July 17, 2025|Franchise Frontlines
July 17, 2025 | U.S. District Court for the Eastern District of Virginia | Published Opinion
Executive Summary
In a published opinion, Judge Jamar K. Walker granted franchisee plaintiffs leave to file a Second Amended Complaint asserting claims for fraudulent inducement, civil RICO, Texas Deceptive Trade Practices Act (DTPA) violations, and breach of contract against Pool Scouts Franchising, LLC. The court dismissed the prior complaint for failing to sufficiently allege RICO enterprise “longevity,” but concluded the plaintiffs acted diligently in seeking amendment and that the proposed amendment plausibly stated each claim under Rule 12(b)(6). The court emphasized that its ruling was procedural and driven by the allegations the plaintiffs added—many of which they claimed were learned through discovery—not by any factual findings about the franchisor’s conduct. The opinion illustrates how detailed allegations concerning franchise disclosures, Item 19-style financial representations, and interactions with corporate executives may survive at the pleading stage even where a franchisor denies wrongdoing.
Relevant Background
According to the allegations in the proposed amended complaint, Pool Scouts Franchising licenses a pool cleaning and service franchise system and, along with its parent company and certain executives, operated internal corporate locations in Virginia Beach. The plaintiffs allege that these internal operations were presented publicly as if they were typical franchise outlets, including in the franchisor’s FTC-regulated financial disclosure documents. The plaintiffs contend that those corporate outlets allegedly benefited from subsidized costs such as free workspace, unreported labor, waived rent, and operational support, and that financial information from those outlets allegedly appeared more profitable than it would have been had they operated as real franchise locations bearing full costs. They claim the franchisor used that data in 2019 and 2020 disclosure documents and in webinars directed at prospective franchisees.
The plaintiffs further allege that executives told them the data reflected the true and complete costs of operating a Pool Scouts franchise. They assert they relied on those materials and statements when they decided to purchase franchise licenses in 2020 and again in 2022. The franchisor disputes these allegations. The plaintiffs also allege that they did not discover the alleged inconsistencies until 2024 after speaking with a former employee who, according to the complaint, described manipulation of cost data and withholding of information.
The parties later entered additional agreements in 2022 and 2023. Those agreements contained release and choice-of-law provisions selecting Virginia law. The plaintiffs argue those later agreements are tainted by the same alleged misrepresentations that induced the initial agreements. The franchisor denies that any fraud occurred and argued that the releases and contractual time limits barred the new claims. The plaintiffs sought leave to amend only after the court dismissed their first amended complaint for failure to allege the “longevity” element of a RICO enterprise. The plaintiffs contend that new discovery materials allowed them to cure that deficiency. The franchisor opposed the motion based on timing, prejudice, and futility.
Decision
Judge Walker granted the plaintiffs leave to amend the complaint. He first concluded the plaintiffs showed “good cause” because they acted within a reasonable time after the court dismissed their earlier complaint and because their proposed amendments relied on information they alleged was unavailable to them before the amendment deadline. He emphasized that diligence, not perfection, governs this threshold inquiry.
The court next found no prejudice to the franchisor. It noted that the proposed amendment did not expand the scope of discovery, did not add new claims, and clarified the existing RICO allegations rather than introducing entirely new theories. The court also rejected the franchisor’s argument that the plaintiffs acted in bad faith, explaining that factual disagreements do not constitute dishonesty or improper purpose, and that none of the plaintiffs’ deposition testimony contradicted the core allegation that they would not have purchased the franchises but for the alleged misrepresentations.
Turning to futility, the court held that all proposed claims were sufficiently pleaded. As to fraud in the inducement, the court applied Texas law and concluded that the plaintiffs plausibly alleged misrepresentations about the accuracy and representativeness of financial disclosures. The court stressed that justifiable reliance—especially where disclosures are regulated by the FTC—is ordinarily a fact question. Although the franchisor argued the plaintiffs should have discovered any issues earlier, the court found the complaint did not conclusively establish that the alleged fraud was discoverable before 2024.
The court held the DTPA claim was also plausibly pleaded. It found the Texas statute of limitations substantive in nature and therefore controlled the claim’s accrual. Because the plaintiffs alleged they discovered the alleged misleading statements only months before filing suit, and because they alleged total “consideration” under the statute fell below $500,000, the claim could proceed at this stage.
The court then conducted an extensive RICO analysis and concluded the plaintiffs adequately alleged all elements, including enterprise, purpose, relationships, longevity, distinctness, conduct, and pattern. The court emphasized that at least 14 alleged predicate acts of wire fraud—based on the dissemination of disclosure documents to prospective franchisees—were sufficiently related and numerous to overcome the continuity threshold. The court also found that the alleged enterprise could be inferred from the corporate structure and that the alleged misconduct was not limited to a single transaction or isolated dispute. These conclusions were tied to the allegations at the pleading stage, not to any factual finding that a RICO violation occurred.
Finally, the court held the breach of contract claim survived because the plaintiffs alleged contractual duties related to marketing fees and that those fees were allegedly used to target households outside their territories. The franchisor did not challenge this claim on substantive grounds at this stage, and the court found it adequately pleaded in the alternative.
Looking Forward
This decision reflects how courts evaluate detailed allegations in franchise disputes at the pleading stage, especially when plaintiffs frame their claims around financial performance representations, disclosure documents, and communications occurring before contract execution. The ruling is inherently procedural and grounded in the standards of Rule 12(b)(6), but franchisors may view it as a reminder that courts often permit expansive claims—including civil RICO—to proceed past the initial pleadings when franchisees articulate specific, document-linked allegations. The case also underscores the importance for franchisors of maintaining consistent internal financial practices and ensuring that any financial information used in disclosure materials, webinars, or executive communications accurately reflects franchise operations. Further, because the court treated justifiable reliance and fraud discovery as fact questions, franchisors should anticipate that challenges to reliance may not be resolved early in litigation absent an undisputed factual record.
The court’s treatment of release provisions and contractual limitation clauses demonstrates that franchisors cannot always rely on those clauses to dispose of fraud-based claims at the amendment stage when franchisees allege the agreements themselves were induced by misrepresentation. While the franchisor may ultimately prevail after factual development, the ruling suggests courts may defer enforceability questions until a fuller evidentiary record exists.
Finally, the decision illustrates the importance of carefully managing franchise communications, understanding how financial data flows from corporate outlets to public disclosures, and being aware that multi-year contracting may complicate reliance and timing defenses. Although this ruling hinges on allegations, not findings, franchisors can draw lessons about litigation risk tied to financial disclosures in regulated industries and the need for coordinated review of materials presented to prospective franchisees.
This article is based solely on the opinion of the Court in this matter. The author has not conducted any independent investigation into the facts. For the avoidance of doubt, each statement related to the law and facts in this article is drawn from the Court’s opinion in this case.
Thomas O’Connell is a Shareholder at Buchalter APC and Chair of the firm’s Franchise Practice Group. For questions about this article or media inquiries, you can contact Tom at toconnell@buchalter.com.
This communication is not intended to create, and does not create, an attorney-client relationship or any other legal relationship. No statement herein constitutes legal advice, nor should it be relied upon or interpreted as such. This communication is for general informational purposes only and is not a substitute for legal counsel. Readers should not act or refrain from acting based on any information provided without seeking appropriate legal advice specific to their situation. For more information, visit www.buchalter.com.
