July 29, 2022
By: Thomas O’Connell
Citation:
Full Tilt Boogie, LLC v. Kep Fortune, LLC, Not Reported in Fed. Supp., 2022 WL 3018055 (C.D. Cal. July 29, 2022).
Executive Summary:
In an unreported decision, Judge Otis D. Wright II of the United States District Court for the Central District of California addressed motions for summary judgment in a contentious dispute between a franchisor (KEP Fortune, LLC) and a franchisee (Full Tilt Boogie, LLC). The case delves into allegations of fraud, breach of contract, and violations of franchise laws, under the California Franchise Investment Law (CFIL) and other related statutes. The court granted in part and denied in part both parties’ motions.
Relevant Background:
This case arose from a dispute between Full Tilt Boogie, LLC, a franchisee, and KEP Fortune, LLC, a franchisor operating under the trade name Klein Epstein & Parker. Klein Epstein & Parker stores specialize in made-to-measure clothing. KEP’s business model involves selling franchises and requiring franchisees to purchase inventory from pre-approved suppliers, as the franchisor does not manufacture its own products.
In August 2017, Full Tilt entered into a Franchise Agreement (FA) with KEP after reviewing KEP’s Franchise Disclosure Document (FDD). The FDD, which was registered with the California Department of Business Oversight, included specific representations required under the California Franchise Investment Law (CFIL). These representations stated, among other things, that KEP would not profit from purchases required of franchisees.
Full Tilt opened its first KEP-branded store in December 2017 at Caesar’s Palace in Las Vegas, later relocating to The Palazzo in 2019. During its operation, Full Tilt encountered significant issues with KEP, including delays in fulfilling inventory orders, restrictions on marketing (e.g., prohibiting online promotion of its new location), and inflated inventory and shipping costs. Full Tilt alleged that KEP charged higher prices than those paid to suppliers and concealed these markups, contrary to the FDD representations.
By October 2019, Full Tilt formally rescinded the Franchise Agreement, citing fraudulent misrepresentations, wrongful conduct, and CFIL violations. It then initiated legal action against KEP and its operators, Jeroen and Miray Bik, asserting multiple claims including fraud, breach of contract, and CFIL violations. KEP counterclaimed, alleging breach of contract and unfair competition, among other grievances. The dispute culminated in cross-motions for summary judgment, leading to the court’s ruling on key issues in July 2022.
Decision:
The court granted in part and denied in part the motions for summary judgment filed by both parties.
- The court granted the Defendants’ motion to dismiss Full Tilt’s claims for fraudulent misrepresentation, fraudulent omission, negligent misrepresentation, and violation of the Nevada Deceptive Trade Practices Act (NDTPA), holding that these claims were preempted by CFIL § 31306. The court emphasized that CFIL provides the exclusive remedy for fraud or misrepresentation in franchise disclosures, citing SpeeDee Oil Change Sys., 95 Cal. App. 4th 709 (2002).
- The court denied Defendants’ motion to dismiss Full Tilt’s claims for breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, and unfair business practices under California Business & Professions Code § 17200. It held that these claims arose independently of CFIL disclosure obligations and could proceed.
- The court denied Defendants’ motion to dismiss Full Tilt’s claim for violation of the CFIL based on timeliness. It found that the claim was filed within the four-year statute of limitations under CFIL § 31303. However, the court noted that factual disputes remained regarding whether the claim satisfied the one-year discovery rule.
- The court granted sanctions against Kep Fortune for discovery misconduct, including withholding evidence and failing to comply with court orders. As a result, the court allowed adverse inferences to be drawn against the Defendants regarding their inventory pricing practices and the alleged withholding of inventory.
- The court ordered the parties to submit a joint report within thirty (30) days proposing pretrial and trial dates. Additionally, the court directed the parties to engage in mediation within sixty (60) days, aiming to resolve the remaining disputes outside of trial.
The court dismissed several counterclaims brought by Kep Fortune for lack of sufficient evidence but allowed others, including breach of contract, to proceed. These counterclaims will be addressed at trial.
Looking Forward:
This decision highlights critical considerations for franchisors and franchisees alike:
- Franchisors must ensure FDDs are accurate and fully compliant with CFIL disclosure requirements. Misstatements or omissions can lead to liability and preempt common law claims.
- Franchisors should act in good faith when implementing contract terms, avoiding conduct that may hinder franchisee operations, such as inventory manipulation or lack of support.
- Clear delineation between franchise obligations and general business arrangements is crucial to avoid misclassification under franchise laws.
Notwithstanding of the above, the full lessons and implications of this case will be addressed in the summary of the subsequent proceedings, which will be published soon.