.
Except for the common law fraud claim, each of Wataru Iwata's claims are
dismissed for failure to state a claim. MMI's motion for attorney's fees
against Waturu Iwata is denied. Plaintiffs' motion to stay and order MMI to dismiss its lawsuits
in the District of Maryland is denied.
It is so ordered.