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Court Permits Franchisee to Seek Punitive Damages Against Franchise Broker
Posted in Damages

In another recent damages case, a federal court in Minnesota has granted in part a franchisee’s motion to add a claim for punitive damages, holding that the Federal Rules of Civil Procedure supersede state rules with respect to a franchisee amending its complaint to assert a claim for punitive damages. JTKB, LLC v. FranChoice, Inc., 2020 WL 2192337 (D. Minn. May 6, 2020). JTKB became a franchisee of ILKB kickboxing studios after engaging the services of franchise broker FranChoice. JTKB filed suit against FranChoice, alleging claims of fraud and misrepresentations regarding the ILKB franchise system. Because the case was in federal court under diversity jurisdiction, JTKB later moved to amend its complaint to seek punitive damages under Minnesota’s Rules of Civil Procedure. JTKB sought punitive damages on grounds that FranChoice, among other things, allegedly knew that ILKB’s founder was involved in bankruptcy proceedings over 10 years ago, that ILKB engaged in illegal marketing techniques, and that FranChoice misrepresented certain aspects about the ILKB franchise system, such as financial performance representations, the high end initial investment, that the business was a semi to fully absentee owner business, and the membership conversion rate was based upon ILKB’s marketing activities.

As an initial matter, the court applied the Federal Rules of Civil Procedure, rather than Minnesota’s rules, in analyzing whether to grant JTKB’s motion to amend. The Supreme Court has held that a federal court exercising diversity jurisdiction should not apply a state law if a federal rule “answer[s] the same question,” and would not violate the Rules Enabling Act. The court held that because Minnesota’s procedural law attempts to answer the same question as the federal law regarding when an amendment should be permitted, the federal rule shall apply as it would not violate the Rules Enabling Act. Under those rules, the court concluded that JTKB’s motion should only be granted with respect to the allegation that FranChoice made misrepresentations about the franchise system. The claims for punitive damages failed to allege sufficient facts, which if taken as true, would survive a motion for summary judgment. The court further explained that a showing of mere negligence is insufficient for punitive damages. However, the court found that JTKB alleged sufficient facts regarding FranChoice’s alleged misrepresentations about the system to be entitled to seek punitive damages on such grounds.

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