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Moua et al. v. Jani-King of Minnesota et al.: US District Court : CIVIL PROCEDURE | CLASS ACTION FAIRNESS ACT | FRANCHISE - who is 'primary defendant' for CAFA; particularity as to franchise fraud claims; statute of limitation issues

UNITED STATES DISTRICT COURT
DISTRICT OF MINNESOTA
Teng Moua, Juan Martinez, Cheri Martinez, Kua
Vang Xiong, Maiku Thao, Cherpao Yang, Bee
Vang, Vang Pao Moua, Mailou Xiong Yang,
Vangxue Yang, Eng Thao, Choua Moua, Meshack
Balira, Ferdinand Nyambarya, VMS Inc., Richard
Chang, Lee Wong Chang, Khonekham Dejvongsa,
Nouphet Dejvongsa, Diego Cortez Dominguez,
Mohamud Egal, Mohamed Osable, Hussein Osable,
Ifran Jimale, Layla Jimale, Mohamed Jimale, Paul
Bel George, Chue Hang, Tong Thao Hang, Rexhep
Krasniqi, Tou Lor, Mai Moua Vue, Arif Metushi,
Wa Her Moua, Mee Yang, John Schroeder, Judy
Schroeder, Berhane Tesfai, Dual Cykao Thao,
Xong Thao Yang, Kou Thao, Yang Xiong, Kevin
Vilavong, Chong Xiong, Ko S. Xiong, Blia Yang,
Ying Cheng, Chang Yang, Choua Lor, Mai Blia
Yang, Pang Yang, Lue Her, for themselves and all
other persons similarly situated as franchisees of
Jani-King of Minnesota, Inc. and Jani-King
International, Inc.,
Plaintiffs, MEMORANDUM OPINION
AND ORDER
v. Civil No. 08-4942 ADM/JSM
Jani-King of Minnesota, Inc., a Texas Corporation,
Jani-King International, Inc., a Texas Corporation,
George Selman, a Minnesota resident, and Steve
Schmidt, a Minnesota resident,
Defendants.
Thomas W. Pahl, Esq., Foley & Mansfield, PLLP, Minneapolis, MN, appeared on behalf of
Plaintiffs.
Kerry L. Bundy, Esq., and Aaron D. Van Oort, Esq., Faegre & Benson, LLP, Minneapolis, MN,
appeared on behalf of Defendants.
1 In considering a motion to remand, [t]he allegations of the complaint as set forth at the
time the petition for removal was filed are controlling. Crosby v. Paul Hardeman, Inc., 414
F.2d 1, 3 (8th Cir. 1969) (citing Pullman Co. v. Jenkins, 305 U.S. 534, 537-38 (1939)).
2
I. INTRODUCTION
On November 25, 2008, the undersigned United States District Judge heard oral
argument on the above-captioned Plaintiffs (Plaintiffs) Motion to Remand [Docket No. 12]
and on Defendants Jani-King of Minnesota, Inc.; Jani-King International, Inc.; George Selman
(Selman); and Steve Schmidt (Schmidt) (collectively Defendants) Motion for Partial
Judgment on the Pleadings [Docket No. 27]. For the reasons set forth below, Plaintiffs motion
is denied and Defendants motion is granted.
II. BACKGROUND1
Jani-King International is a Texas corporation that sells franchises to individuals across
the United States. Notice of Removal [Docket No. 3], Attach. 2 (Compl.) 45. These franchises
entitle the franchisee to cleaning or janitorial service accounts from Jani-King customers. Id.
Jani-King of Minnesota is a Minnesota corporation and a regional business division of Jani-King
International authorized to sell franchises to Minnesota residents and to solicit service accounts
throughout Minnesota. Id. 31, 46. Selman, a Minnesota resident, is employed as a regional
director by Jani-King International, and Schmidt, also a Minnesota resident, is an assistant
operations manager for Jani-King International. Id. 34-35. The 52 individuals named in the
caption as Plaintiffs, the vast majority of whom are Minnesota residents, purchased Jani-King
franchises between 2000 and 2008. Id. 1-29; Grecian Aff. [Docket No. 24] 30.
At the time of the purchase of a Jani-King franchise, each Plaintiff entered into a
franchise agreement setting forth the rights and obligations of the parties. Compl. 46, 51.
3
Under the agreements, the franchisee pays franchise fees in exchange for business referrals and
cleaning and janitorial service accounts. Id. 55. Plaintiffs allege that when they purchased
their respective franchises, they were promised that once they paid all the necessary franchise
fees, completed training, and obtained necessary supplies and equipment, they would be
provided a certain level of monthly business. Id. 56. Plaintiffs assert, however, that Jani-King
did not have enough cleaning and janitorial accounts to provide the minimum level of monthly
business that had been promised each franchisee. Id. 48. In addition, Plaintiffs allege that (1)
many of the accounts offered to Plaintiffs were underbid to the extent that they were not
profitable; (2) Plaintiffs were offered accounts that were geographically inconvenient; (3) the
same accounts were offered to multiple franchisees who then had to compete against each other
for the business; (4) Plaintiffs were required to immediately accept an offered account; and (5)
accounts were taken away from Plaintiffs under the manufactured claim that the franchisees
cleaning or janitorial services were not up to standard. Id. 59-60, 64, 66. Plaintiffs assert that
such tactics were employed to create the appearance that the obligation to the franchisees of
providing a minimum level of monthly business had been satisfied. Id. 75.
Plaintiffs initiated a class action in state court on July 16, 2008, alleging the activities
described above gave rise to claims for breach of contract, breach of implied covenant of good
faith and fair dealing, violations of the Minnesota Franchise Act (MFA), fraud, unjust
enrichment, quantum meruit, violations of the Minnesota Consumer Fraud Act (MCFA), and
violations of the Minnesota False Statement in Advertising Act (MFSAA). Id. 125-83. On
August 15, 2008, Defendants filed their Answer [Docket No. 1] and Notice of Removal [Docket
No. 3], claiming that jurisdiction in federal court is proper pursuant to the Class Action Fairness
4
Act (CAFA), 28 U.S.C. 1332(d)(2).
III. DISCUSSION
A. Motion to Remand
A case shall be remanded to state court [i]f at any time before final judgment it appears
that the district court lacks subject matter jurisdiction . . . . 28 U.S.C. 1447(c). The party
seeking removal and opposing remand has the burden of establishing federal subject matter
jurisdiction. See In re Bus. Mens Assurance Co. of Am., 992 F.2d 181, 183 (8th Cir. 1993).
When considering a motion to remand, a court must resolve all doubts about federal jurisdiction
in favor of remand. See id.
1. Burden of Proof under CAFA
CAFA provides that federal courts have jurisdiction over class actions based on state law
when (1) there is minimal diversity, meaning that at least one plaintiff and one defendant are
from different states; (2) the amount in controversy exceeds ,000,000; and (3) the action
involves at least 100 class members. 28 U.S.C. 1332(d)(2), (5)(B). Here, all three
requirements have been met. First, there is minimal diversity as Jani-King International is a
citizen of Texas and no plaintiff is a Texas citizen. Second, there are likely in excess of 100
class members given Plaintiffs representation of 524 potential class members in addition to the
52 identified plaintiffs. Pls. Mem. in Supp. of Mot. to Remand [Docket No. 17] at 3-4; Grecian
Aff. 31. Lastly, although Plaintiffs initially disputed whether the ,000,000 amount-incontroversy
requirement of CAFA had been met, they conceded at oral argument that the
statements in the Supplemental Affidavit of George B. Selman [Docket No. 36] satisfy the
amount-in-controversy requirement. Suppl. Aff. of Selman 8-10.
2 One district court has concluded that the burden regarding an exception to CAFA
should remain on the removing party. Kearns v. Ford Motor Co., Inc., No. CV 05-5644, 2005
WL 3967998, at *4-5 (C.D. Cal. Nov. 21, 2005). In light of the Ninth Circuits subsequent
decision in Serrano, however, it appears that Kearns has been implicitly overruled. 478 F.3d at
1021-22 (concluding that a district court erred by not placing the burden to prove an exception to
CAFA on the party claiming the exception).
5
Plaintiffs argue that the Court must decline jurisdiction because this case falls within one
of CAFAs exceptions to federal jurisdiction. Although, as noted above, the burden is generally
on the party opposing remand to establish federal jurisdiction, there is a consensus among the
courts that have considered the issue that once CAFAs initial requirements have been satisfied,
the burden of proving one of CAFAs exceptions rests with the party asserting the exception. 2
McLaughlin on Class Actions 12:7, n.17 (3d ed. Dec. 2008 update) (citing Preston v. Tenet
Healthsystem Meml Med. Ctr., Inc., 485 F.3d 804, 813 (5th Cir. 2007); Serrano v. 180 Connect,
Inc., 478 F.3d 1018, 1021-22 (9th Cir. 2007); Hart v. FedEx Ground Package Sys. Inc., 457 F.3d
675, 680 (7th Cir. 2006); Frazier v. Pioneer Americas, LLC, 455 F.3d 542, 546 (5th Cir. 2006);
Evans v. Walter Indus., 449 F.3d 1159, 1164 (11th Cir. 2006)). Given the consensus among the
courts2 and Plaintiffs acceptance of this burden at oral argument, the party claiming the
applicability of the exception bears the burden of proof on that issue.
2. Home-State Controversy
Plaintiffs argue federal jurisdiction is lacking under 1332(d)(4)(B), the so-called
home-state controversy exception to federal jurisdiction under CAFA. The home-state
controversy exception requires a federal district court to decline jurisdiction over a class action
in which two-thirds or more of the members of all proposed plaintiff classes in the aggregate,
and the primary defendants, are citizens of the State in which the action was originally filed. 28
3 As other courts have recognized, the use of the language the primary defendants in
1332(d)(4)(B) rather than a primary defendant clearly demonstrates that all of the primary
defendants must be residents of the state in which the action was originally filed. See Anthony
v. Small Tube Mfg. Corp., 535 F. Supp. 2d 506, 515 (E.D. Pa. 2007); Robinson v. Cheetah
Transp., No. 06-0005, 2006 WL 3322580, at *3 (W.D. La. Nov. 14, 2006). There is no dispute
that the other defendantsJani-King of Minnesota, Selman, and Schmidtare primary
defendants and Minnesota residents.
4 The Senate Report was issued ten days after CAFAs enactment, which has caused
some courts to question its value in discerning legislative intent. See Brook v. UnitedHealth
Group Inc., No. 06 CV 12954, 2007 WL 2827808, at *5 (S.D.N.Y. Sep. 27, 2007) (citing
Blockbuster, Inc. v. Galeno, 472 F.3d 53, 58 (2d Cir. 2006)). Courts have nonetheless
considered the report in determining the meaning of primary defendants, and both Plaintiffs
and Defendants rely on the report in support of their arguments. See Hangarter v. Paul Revere
Life Ins. Co., No. C 05-04558, 2006 WL 213834, at *3 (N.D. Cal. Jan. 26, 2006) (considering
the report despite having commented that [the] report is of dubious value as an interpretative
aid); see also Sorrentino v. ASN Roosevelt Ctr., LLC, ___ F. Supp. 2d ___, 2008 WL 5068821,
at *8 (E.D.N.Y. Dec. 1, 2008); Harrington v. Mattel, Inc., No. C07-05110, 2007 WL 4556920, at
*5 (N.D. Cal. Dec. 20, 2007); Kendrick v. Standard Fire Ins. Co., No. 06-141-DLB, 2007 WL
1035018, at *5 (E.D. Ky. Mar. 31, 2007); Robinson, 2006 WL 3322580, at *2-3; Frazier v.
Pioneer Americas, LLC, No. 05-1338-D-M1, 2006 WL 5670538, at *3-4 (M.D. La. Mar. 23,
2006).
6
U.S.C. 1332(d)(4)(B). Plaintiffs assert that more than two-thirds of the proposed class
members are Minnesota citizens. Pls. Mem. in Supp. of Mot. to Remand at 9-10; Grecian Aff.
32-39. Defendants do not dispute Plaintiffs assertion but contend that Jani-King
International is a Texas citizen and thus not all of the primary defendants are Minnesota
citizens.3 Plaintiffs counter that Jani-King International is not a primary defendant.
The term primary defendant is not expressly defined in CAFA. A Senate Report issued
after CAFAs enactment,4 however, attempted to clarify the meaning of the term:
[T]he Committee intends that primary defendants be interpreted to
reach those defendants who are the real targets of the lawsuiti.e.,
the defendants that would be expected to incur most of the loss if
liability is found. Thus, the term primary defendants should
include any person who has substantial exposure to significant
portions of the proposed class in the action, particularly any
7
defendant that is allegedly liable to the vast majority of the members
of the proposed classes (as opposed to simply a few individual class
members).
S. Rep. No. 109-14, at 43. The courts that have been asked to ascertain the meaning of primary
defendants have relied on several potential (and sometimes incongruent) understandings of the
term. Brook, 2007 WL 2827808, at *5. Thus, a primary defendant has been understood to
mean a defendant who (1) has the greater liability exposure; (2) is most able to satisfy a potential
judgment; (3) is sued directly, as opposed to vicariously, or for indemnification or contribution;
(4) is the subject of a significant portion of the asserted claims; or (5) is the only defendant
named in one particular cause of action. Id. (citing cases).
Plaintiffs argue that Jani-King International is not a primary defendant because it is not
named in Count I (breach of contract) and is not a party to the contracts or agreements at issue,
which necessarily means that Jani-King International also cannot be a target of Count II (breach
of the implied covenant of good faith and fair dealing). Pls. Mem. in Supp. of Mot. to Remand
at 12-13. Furthermore, Plaintiffs contend, to the extent that Jani-King International might be
held liable, such a finding would have to be based on vicarious liability theories for establishing
the business model, policies and practices, corporate climate and lack of oversight which its
Minnesota-based employees and entities utilized and relied upon in order to repeatedly violate
various provisions of the Franchise Agreements, Minnesota state law[,] and common law. Id. at
13. The Court finds Plaintiffs argument unavailing.
First, the fact that Jani-King International is not named in Count I suggests that Plaintiffs
targeted certain claims against only certain defendants. And yet Plaintiffs made no similar
distinctions regarding which defendants were the target of their claims of fraud, unjust
8
enrichment, quantum meruit, and violations of the MCFA, and MFSAA. Thus, on the face of the
Complaint, it appears that Jani-King International is alleged to be directly liable in a significant
number of the asserted claims. Second, the allegations and arguments in Plaintiffs other
submissions to the Court belie Plaintiffs insistence now that Jani-King Internationals potential
liability is based solely on theories of vicarious liability. On several occasions, Plaintiffs group
all Defendants together in levying allegations. For example, in their brief opposing the motion
for judgment on the pleadings, Plaintiffs asserted theme throughout the Complaint is the promise
of a specific amount of cleaning business per month but that Jani-King of Minnesota, Selman,
Schmidt, and Jani-King International knew it [sic] could not fulfill that promise. Pls. Mem. in
Opp. to Mot. for Partial J. on the Pleadings [Docket No. 31] at 11. In another instance, Plaintiffs
allege that Jani-King of Minnesota, Jani-King International, Selman, and Schmidt engaged in
fraud related to the misrepresentations and omissions regarding Defendants ability to fulfill its
contractually obligated duties to each Plaintiff. Id. at 12-13. Most significantly, Plaintiffs
explicitly and directly accuse Jani-King International of wrongdoing for instruct[ing] and
direct[ing] many of the affairs and operations of [Jani-King of Minnesota]. Id. at 12.
In Adams v. Federal Materials Co., Inc., the court concluded that there was no basis for
treating a defendant as secondary because no principled distinction existed between that
defendants status and another defendants status given the fact that one count of the complaint
was explicitly directed against both defendants. No. Civ. A. 5:05CV-90-R, 2005 WL 1862378,
at *5 (W.D. Ky. July 28, 2005); see also Brook, 2007 WL 2827808, at *6 (concluding that
deciding the definitive meaning of the term primary defendants was unnecessary because, in
light of the plaintiffs concession that there was no distinction between the culpability and
5 In addition to the exceptions under CAFA that require a district court to decline federal
jurisdiction, a district court also has discretion to decline federal jurisdiction in certain cases.
See 28 U.S.C. 1332(d)(3). Plaintiffs have not argued for the application of this provision and,
in any event, it appears that it would not apply because, like the home-state controversy
exception, 1332(d)(3) requires that the primary defendants be citizens of the state in which
the action was originally filed.
9
liability of the various defendants, there was no rational[] basis upon which to differentiate the
defendants status as being primary or secondary). Here too, the face of the Complaint provides
no principled reason for finding, on the one hand, that Jani-King of Minnesota, Selman, and
Schmidt are primary defendants but, on the other hand, that Jani-King International is not. As
such, Plaintiffs have failed to satisfy their burden of proving the home-state controversy
exception, and, therefore, federal jurisdiction is proper.5
B. Motion for Judgment on the Pleadings
Pursuant to Rule 12(c) of the Federal Rules of Civil Procedure, Defendants move for
judgment on the pleadings with respect to Plaintiffs claims of fraud/misrepresentation (Count
IV), violations of the MCFA (Count VII), and violations of the MFSAA (Count VIII). Rule
12(c) provides that [a]fter the pleadings are closedbut early enough not to delay triala party
may move for judgment on the pleadings. A motion for judgment on the pleadings is analyzed
under the same standard as a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6).
Westcott v. Omaha, 901 F.2d 1486, 1488 (8th Cir. 1990). In considering a motion to dismiss,
the pleadings are construed in the light most favorable to the nonmoving party, and the facts
alleged in the complaint must be taken as true. Hamm v. Groose, 15 F.3d 110, 112 (8th Cir.
1994); Ossman v. Diana Corp., 825 F. Supp. 870, 879-80 (D. Minn. 1993). Any ambiguities
concerning the sufficiency of the claims must be resolved in favor of the nonmoving party.
10
Ossman, 825 F. Supp. at 880. A motion to dismiss should be granted as a practical matter . . .
only in the unusual case in which the plaintiff includes allegations that show on the face of the
complaint that there is some insuperable bar to relief. Frey v. City of Herculaneum, 44 F.3d
667, 671 (8th Cir. 1995).
1. Count IVCommon Law Fraud
Count IV asserts a claim of common law fraud by misrepresentation. Compl. 145-53.
Rule 9(b) of the Federal Rules of Civil Procedure provides that [i]n alleging fraud or mistake, a
party must state with particularity the circumstances constituting fraud or mistake. Malice,
intent, knowledge, and other conditions of a persons mind may be alleged generally. The
Eighth Circuit has explained:
Circumstances includes such matters as time, place, and contents
of false representations, as well as the identity of the person making
the misrepresentation and what was obtained or given up thereby.
Because one of the main purposes of the rule is to facilitate a
defendants ability to respond and to prepare a defense to charges of
fraud, conclusory allegations that a defendants conduct was
fraudulent and deceptive are not sufficient to satisfy the rule.
Commercial Prop. Invs., Inc. v. Quality Inns Intl, Inc., 61 F.3d 639, 644 (8th Cir. 1995). Put
another way, the complaint must identify the who, what, where, when, and how of the alleged
fraud. United States v. St. Lukes Hosp., Inc., 441 F.3d 552, 556 (8th Cir. 2006) (quotation
omitted). However, a complaint need not be filled with precise detail in order to satisfy Rule
9(b) since one of the main purposes of the rule is to facilitate a defendants ability to respond
and to prepare a defense to charges of fraud. Commercial Prop., 61 F.3d at 644. Thus, Rule
9(b) does not require that the exact particulars of every instance of fraud be alleged, so long as
the complaint includes enough detail to inform the defendant of the core factual basis for the
6 Another district court in this circuit has declined the invitation to follow the reasoning
of Alfaro. See Gunderson v. ADM Investor Servs., Inc., Nos. C. 96-3148, C 96-3151, 1997 WL
57070453, at *9, n.6 (N.D. Iowa Apr. 17, 1997). But even the Gunderson court recognized that
logic dictates that the sufficiency of a pleading under Rule 9(b) varies with the complexity of
the transaction, and, accordingly, certain cases might warrant less stringent[] application of
the rule. 1997 WL 57070453, at *9. In this regard, Rule 9(b)s particularity requirement for
fraud should not be applied with such draconian strictness as to undermine the liberal spirit of
the Federal Rules of Civil Procedure. Id.
11
fraud claims. Id. at 646.
In alleging the factual basis for their claims, Plaintiffs Complaint begins by reciting a
description of the general types of alleged wrongful conduct by Defendants. Compl. 45-75.
Following that section, the Complaint provides allegations specific to eleven of the named
Plaintiffs. Id. 76-123. Lastly, the Complaint then alleges that the remaining 41 named
Plaintiffs have experienced many of the same or similar wrongs and unlawful conduct
described in both the general and specific allegations directed to the eleven Plaintiffs. Id. 124.
As an initial matter, Defendants argue that because the Complaint contains allegations of
fraud specific to only eleven Plaintiffs, it fails to plead fraud with particularity as to the other 41
Plaintiffs. Defs. Mem. in Supp. of Mot. for Partial J. on Pleadings [Docket No. 39] at 6.
Essentially, Defendants position is that in a class action asserting claims of fraud, Rule 9(b)
requires that the Complaint set forth allegations stating the particularities of the fact pattern
supporting each class members claim. The Court disagrees with such a rhadamanthine
application of Rule 9(b) and instead adopts the view that where the complaint presents the
claims of a class and individual identification of the circumstances of the fraud as to each class
member would require voluminous pleadings, less specificity is required. Charleswell v. Chase
Manhattan Bank, N.A., 308 F. Supp. 2d 545, 571 (D.V.I. 2004) (quotation omitted); see also
Alfaro v. E.F. Hutton & Co., Inc., 606 F. Supp. 1100, 1107-10 (E.D. Pa. 1985) (same).6 Here,
12
the Complaint, which exceeds 50 pages and 180 numbered paragraphs, pleads the individual
circumstances of the alleged fraud as to eleven of the class members. Requiring Plaintiffs to
plead the individual circumstances of the remaining 41 named Plaintiffs would unreasonably
expand an already lengthy Complaint. It is unlikely that additional allegations setting forth the
exact particulars of every individual instance of fraud is necessary to provide Defendants a fair
opportunity to respond and prepare a defense to the fraud claims. See Commercial Prop., 61
F.3d at 644.
Defendants, however, are correct that Plaintiffs fraud claims fail to satisfy Rule 9(b)
because the allegations cluster all the Defendants together without the required specificity to
discern the respective roles of the individual defendants in the alleged fraud scheme. Defs.
Mem. in Supp. of Mot. for Partial J. on Pleadings at 7. Throughout the Complaint, Plaintiffs
generically accuse Defendants and Jani-King of misrepresentations but never specify which
Defendant (or which Jani-King entity) is responsible for which alleged misrepresentations. For
example, the Complaint contains the following allegations: (1) Defendants . . . misrepresented
that Jani-King has sufficient business to provide the guaranteed monthly income promised . . .
pursuant to [the] Franchise Agreements; (2) Defendants further misrepresented that Plaintiffs
and other class members would receive cleaning accounts that are properly bid so as to not
require an inordinate and unfair number of hours of work than the income generated from those
accounts; and (3) Defendants represented . . . Plaintiffs would have an opportunity to cure any
flaws in their cleaning within a certain time period, but instead, . . . would . . . remove [an]
account . . . without giving [Plaintiffs] the promised opportunity to cure. Compl. 47, 49, 149
(emphasis added). Rule 9(b) is not satisfied when the complaint vaguely attributes the alleged
fraudulent statements to defendants. Mills v. Polar Molecula Corp., 12 F.3d 1170, 1175 (2d
13
Cir. 1993); see also Sears v. Likens, 912 F.2d 889, 893 (7th Cir. 1990) (holding that a complaint
that lumps all the defendants together and does not specify who was involved in what
[fraudulent] activity fails to satisfy Rule 9(b)). Rather, when a complaint accuses multiple
defendants of participating in the scheme to defraud, the plaintiff must take care to identify
which of them was responsible for the individual acts of fraud. Weimer v. Intl Flavors &
Fragrances, Inc., 20 F.R.D. 431, 437 (N.D. Iowa 2007). If the requirements of Rule 9(b) were
otherwise, a defendant would be forced to guess which allegations in the complaint were
pleaded against it, rendering it difficult (if not impossible) to adequately frame a response,
which is precisely the problem that Rule 9(b) was designed to remedy. Carlson v. A.L.S.
Enterprises, Inc., Civ. No. 07-3970, 2008 WL 185710, at *4 (D. Minn. Jan. 18, 2008).
Because the Complaint does not identify which Defendant was responsible for the
particular misrepresentations, Plaintiffs fraud claims are not particular as to the who
requirement of pleading fraud. Therefore, Count IV is dismissed. The dismissal is without
prejudice, and Plaintiffs are permitted to file an amended complaint correcting the deficiencies.
See 2 James Wm. Moore et al., Moores Federal Practice, 9.03[4] (3d ed. 2007) (commenting
that a first dismissal for failing to satisfy Rule 9(b) should be without prejudice to re-pleading).
2. Count VIIFalse Statements in Advertising
Count VIII of the Complaint asserts claims for violations of the MSFAA, which prohibits
the following conduct:
Any person, firm, corporation, or association who, with intent to sell
or in anywise dispose of merchandise, securities, service, or anything
offered . . . to the public, for sale or distribution, . . . makes,
publishes, disseminates, circulates, or places before the public . . . an
advertisement of any sort . . ., which . . . contains any material
assertion, representation, or statement of fact which is untrue,
deceptive or misleading.
14
Minn. Stat. 325F.67. Defendants assert that the MSFAA claims sound in fraud and, as such,
are subject to the pleading with particularity requirement of Rule 9(b). See Russo v. NCS
Pearson, Inc., 462 F. Supp. 2d 981, 1003 (D. Minn. 2006) (concluding that statutory fraud claims
made under Minnesota law, such as the MSFAA, are subject to Rule 9(b)s requirement of
pleading with particularity). Defendants argue that the claims have not been pled with
particularity because the Complaint does not identify a single untrue or misleading
advertisement placed before the public by [Defendants]. Defs. Mem. in Supp. of Mot. for
Partial J. on Pleadings at 12. In response, Plaintiffs argue that the Complaint identifies the
Uniform Franchise Offering Circular (UFOC), a public offering statement required by law to
be filed with the Minnesota Department of Commerce, as the public advertisement that
satisfies this MSFAA requirement. Pls. Mem. in Oppn to Mot. for Partial J. on the Pleadings at
19. Defendants respond that even if the UFOC is the basis for the MSFAA claims, the UFOC is
never explicitly mentioned in Count VII, the Complaint fails to identify the specific provisions
of the UFOC that constitute the misrepresentations, and the Complaint fails to specify which
Defendant or Defendants are responsible for the misrepresentations in the UFOC. Defs. Reply
Mem. in Supp. of Mot. for Partial J. on Pleadings [Docket No. 39] at 9-11.
Given that the UFOC is the only document that could constitute a public advertisement
and that Plaintiffs have confirmed on the record that the UFOC is the public advertisement on
which the MSFAA claims are based, the failure to explicitly refer to the UFOC in Count VII is
inconsequential. Defendants are now clearly on notice that the UFOC forms the basis of the
MSFAA claims. The Court agrees with Defendants, however, that, like the common law fraud
claims, Rule 9(b)s pleading requirement is not met because the Complaint fails to specify the
15
Defendant or Defendants responsible for the misrepresentations in the UFOC. Further, the
failure to identify the specific provisions of the lengthy UFOC is equally problematic. Although
it is true, as Plaintiffs argue, that one cannot point to a specific provision to identify a
misrepresentation by omission, Plaintiffs have alleged affirmative misrepresentations in the
UFOC, and, as to these allegations, they should be required to specifically identify the source of
those misrepresentations in the UFOC. Accordingly, Count VII is dismissed for failure to plead
with particularity, but the dismissal is without prejudice, and Plaintiffs are permitted to file an
amended complaint correcting these deficiencies.
3. Count VIIIConsumer Fraud
Count VIII asserts claims for violations of the MCFA, Minn. Stat. 325F.68-.70, which
prohibits [t]he act, use, or employment by any person of any fraud, false pretense, false
promise, misrepresentation, misleading statement or deceptive practice, with the intent that
others rely thereon in connection with the sale of any merchandise. Minn. Stat. 325F.69
(emphasis added). Defendants argue that the MCFA claims fail as a matter of law because
Plaintiffs have alleged misrepresentations in connection with the sale of a franchise, not any
misrepresentations connected to the sale of merchandise.
The Minnesota Court of Appeals has held that the MCFA does not apply to all
allegations of fraud, but only to those where there is a nexus between the alleged fraud and the
sale of merchandise. Banbury v. Omnitrition Intl, Inc., 533 N.W.2d 876, 882 (Minn. Ct. App.
1995). In Banbury, the court affirmed summary judgment on the ground that the
misrepresentations that formed the basis of the MCFA claim were allegedly made in connection
with the establishment and later termination of a distributorship relationship and not in
connection with the sale of merchandise. Id. In so holding, the Banbury court relied on
16
Cooperman v. R.G. Barry Corp., which concluded that a claim under the MCFA requires a
nexus between the fraud alleged and the sale of merchandise. 775 F. Supp. 1211, 1213 (D.
Minn. 1991).
Plaintiffs argue that the sales at issue here were not solely sales of the right to operate
franchises but also included sales of accounting services, initial training courses and manuals,
cleaning supplies, cleaning equipment, and Jani-Kings name recognition and goodwill. Pls.
Mem. in Oppn to Mot. for Partial J. on the Pleadings at 21. They contend these aspects of the
sales fit squarely within the statutory definition of merchandise. Id. The critical issue is not,
however, whether the sale involved aspects that can be viewed as constituting merchandise,
but rather whether there is a nexus between the alleged misrepresentations and that
merchandise. Even if accounting services, training courses, and cleaning supplies constitute
merchandise, the Complaint is entirely devoid of any allegations that Defendants
misrepresented the nature or quality of those accounting services, training courses, or cleaning
supplies. Instead, the alleged misrepresentations all relate to the sale of the right to operate
franchises and the rights and obligations of the parties in the franchise relationship.
Accordingly, there are no allegations that would support a claim under the MCFA, and, as such,
judgment in favor of Defendants on Count VIII is appropriate.
7 As noted in the previous section, supra Part III.B.3, judgment on the pleadings is
granted on all of the claims based on the MCFA on the ground that the Complaint fails to allege
misrepresentation in connection with the sale of merchandise, which is necessary to support such
claims. Accordingly, the Court need not consider Defendants argument that MCFA claims of
the eleven particular Plaintiffs are also untimely.
17
4. Statute of Limitations
Lastly, Defendants argue that the MSFAA claims of eleven of the Plaintiffs are barred by
the six-year statute of limitations applicable to such claims.7 Defendants argue the limitations
period began at the time Plaintiffs purchased their franchises and that because the eleven
Plaintiffs purchased their franchises more than six years prior to the filing of this class action on
July 14, 2008, their MSFAA claims based on those purchases are time barred. In support of this
argument, Defendants cite Tuttle v. Lorillard Tobacco Co., 377 F.3d 917 (8th Cir. 2004). In
Tuttle, the Eighth Circuit held that claims based on violations of the MSFAA are governed by
the six-year statute of limitations in Minn. Stat. 541.05, subd. 1(2), which does not include a
discovery allowance similar to that allowed in the statute of limitations applicable to commonlaw
fraud claims. Id. at 926. Thus, the statute of limitations for claims under the MSFAA
begins to run on the date of sale, not when the alleged fraudulent conduct is discovered. See id.
In response, Plaintiffs argue that Tuttle was wrongly decided. They contend that it is
incongruous to treat claims under the MSFAA similarly to common law fraud claims for
purposes of the particularity requirement of Rule 9(b), while at the same time decline to
recognize a discovery allowance accorded to common law fraud claims. Pls. Mem. in Oppn
to Mot. for Partial J. on the Pleadings at 24. Though this argument regarding the incongruous
treatment of MSFAA claims under existing law is not entirely without merit, this Court will
follow binding Eighth Circuit precedent. The MSFAA claims arising from the purchases of Jani8
The Complaint alleges that Mailou Yang purchased franchises in 2000, 2002, and 2005.
Compl. 6. Defendants direct their statute of limitations argument only with regard to the
purchase in 2000. Defs. Mem. in Supp. of Mot. for Partial J. on Pleadings at 16. Thus, the
dismissal of the Mailou Yangs MSFAA claim extends only to such a claim based on the
purchase of a franchise in 2000.
18
King franchises prior to July 14, 2002specifically, the purchases by Mailou Yang8; Meshack
Balira and Ferdinand Nyambarya; Mohamud Egal, Mohamed Osable, Hussein Osable, Ifran
Jimale, Layla Jimale, and Mohamed Jimale; Berhane Tesfai; and Chong Xiongare not timely
under the statute of limitations applicable to such claims. Therefore, Defendants are entitled to
judgment on the pleadings on these claims.
IV. CONCLUSION
Based upon the foregoing, and all of the files, records and proceedings herein, IT IS
HEREBY ORDERED that
1. Plaintiffs Motion to Remand [Docket No. 12] is DENIED;
2. Defendants Motion for Partial Judgment on the Pleadings [Docket No. 27] is
GRANTED;
3. Counts IV and VII are DISMISSED WITHOUT PREJUDICE;
4. Count VIII is DISMISSED WITH PREJUDICE;
5. The MSFAA claims arising from the purchase of franchises that occurred prior to
July 14, 2002, are DISMISSED WITH PREJUDICE.
BY THE COURT:
s/Ann D. Montgomery
ANN D. MONTGOMERY
U.S. DISTRICT JUDGE
Dated: January 27, 2009.
 

 
 
 

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