Executive Summary:
In an unpublished decision, Judge Houston of the United States District Court for the Southern District of California denied Sprouts Farmers Market, Inc.’s motion to dismiss California Unfair Competition Law Claims based exclusively on alleged violations of the California Franchise Investment Law from, at the latest, 2011.
Citation:
Ronald Cohn, Inc. v Sprouts Farmers Market, Inc., 2021 WL 120896 (S.D. Cal. Jan. 13, 2021).
Relevant Background:
In October 1990, Sprouts Farmers Market, Inc.’s (“Sprouts”) predecessor, Boney’s Services, Inc. (“Boney’s”) entered into a Trademark License Agreement with Ronald Cohn, Inc. (“Plaintiff”) for the operation of a grocery store in Chula Vista, California. Boneys and Plaintiff entered into a second Trademark License Agreement in September 1995 allowing Plaintiff to open and operate a second grocery store in Chula Vista, California. In 2011, Sprouts acquired Boney’s and amended the Trademark License Agreements (“TLAs”). Ultimately, the TLAs allowed Plaintiff exclusive rights to use Sprouts’ trade name within designated protected areas in exchange for royalties that Plaintiff paid to Sprouts.
While not stated clearly in the opinion, it appears that in or around late 2019 or early 2020, Ronald Cohn filed a complaint against Sprouts. That complaint included within it six causes of action based in tort and contract. Pending before the Court is Sprouts motion to dismiss claims for violation of California’s Unfair Competition Law, intentional and negligent tortious interference, breach of good faith and fair dealing, and declaratory relief.
Decision:
The Court’s analysis related to the claims for relief for intentional and negligent tortious interference, breach of good faith and fair dealing, and declaratory relief claims do not raise any applicable franchise issues and are not discussed herein. However, the Court’s analysis related to the California Unfair Competition Law (“UCL”) claims do and the relevant findings are as follows:
- California UCL prohibits any “unlawful, unfair, or fraudulent business act or practice” (Cal. Bus. & Prof. Code § 17200) and “[e]ach prong of the UCL is a separate and distinct theory of liability” and “an independent basis for relief” (Lozano v. AT&T Wireless Servs., Inc., 504 F.3d 718, 731 (9th Cir. 2007).
- To establish a UCL claim under the “unlawful” prong, the plaintiff must show the challenged business practice must be one prohibited by civil, criminal, federal, state, municipal, statutory, regulatory, or court-made laws. People v. McKale, 25 Cal.3d 626, 626 (1979). Plaintiff alleged that their TLAs violated the California Franchise Investment Law by failing to register the franchise with the California Department of Business Oversight even though the last of which was signed at least eight years prior to when Plaintiff filed the lawsuit. Both the CFIL and UCL have four year statutes of limitations. Cal. Corp. Code § 31330 and Cal. Bus. & Prof. Code § 17208. Nevertheless, the Court found that reading the Complaint liberally would permit Plaintiff to prove the statutes of limitations had not been tolled.
- To establish a UCL claim under the “unfair” prong, a plaintiff must show a business practice that “violates established public policy or if it is immoral, unethical, oppressive or unscrupulous and causes injury to consumers which outweighs its benefits.” McKell v. Washington Mut., Inc., 142 Cal. App. 4h 1457, 1473 (2006). Cal-Tech Commc’ns. Inc. v. LA.A. Cellular Tel. Co., 20 Cal.4th 163 (1992) found that a business practice is unfair if the plaintiff alleges that a defendant violated a “legislatively declared policy or proof of some actual or threatened impact on competition.” Id. at 186. Here, Plaintiff alleged that the above violations of the CFIL violated legislatively declared policies. In spite of the same statute of limitations arguments, the Court found that “Plaintiff’s CFIL claim is not considered time barred by the UCL’s four-year statute of limitation on the face of the complaint.” *4.
- The Court found that Plaintiff’s UCL fraud claim was untenable because Plaintiff lacked standing to bring such a claim unrelated to the CFIL.
Looking Forward:
The foundation of the Court’s denial of Sprouts’s motion to dismiss is that “Plaintiff’s CFIL claim is not considered time barred … on the face of the complaint.” However, when ruling on a motion to dismiss, the Court may consider the facts alleged in the complaint as well as documents attached to the complaint, documents relied upon but not attached to the complaint when authenticity is not contested and matters of which the Court takes judicial notice. Lee v. City of Los Angeles, 250 F.3d 668, 688-89 (9th Cir. 2001). Here, it does not appear that there is any dispute about when Sprouts allegedly failed to register with the California Department of Business Oversight, when it made a franchise offering without being registered pursuant to the CFIL, and when Plaintiff discovered these alleged deficiencies. Said differently, it is unclear how the Court ruled as it did and it is likely that the underlying briefs provide more context. Without those facts, it is difficult to determine how this opinion should be used looking forward but is a warning nonetheless to franchisors that even a facially time barred case may be allowed to slip through the motion to dismiss stage on occasion.
This article was originally published on the California Franchise Network.
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Thomas O’Connell – Tom O’Connell is a Shareholder at Buchalter APC, where he serves as Chair of the firm’s Franchise Law Practice and Chair of Litigation for the firm’s San Diego office.
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