September 29, 2022
By: Thomas O’Connell
Citation:
JB Brothers, Inc. v. Poke Bar GA Johns Creek I, LLC, Not Reported in Fed. Supp., 2022 WL 17080158
Executive Summary:
In this unpublished decision, the United States District Court for the Central District of California, presided over by Judge Consuelo B. Marshall, granted summary judgment in favor of JB Brothers, Inc., the franchisor of the Poke Bar brand. The court found that all four counterclaims brought by the franchisees, including alleged violations of the California Franchise Investment Law (CFIL), fraud, violations of California’s Unfair Competition Law (UCL), and unjust enrichment, were either preempted by the CFIL or barred by its statute of limitations.
Relevant Background:
This proceeding follows the court’s June 2022 ruling, in which several of the franchisees’ counterclaims were dismissed as time-barred under the CFIL. JB Brothers, Inc., the franchisor of the Poke Bar brand, had entered into preliminary licensing agreements with Georgia-based franchisees in 2017, prior to its registration as a franchisor under California law. These agreements indicated that formal franchise agreements would be executed once registration was finalized.
Franchisees later filed counterclaims alleging that JB Brothers misrepresented its franchisor registration status and trademark ownership, causing financial damages. In the June decision, the court ruled that several of these counterclaims were barred by the CFIL’s strict statute of limitations.
In this proceeding, JB Brothers sought summary judgment to resolve the remaining counterclaims, arguing that they were either preempted by the CFIL or similarly time-barred. The case also examined whether JB Brothers’ operations qualified for exemptions from registration under California law.
Decision:
The court granted summary judgment in favor of JB Brothers, Inc. on all four counterclaims raised by the franchisees. The key aspects of the court’s decision are as follows:
- The franchisees alleged that JB Brothers violated Cal. Corp. Code § 31110 by selling unregistered franchises. JB Brothers argued that the CFIL’s registration requirements did not apply under Cal. Corp. Code § 31105, which exempts franchisors whose operations and customers are entirely outside California. The court found that because the franchisees’ businesses and customers were located in Georgia, JB Brothers qualified for this exemption.
- Additionally, the court reiterated its earlier ruling that the franchisees’ CFIL counterclaim was time-barred under Cal. Corp. Code § 31303. The court held that the franchisees had “inquiry notice” of JB Brothers’ registration status by September 2018 when franchise disclosure documents were sent. Since the counterclaims were not filed until 2021, they exceeded the CFIL’s one-year statute of limitations for discovering violations.
- The franchisees alleged that JB Brothers committed fraud by misrepresenting its franchisor registration status and claiming ownership of the “Poke Bar” trademark. The court held that the fraud claim was preempted by the CFIL under Cal. Corp. Code § 31306. It found that the alleged misrepresentations were already addressed within the scope of the CFIL, which provides an exclusive remedy for such claims. The court relied on Samica Enters. v. Mail Boxes Etc., 637 F. Supp. 2d 712 (C.D. Cal. 2008), which established that claims of misrepresentation falling under the CFIL cannot be pursued separately as common law fraud claims.
- The UCL counterclaim was based on the same allegations of misrepresentation that underpinned the CFIL and fraud claims. The court found that this claim was also preempted by the CFIL. The court cited Samica and similar cases, noting that the UCL claim was derivative of the CFIL claims and could not stand independently.
- The franchisees’ unjust enrichment counterclaim alleged that JB Brothers benefitted unjustly from their payments under the licensing agreements. The court dismissed this claim, finding it similarly preempted by the CFIL. The court reasoned that the unjust enrichment allegations were rooted in the same factual basis as the CFIL and fraud claims, making them subject to preemption.
Looking Forward:
This decision builds upon the lessons from the June 2022 ruling, further reinforcing the strategic importance of compliance, preparation, and the effective use of legal defenses in franchise disputes. Franchisors can draw the following insights from this case:
- Franchisors operating outside California can benefit from exemptions under Cal. Corp. Code § 31105, which exclude out-of-state operations from registration requirements. Properly structuring operations to qualify for such exemptions can significantly reduce compliance burdens and litigation risks.
- Franchisees must conduct thorough due diligence before entering agreements, including verifying the franchisor’s registration and compliance with applicable laws. Consulting legal counsel can help identify potential issues, such as unregistered franchises or incomplete disclosures.
- Franchisees must be vigilant about statutes of limitations. Delaying claims beyond statutory deadlines, as seen in these cases, can lead to the dismissal of otherwise valid grievances.