Argus Capital Management LLC v. The Grounds Guys SPV, LLC

[7] 8 UNITED STATES DISTRICT COURT 9 EASTERN DISTRICT OF CALIFORNIA [10] 11 ARGUS CAPITAL, Case No. 1:23-cv-00043 JLT 12 Plaintiff, ORDER DENYING DEFENDANTS’ MOTION TO DISMISS PURSUANT 13 v. FEDERAL CIVIL PROCEDURE RULES 12(b)(1) and 12(b)(6) 14 KATHLEEN ALLISON, PETER ALDANA, ROB BONTA, AND BRIAN (Docs. 15, 16, 20, 23) 15 CATES, 16 Defendants. [17] 18 The matter before the Court arises from the franchise agreement between Argus Capital 19 Management LLC and The Grounds Guys SPV LLC. The current dispute concerns the 20 enforceability of a mandatory out-of-state mediation provision. Specifically, an express 21 “condition precedent” requires Argus Capital, a California franchisee, to meet and mediate with 22 The Grounds Guys, the franchisor, in Texas before filing or initiating any action in court. Argus 23 Capital filed a complaint in this Court alleging fraud-based claims against The Grounds Guys. 24 The Grounds Guys filed two motions: (1) a motion to dismiss under Federal Civil Procedure 25 Rules 12(b)(1) and 12(b)(6) and (2) a motion to compel arbitration arguing Argus Capital failed 26 to comply with the express “condition precedent” and mediate in Texas before initiating the 27 ongoing action.1 Argus Capital opposes dismissal and argues the out-of-state “the mediation [28] 1 prerequisite” is unenforceable under the California Franchise Relations Acts and unconscionable 2 under California law. For reasons further discussed below, the Court DENIES Defendants’ 3 motion to dismiss. 4 BACKGROUND 5 On January 9, 2023, Argus Capital Management LLC (Argus Capital) initiated suit 6 against The Grounds Guys SPV LLC (TGG) by filing a complaint (Doc. 1) in this Court alleging 7 (1) Fraudulent Misrepresentation; (2) Negligent Misrepresentation; (3) Fraudulent Inducement; 8 (4) Fraudulent Nondisclosure and (5) Violation of the Texas Deceptive Trade Practices Act. On 9 March 10, 2023, TGG filed motions to dismiss and compel arbitration (Docs. 6, 8), which this 10 Court denied as moot following Argus Capital filing a first amended complaint (FAC) as of right 11 pursuant to Federal Civil Procedure Rule 15(a)(1)(B). (See Doc. 13.) Argus Capital filed the 12 FAC on March 27, 2023, naming TGG and Russ Meier, a TGG Director of Franchise 13 Development, as defendants (collectively “Defendants”). (See generally Doc. 11.) Plaintiff’s 14 FAC included additional facts and allegations but alleged the same fraud-based claims: (1) 15 Fraudulent Misrepresentation; (2) Negligent Misrepresentation; (3) Fraudulent Inducement; (4) 16 Fraudulent Nondisclosure and (5) Violation of the Texas Deceptive Trade Practices Act. (Id.) In 17 lieu of filing an answer, Defendants filed a pre-answer motion to dismiss (Doc. 15) and motion to 18 compel arbitration (Doc. 20) thereby tolling Defendants’ time to file an answer while the Court 19 ponders the merits of the motions. See Fed. Civ. P. 12(a)(4); (See generally Doc. 14, Stipulation 20 Extending Time to Respond to First Amended Complaint.) The Court considers Defendants’ 21 motion to dismiss (Doc. 15) and responsive arguments below. 2 22 A. The TGG Franchise Agreement 23 Argus Capital is a California LLC with its principal place of business in Prather, 24 California. (Doc. 11. at 2.) Jason Peterson owns and operates Argus Capital. (Id.) TGG is a 25 Delaware LLC “offer[ing] franchises in full-service lawn case and landscape solutions” and its 26 principal place of business in Waco, Texas. (Id.) Meier is a Director of Franchise Development. [27] 28 2 Defendants also filed a motion to compel arbitration (Doc. 17) and acknowledges “[t]hat motion would be rendered 1 Peterson began working with Defendants to establish a franchise outlet in Central California in 2 September 2021. (Id. at 9) Peterson signed and entered into a franchise agreement with 3 Defendants on October 4, 2021, and assigned his rights to Argus Capital on December 20, 2021. 4 (Id.) 5 Plaintiff attached a true and accurate copy of the “Addendum to Franchise Agreement for 6 Residents of California” (“California Addendum”) to its FAC and alleges the addendum 7 establishes this Court’s subject matter jurisdiction and personal jurisdiction over Defendants. 8 (See Doc. 11 at 4, Ex. A.) The California Addendum states, in pertinent part, the following: 9 1. The provisions of this Addendum form an integral part of, and are incorporated into the Franchise Agreement. This Addendum is being executed because: (a) the 10 offer or sale of the franchise to Franchisee was made in the State of California; (b) Franchisee is a resident of the State of California; and/or (c) the Franchised 11 Business will be located or operated in the State of California. 12 2. California Business and Professions Code Sections 20000 through 20043, the California Franchise Relations Act, provide rights to the franchisee concerning 13 termination, transfer or non-renewal of a franchise If the franchise agreement contains a provision that is inconsistent with the law, the law will control. [14] 3. Except as expressly modified by this Addendum, the Franchise Agreement 15 remains unmodified and in full force and effect. 16 (Id.) Plaintiff also attached pages of TGG Franchise Disclosure Statement (“FDD”): 17 Section in Provision Franchise Summary 18 Agreement (unless [19] otherwise specified) [20] t. Integration/ merger clause 14(B) Only the terms of the Franchise Agreement 21 are binding (subject to state law). Any other promises may not be enforceable. 22 Nothing in the Franchise Agreement or any related agreement is intended to disclaim 23 our representations made in this disclosure document. 24 u. Dispute resolution by arbitration 11 Most disputes must be initially mediated. If or mediation a dispute is not resolved through the [25] mediation process described in the Franchise Agreement, most disputes must [26] be settled by litigation, subject to state law. 27 Only if a court invalidates a jury waiver or a class action waiver will the dispute be 28 resolved through arbitration, subject to 1 state law. [5] v. Choice of venue 14(H) Unless local law supersedes this provision, 6 venue for mediation, arbitration, and litigation is in McLennan County, Texas. 7 w. Choice of law 14(G)(1) Texas law applies unless local state law supersedes this provision. [8] 9 The Franchise Agreement contains a “Dispute Resolution” section with the following relevant 10 provisions: 11.A Mediation Before any party may bring an action in court or against the 11 other, or commence an arbitration proceeding (except as noted in Section 11.B below), the parties must first meet to mediate the dispute. The mediation will 12 be held in McLennan County, Texas. Any such mediation shall be nonbinding and shall be conducted by the American Arbitration Association (the 13 “AAA”) in accordance with its then-current rules for mediation of commercial disputes unless the parties agree otherwise in writing.3 [14] 11.C Litigation Except as provided in Section 11.D., any dispute between you 15 and us or any of our or your affiliates, . . . arising under, out of, in connection with or in relation to this Agreement, the parties’, relationship, or your 16 Business . . . not resolved through mediation under Section 11.A must be submitted to litigation pursuant to Section 14.H. [17] 11.D Arbitration If a court of competent jurisdiction determines that Section 18 14.I (Jury Waiver) and/or Section14.J (No Class or Consolidated Actions) is invalid or unenforceable . . . Dispute must be submitted to binding arbitration 19 under the authority of the Federal Arbitration Act and must be determined by arbitration administered by the AAA [20] 14. G Interpretation of Rights and Obligations: 1. Applicable Law and 21 Waiver: The parties agree that the execution of this Agreement and the acceptance of its terms occurred in the state of Texas. . . the parties’ rights 22 under this Agreement, and the relationship between the parties under this Agreement are governed by, and will be interpreted in accordance with, the 23 laws (statutory and otherwise) of the state of Texas (excluding any conflicts of laws principles). [24] 14.H Venue Any dispute between you and us or any of our or your affiliates, 25 including without limitation . . . including disputes not resolved through mediation, must be brought in the state or federal district court located in 26 McLennan County, Texas. Both parties hereto irrevocably submit themselves to, and consent to, the jurisdiction of said courts and specifically waive any [27] 28 3 The provision at issue is 11C. Mediation (“mediation provision”). 1 objection to the jurisdiction and venue of such courts. The parties specifically waive the right to remove any action brought in the state court of McLennan 2 C ounty, Texas to a federal district court. 3 B. Prior Attempts to Mediate 4 On July 14, 2022, Plaintiff sent Defendant TGG a request to participate in a joint 5 mediation. The joint mediation would include Plaintiff and two other California franchisees, 6 Dean Mellos and Andrew Choi, with “essentially identical” grievances. Defendant TGG declined 7 joint mediation on the grounds separate mediations were necessary. Following an unsuccessful 8 mediation with California franchisee Choi, Defendant filed an action in Texas against Choi. 9 Plaintiff asserts that it filed the current action “in light of TGG’s refusal to participate in . . . joint 10 mediation, and aware that TGG filed a preemptive lawsuit against California franchisee Mellos 11 prior to engaging in mediation.” (Doc. 20 at 7.) On February 24, 2023, Defendants TGG sent a 12 “meet and confer” letter to Plaintiff stating the FAC should be dismissed “on the grounds that 13 Plaintiff failed to satisfy the mediation pre-condition before filing” suit. (Id.) On March 2, 2023, 14 a meet and confer call occurred in which Plaintiff “offered a stay to allow for a mediation or, in 15 the alternative, offered to stipulate to a voluntary dismissal provided that the parties would agree 16 that any action filed within a specified period. . . had to be filed in the Eastern District of 17 California [;]” but Defendants rejected the proposals. (Id. at 8.) 18 DEFENDANTS’ MOTION TO DISMISS 19 Pursuant Federal Civil Procedure Rule 12(b)(1) and/or Rule 12(b)(6) Defendants move to 20 dismiss Plaintiff’s FAC “in its entirety without prejudice and allow [Defendants] to file a motion 21 to recover its attorney’s fees.” (See Doc. 15 at 8.) Defendants contend Plaintiff failed to comply 22 with an expressed pre-condition of the parties’ Franchise Agreement requiring the parties engage 23 in mediation prior to “initiating an action in court.” (Id.) Defendants direct the Court to Section 24 11C of the Franchise Agreement for the express pre-condition, (11.C Mediation4) and urges the 25 Court to incorporate by reference the entire Franchise Agreement and take judicial notice (see 26 generally Doc. 16) of the agreement despite Plaintiff’s failure to attach the entire Agreement to 27 the FAC. (Doc. 15 at 8.) Defendants request judicial notice because “the FAC incorporates by [28] 1 reference, attaches in part and repeatedly quotes the Franchise Agreement.” (Id.) Defendants also 2 anticipate Plaintiff raising an argument based on unconscionability regarding the mediation 3 provision and assert any contention is entirely without merit, and “as an assignee to the Franchise 4 Agreement,” Plaintiff “waived any claim that the dispute resolution provision of the [] Agreement 5 is unconscionable.” (Id.) Defendants request “judicial notice of the assignment and its terms” for 6 the same reason, “the assignment is incorporated by reference into the FAC.” (Id. at n. 2.) In the 7 alternative, “and solely in the event the Court is not inclined to dismiss this action as a result of 8 Argus’ failure to mediate or compel arbitration,” Defendants request Plaintiff’s FAC be dismissed 9 under Federal Civil Procedure Rule 9(b) for failure to “allege with particularity facts sufficient to 10 support any of its purported fraud based claims” and “because such claims have all been released 11 by Argus’ predecessor-in interest to the Franchise Agreement.” (Id. at 11.) 12 In opposition to Defendants’ motion to dismiss, Plaintiff request the Court deny the 13 motion or stay the action while the parties mediate before a magistrate judge of this Court to 14 facilitate good faith. (Doc. 20 at 8.) Plaintiff contends the following warrants denying the 15 motion, that: (1) Defendants failed to meet and confer, (2) that Defendants “waived the mediation 16 requirement by rejecting Plaintiff’s request to mediate,” (3) “the mediation venue provision 17 requiring mediation in Texas is void,” and (4) “the mediation provision is unenforceable” because 18 it is “substantively and procedurally unconscionable under both California and Texas law.” (See 19 generally Doc. 20 at 9-16.) 20 LEGAL STANDARD 21 A. Federal Civil Procedure Rule 12(b)(1) 22 Cases are presumed to fall outside a federal court’s limited jurisdiction until proven 23 otherwise. Kokkonen v. Guardian Life Ins. Co. of Am., 511 U.S. 375, 377-781 (1994). Under 24 Federal Civil Procedure 12(b)(1) a party may challenge subject matter jurisdiction by facial of 25 factual attack. Johnson v. Tackett, 272 F. Supp. 3d 1198, 1201 (E.D. Cal. 2017); see also 26 Ruhrgas AG v. Marathon Oil Co., 526 U.S. 574, 583-84 (1999). “In a facial attack, the court 27 assumes the complaint’s allegations are true and assesses jurisdiction in a light most favorable to 28 plaintiff.” Johnson, 272 F. Supp. 3d T 1201 (citing Safe Air for Everyone v. Meyer, 373 F.3d 1 1035, 1039 (9th Cir. 2004)). Though “a factual attack challenges the veracity of plaintiff's 2 jurisdictional facts, or contends a necessary jurisdictional fact is absent.” Id. “The allegations are 3 not presumed to be true and “the district court is not restricted to the face of the pleadings, but 4 may review any evidence, such as affidavits and testimony, to resolve factual disputes concerning 5 the existence of jurisdiction.” Id. 6 B. Federal Civil Procedure Rule 12(b)(6) 7 Under Rule 12(b)(6), a district court must dismiss a complaint if it fails to state a claim 8 upon which relief can be granted. In ruling on a motion to dismiss, the court may consider only 9 “the complaint, materials incorporated into the complaint by reference, and matters of which the 10 court may take judicial notice.” Metzler Inv. GmbH v. Corinthian Colls., Inc., 540 F.3d 1049 , 11 1061 (9th Cir. 2008). In deciding whether the plaintiff has stated a claim, the Court must assume 12 the plaintiff’s allegations are true and draw all inferences in the plaintiff’s favor. Usher v. City of 13 L.A., 828 F.2d 556, 561 (9th Cir. 1987). However, the Court is not required to accept as true 14 “allegations that are merely conclusory, unwarranted deductions of fact, or unreasonable 15 inferences.” In re Gilead Scis. Sec. Litig., 536 F.3d 1049, 1055 (9th Cir. 2008) (citation omitted). 16 DISCUSSION 17 I. PRELIMINARY MATTERS 18 A. Meet and Confer Requirement 19 As an initial matter, the Court addresses Plaintiff's meet and confer argument. (See 20 generally Doc. 20 at 9.) For clarification purposes, the Court issued an Order to Show Cause 21 (Doc. 36) requiring the parties to “engage in a substantive meet and confer process related to the 22 issues raise in the motions and in the entire litigation as they relate to mediation, and to file a joint 23 statement whether the Plaintiff’s willingness to mediate resolves the substantive issues raised in 24 the motions.” (Doc. 36 at 2.) The parties complied with the Court’s order and timely filed a joint 25 statement explaining their positions. (See Doc. 37.) Plaintiff explained that it filed suit in this 26 Court to “preserve [its] contractual and statutory right to file the action in California” following a 27 failed attempt mediate with Defendants. Plaintiff explained, before filing its complaint on 28 January 9, 2023, it “attempted to set up a joint mediation” in July 2022. The proposed joint 1 mediation would include Argus and “two other California franchisee . . . [with] nearly identical 2 claims against TGG” (see Doc. 20 at 5), but Defendant TGG rejected the request and filed “a 3 preemptive action in McLennan County, Texas” against Dean Mellos and Mellos LLC, one of the 4 California franchisees, also represented by Argus’s counsel. (Doc. 37 at 2.) Plaintiff asserts that 5 it has offered to mediate “over the last two years,” and the most recent attempt being at the Court 6 ordered meet and confer in which Plaintiff proffered “two alternative proposals:” (1) “[T]here be 7 no dismissal and … the parties stipulate to stay the action 60 days while undertaking a 8 mediation;” or (2) “Dismissal and the parties agree to undertake a mediation within 60 days, and 9 for any action between the parties filed after dismissal and up to the 30 days following the end of 10 mediation, TGG agrees to the Eastern District of California as the forum and a tolling agreement 11 that the statute of limitations is tolled starting when the present action was filed up through 30 12 days after mediation.” (Id.) Defendants did not agree to either proposal. Plaintiff infers an 13 ulterior motive: “Ultimately [Defendants] wants a dismissal so it can turn around and file an 14 action in McLennan County, Texas. If TGG’s request truly had to do with mediating the matter, 15 it would have agreed to a mediation without any preconditions at some point between July 14, 16 2022, and February 2025.” (Id. at 3.) 17 Defendants explained its position: “Argus was contractually obligated pursuant to the 18 terms of its franchise agreement to mediate with TGG in McLennan County, Texas prior to 19 commencing an arbitration in McLennan County, Texas [;]” but “Argus filed this lawsuit, instead 20 of an arbitration, without first mediation with TGG.” (Id. emphasis included.) Defendants stated 21 prior attempts to mediate were always rejected because Plaintiff “has set forth preconditions . . . it 22 has no right to demand under the franchise agreement” and the pending motion to dismiss “is 23 based in part on [Plaintiff’s] failure to mediate prior to filing this action, as well as a motion to 24 compel arbitration in McLennan County, Texas pursuant to the terms of the franchise agreement 25 between [Plaintiff] and TGG.” (Id.) At the Court ordered meet and confer, Defendants 26 maintained its position stating, Plaintiff “continues to demand that any mediation be subject to 27 preconditions imposed by Argus.” (Id. at 4.) Defendants explained its “unwilling[ness] to agree” 28 to either of Plaintiff’s alternative proposals. In response to Plaintiff’s “proposed a mediation 1 subject to its precondition that this matter be stayed, not dismissed, pending the mediation,” 2 Defendants stated, “TGG is unwilling to agree to such a precondition as it would further deprive 3 TGG of its right under the franchise agreement that the mediation take place prior to any active 4 lawsuit and reward Argus for its noncompliance with the express terms of the franchise 5 agreement.” (Id.) Defendants “countered that it would agree to mediation” if Plaintiff dismissed 6 the pending lawsuit, but Plaintiff rejected the proposal. As for Plaintiff’s second proposal, “a 7 mediation with a dismissal of this action subject to tolling and TGG agreeing that the United 8 States District Court for the Eastern District of California is the proper forum,” Defendants stated 9 it “has no objection to mediation subject to tolling [;]” however, “it has a pending motion to 10 compel arbitration that explains in detail why the proper forum for this matter is arbitration in 11 McLennan County, Texas.” (Id.) 12 The Court finds the parties sufficiently clarified their positions in the ongoing matter and 13 adequately explained why Plaintiff’s willingness to mediate did not resolve substantive issues 14 raised in Defendants concurrently filed motions (Docs. 15, 17). (See generally Doc. 37.) Based 15 on the parties’ detailed account of the meet and confer efforts conducted by telephone on 16 February 12, 2025, and emails between February 14, 2025, and February 17, 2025, the Court 17 finds both parties engaged in good faith efforts to resolve the ongoing issues. (Id.) For these 18 reasons, the Court deems the meet and confer requirement established by the Court’s Standing 19 Order satisfied. Accordingly, the Court disregards the parties’ meet and confer arguments (see 20 generally Doc. 20 at 9, Doc. 23 at 5-6) and declines to deny the pending motion to dismiss (Doc. 21 15) for failure to meet and confer. 22 B. The Parties’ Objections 23 Defendants “object to, and request the Court strike, the evidence submitted” in support of 24 Plaintiff’s Opposition (see generally Doc. 20) “on the grounds that the evidence is outside the 25 allegations of the FAC, is not an exhibit attached to, or incorporated by reference in, the FAC 26 and/or is not subject to judicial notice.” (Doc. 26 at 2.) Plaintiff objects to Defendants’ Reply 27 Brief (Doc. 23) and “supporting papers filed . . . on the grounds that it contains new evidence not 28 included in the underlying Motion [;]” and “to the extent that it omitted discussion regarding 1 mediation that occurred prior to the filing of Defendants’ Reply.” (See Doc. 27 at 2.) Plaintiff 2 asserts the Declaration of Aaron P. Rudin included “purported new evidence regarding the 3 parties’ mediation discussions” but “omitted Plaintiff’s further request for mediation.” (Id.) 4 Defendants’ objection is OVERRULED because: (1) the evidence submitted by Plaintiff 5 is not outside the allegations of the FAC; and (2) the objection is “boilerplate and devoid of any 6 specific argument or analysis as to why any particular exhibit or assertion in a declaration should 7 be excluded.” Plaintiff’s objection is also OVERRULED for it appears to assert irrelevancy 8 without legal argument or analysis. 9 C. Judicial Notice 10 Defendants request the Court take judicial notice of the following records: (1) the TGG 11 Franchise Agreement “entered into between nonparty Jason Robert Peterson [] and TGG with an 12 effective date of October 4, 2021,” (2) “[p]ortions of TGG’s Franchise Disclosure Document, 13 dated March 31, 2021, as amended September 1, 2021,” and (3) the “Assignment of Franchise 14 Agreement & Guaranty entered into between TGG, Peterson and plaintiff Argus Capital 15 Management, LLC with an effective date of December 22, 2021.” (Doc. 16 at 1-2.) 16 a. Legal Standard 17 “When ruling on a Rule 12(b)(6) motion to dismiss, if a district court considers evidence 18 outside the pleadings, it must normally convert the 12(b)(6) motion into a Rule 56 motion for 19 summary judgment, . . ..” United States v. Ritchie, 342 F.3d 903, 907 (9th Cir. 2003). However, 20 the court may consider “documents attached to the complaint, documents incorporated by 21 reference in the complaint, or matters of judicial notice” without converting the motion. Id. 22 b. Incorporation by Reference 23 If a document is not attached to a complaint, “it may be incorporated by reference into a 24 complaint if the plaintiff refers extensively to the document or the document forms the basis of 25 the plaintiff’s claim.” Ritchie, 342 F.3d 903 at 908 . However, the mere mention of the existence 26 of a document is insufficient to incorporate the contents of a document. Khoja v. Orexigen 27 Therapeutics, Inc., 899 F.3d 988, 1002 (9th Cir. 2018). Nonetheless, a document may still form 28 the basis of the plaintiff's claim where “the claim necessarily depended on the [document].” Id. 1 (citing Knievel v. ESPN, 393 F.3d 1068, 1076 (9th Cir. 2005)). 2 Defendants are correct to argue and request incorporation by reference of the entire 3 Franchise Agreement as Plaintiff frequently refers to the agreement throughout its FAC. (See 4 generally Doc. 11 at ¶¶ 4, 15, 37, Ex. A.) Plaintiff also presumes the dispute resolution provisions 5 are valid but that they demonstrate unconscionability. (Id.) Likewise, the attached California 6 Addendum provides the following language: “the provisions of this Addendum form an integral 7 part of, and are incorporated into the Franchise Agreement.” (Id.) The express language supports 8 and requires incorporation of the Franchise Agreement. See Ritchie, 342 F.3d at 908 Plaintiff’s 9 CFRA and enforceability arguments are premised on the mediation provision validity. Id. (If 10 Plaintiff refers extensively to the document, the document is incorporated by reference into a 11 complaint.). Most determinative here is Plaintiff does not dispute the authenticity of the Franchise 12 Agreement, rather disputes legal enforceability. For these reasons, Defendants’ request for 13 incorporation by reference of the Franchise Agreement is GRANTED. The incorporation 14 includes the agreement’s assignment and release provision: 15 5. Release In consideration of Franchisor’s approval of this Assignment, Franchisee hereby releases and forever discharges Franchisor . . . of and from any 16 and all causes of action, liability, damages and claims whatsoever, including but not limited to claims arising from contract, regulation, statute, tort, in any way 17 connected with the Franchise Agreement or the offer and sale, development and operation of the Franchise, or Franchisor’s own negligence, known or unknown, 18 direct or indirect, which Franchisee might or could have against Franchisor, from the beginning of time to the effective date of this Assignment. [19] 20 (See Doc. 17-3 “Assignment of Franchise Agreement & Guaranty”.) To the extent defendants 21 request contains documents disputed by the parties, the disputed documents are disregarded and 22 excluded from incorporation by reference. 23 Defendants also request judicial notice of “[p]ortions of TGG’s Franchise Disclosure 24 Document, dated March 31, 2021, as amended September 1, 2021,” and Plaintiff does not appear 25 to object (see generally Doc. 27). Defendants do not specify whether they seeks judicial notice 26 under Rule 201 or via incorporation by reference, nor do they provide any analysis as to whether 27 this document is properly noticed. The failure to offer this analysis constitutes a waiver of the [28] 1 issue. Thus, Court DENIES Defendants’ request for judicial notice of the FDD.5 2 II. DEFENDANTS’ ARGUMENTS UNDER FEDERAL CIVIL PROCEDURE 3 RULE 12(b)(1). 4 Defendants contend dismissal is appropriate under Rule 12(b)(1) for lack of subject matter 5 jurisdiction. Defendants point to the Franchise Agreement mediation provision requiring the 6 parties to first meet and mediate before filing any action in court. (Doc. 15 at 13.) Defendants 7 argue “the plain language of [the] provision establishes that mediation is a condition precedent to 8 [Plaintiff] initiating this suit” and Plaintiff “cannot allege that it mediated its dispute with TGG 9 prior to initiating this lawsuit.” As a result of Plaintiff’s failure to satisfy the expressed pre10 condition to meditate, Defendants contend the lawsuit is “premature” and request the Court to 11 dismiss Plaintiff’s FAC without prejudice. (Id. at 15.) Defendants cite Delamater v. Anytime 12 Fitness, Inc. 722 F.Supp.2d 1168 (E.D. Cal. 2010) for its pre-condition contention. 13 Plaintiff asserts “as a matter of law, the mediation venue provision requiring mediation in 14 Texas is void.” (Doc. 20 at 10.) Plaintiff cites the California Addendum agreement attached to 15 the FAC (Doc. 11, Ex. A) explaining, “the parties executed an Addendum to the Franchise 16 Agreement, which voids or supersedes the Texas venue provisions of the Franchise Agreement.” 17 (Id.) Specifically, “[t]his Addendum is being executed because: (a) the offer or sale of the 18 franchise to Franchisee was made in the State of California; (b) Franchisee is a resident of the 19 State of California; and/or (c) the Franchised Business will be located or operated in the State of 20 California [;]” and “California Business and Professions Code Sections 20000 through 20043, 21 the California Franchise Relations Act, provide rights to the franchisee . . .. If the franchise 22 agreement contains a provision that is inconsistent with the law, the law will control.” (Id. 23 emphasis added.) Based on the California Addendum, “the parties expressly contracted to apply 24 the California Franchise Relations Act [;]” therefore, “California law applies to venue 25 determination.” (Id.) Plaintiff relies heavily on Cal. Bus. &. Prof. Code section 20040.5 stating, 26 “[a] provision in a franchise agreement restricting venue to a forum outside this state is void with [27] 5The portion of the FDD at issue does not speak to the adequacy of the FAC nor does it attempt to demonstrate that 28 Plaintiffs engaged in “artful pleading.” Khoja at 1003 . More important, the information found on this portion of the 1 respect to any claim arising under or relating to a franchise agreement involving a franchise 2 business operating within this state.” 3 Before discussing the merits, the Court must address the vagueness surrounding 4 Defendants’ Rule 12(b)(1) motion. As briefed, the parameters of Defendants’ 12(b)(1) arguments 5 are unclear because Defendants avoid using the jurisdictional language and terms outside the 6 quoted legal standard. (See generally Doc. 15.) A Rule 12(b)(1) motion is a jurisdictional 7 challenge to the Court’s subject matter jurisdiction. Safe Air for Everyone, 373 F.3d at 1039. The 8 jurisdictional attack may be facial or factual. Id. (citing White v. Lee, 227 F.3d 1214, 1242 (9th 9 Cir.2000)). “In a facial attack, the challenger asserts that the allegations contained in a complaint 10 are insufficient on their face to invoke federal jurisdiction. By contrast, in a factual attack, the 11 challenger disputes the truth of the allegations that, by themselves, would otherwise invoke 12 federal jurisdiction.” Safe Air for Everyone, 373 F.3d at 1039. Defendants do not appear to 13 challenge subject matter jurisdiction in the classic manners. However, based on the thorough 14 Rule 12(b)(6) arguments, the Court infers any residual arguments be subject to Rule 12(b)(1) 15 analysis. (Cf. Doc. 15 at 13-21, 21-22.) Defendants rely on the Franchise Agreement mediation 16 provision and argue its enforceability. Defendants jurisdictional challenge is premised on finding 17 Plaintiff’s FAC is premature and improperly before this Court. In other words, Defendants’ 18 motion is a facial attack on a jurisdictional prerequisite. Plaintiff contends the mediation 19 provision is unenforceable and violate the California Franchise Relations Act (CFRA) and 20 Business & Professions Code § 20040.5. After clarifying the motion parameters and arguments, 21 the Court proceeds to the merits. 22 A. Enforceability: The Mediation Provision (11.C Mediation) 23 Defendants point to the choice of law provision to support their position. In light of the 24 California Addendum, which explicitly states with express, unambiguous language that California 25 applies, the choice of law provision provides little assistance to the enforceability of the 26 mediation provision. See also the Franchise Agreement Choice of Law stating conflicts of law 27 principles supersede Texas law. (14. G Interpretation of Rights and Obligations “the parties’ 28 rights under this Agreement, and the relationship between the parties under this Agreement are 1 governed by, and will be interpreted in accordance with, the laws (statutory and otherwise) of the 2 state of Texas (excluding any conflicts of laws principles).”) “Enforcing the franchise 3 agreement’s choice of law provision would enable Defendant to impose an out-of-state mediation 4 requirement, which conflicts with CFRA’s express protections. Under California law, a choice of 5 law provision is unenforceable if it contravenes fundamental public policy. See Winter v. 6 Window Fashions Professionals, Inc., 166 Cal. App. 4th 943 (2008). Though not directly on 7 point, California courts have refused to enforce out-of-state choice of law provisions in franchise 8 agreements if in doing so undermines CFRA’s protections. See Nygaard v. Prop. Damage 9 Appraisers, Inc., No. 16-CV-02184-VC, 2017 WL 1128471 (E.D. Cal. 2017); see also Laxmi 10 Investments, LLC v. Golf USA, 193 F.3d 1095 (9th Cir. 1999). Based on the incorporated 11 Franchise Agreement and the California Addendum attached to Plaintiff’s FAC, the Court finds 12 the choice-of-law clause selecting Texas law as governing the terms of the agreement 13 unenforceable to the extent that it violates the CFRA. 14 Even still, Defendants assert California’s conflict of law principles uphold enforcing the 15 choice of law provision. CFRA’s section 20040.5 states, 16 A provision in a franchise agreement restricting venue to a forum outside this state is void with respect to any claim arising under or relating to a franchise agreement 17 involving a franchise business operating within this state. 18 The mediation provision reads, 19 Before any party may bring an action in court or against the other, or commence an arbitration proceeding . . . the parties must first meet to mediate the dispute. The 20 mediation will be held in McLennan County, Texas. Any such mediation shall be non-binding. . .. [21] 22 Contrary to CFRA, the mediation provision mandates all disputes arising out of the Franchise 23 Agreement be addressed through mediation in Texas before initiating any suit in court. 24 Defendants asserts the meditation provision is enforceable under California conflict of law 25 rules and cite Delamater v. Anytime Fitness, Inc., 722 F.Supp.2d 1168 (E.D. Cal. 2010). 26 However, Delamater is easily distinguished from the matter before the Court. The mediation 27 provision in Delamater was not restrictive and did not violate the CFRA by requiring out-of-state 28 mediation. “The Franchise Agreements explicitly state that Delamater and Anytime Fitness will 1 mediate disputes relating to the Franchise Agreement or franchise relationship prior to initiating 2 litigation or arbitration: 3 We each agree to enter into mediation of all disputes involving this Agreement or any other aspect of this relationship, for a minimum of for (4) hours, prior to 4 initiating any legal action or arbitration against the other. 5 Delamater, 722 F. Supp. 2d at 1177 . Thus, because the Delamater mediation agreement merely 6 required mediation for a four-hour period, but did not attempt to impose a particular location, it 7 did not violate CFRA. 8 Defendants contend that “Section 20040.5 is entirely inapplicable to the mediation 9 provision because the mediation provision does not restrict ‘venue’.” (Doc. 23 at 8.) They urged 10 the Court to disregard Plaintiff’s argument that the term “venue” as used in Section 20040.5 is not 11 ambiguous. (Doc. 23 at 8.) However, courts broadly interpret Section 20040.5 to prevent 12 franchisors from imposing procedural barriers that effectively deny California franchisees access 13 to local courts. See Bridge Fund Capital Corp. v. Fastbucks Franchise Corp., 622 F.3d 996 , 14 1005 (9th Cir. 2010). The mediation provision undoubtedly delays and burdens Plaintiff’s, a 15 California franchisee, ability to litigate in the state of California by requiring out-of-state 16 mediation prior initiating an action in court. At its core, the mediation provision functions as a 17 procedural barrier that obstructs access to California courts which is contrary to California public 18 policy. For these reasons, the Court finds the mandatory mediation provision unenforceable and 19 void under CFRA. Notwithstanding the Court’s finding, the Court still considers the parties’ 20 unconscionable argument. 21 B. Unconscionability: The Mediation Provision (11.C Mediation) 22 Defendants contend Plaintiff’s unconscionability arguments are without merit and waived 23 under Texas law. In arguing choice-of-law, Defendants point to the Agreement’s choice of law 24 clause designating Texas as the jurisdictional law that governs the terms of Agreement and any 25 disputes arising from it. (Doc. 20 at 15.) Defendants also argue California’s conflict-of-law rules 26 deem Texas law applicable “to any claim by [Plaintiff] that the mediation prerequisite is 27 unconscionable.” (Id. at 15-16.) Defendants contend that, under a California conflict-of-law 28 analysis, there is a substantial relationship between the state of Texas and the parties and/or their 1 transactions and a reasonable basis for the parties’ choice of Texas law. (Id. at 16.) Moreover, 2 “the application of Texas law is not contrary to any fundamental public policy of California.” 3 (Id.) Assuming this, Defendants argue that Plaintiff’s unconscionability arguments are without 4 merit and fail because “Argus cannot show that the mediation provision in the Franchise 5 Agreement is procedurally or substantively unconscionable.” (Id. at 17.) Defendants contend 6 “[u]nder Texas law, unconscionability, must be satisfied both procedurally and substantively.” 7 (Id. (quoting Insurance Distribution Consulting, LLC v. Freedom Equity Group, LLC, 2022 WL 8 1491967 at *4 (S.D.Tex. 2022)). 9 Defendants further assert equitable estoppel arguing, “Argus should also be equitably 10 estopped from arguing that the mediation provision is inapplicable to its claims against Meier” 11 because the claims against “Meier each rely on, refer to and presume the existence of the 12 Franchise Agreement,” and allege “identical conduct, not just substantially interdependent and 13 concerted conduct, by both [defendants] TGG and Meier.” (Id. at 19-20.) Defendants explain, 14 “[w]hen each of a signatory’s claims against a nonsignatory makes reference to or presumes the 15 existence of the written agreement, the signatory’s claims arise out of and relate directly to the 16 written agreement” Texas law applies equitable estoppel. (Id. at 19 (quoting Meyer v. WMCO– 17 GP, L.L.C., 211 S.W.3d 302, 305-306 (Tex. 2006).) Therefore, “Argus is equitably estopped … 18 from asserting that the mediation provision of the Franchise Agreement is inapplicable to its 19 claims against Meier.” (Id. at 20.) 20 Lastly, Defendants argue Plaintiff’s unconscionability arguments were waived and/or 21 “released and discharged.” (Id. at 21.) Defendants contend Plaintiff “lacks standing to assert any 22 fraud claims against TGG or that the Franchise Agreement was unconscionable.” (Id.) 23 Defendants explain, “Since Peterson released and discharged any ‘claims whatsoever’ against 24 TGG and Meier, including specifically both contract and tort based claims ‘in any way connected 25 with the Franchise Agreement or the offer and sale’ of the franchise,” Plaintiff “has no standing to 26 assert any of the claims released [waived] by Peterson, or to claim that the Franchise Agreement 27 is unconscionable.” (Id.) 28 /// 1 a. California Law applies 2 Defendants assert Texas law governs the terms of the Franchise Agreement and Plaintiff’s 3 unconscionability arguments. For reasons previously discussed and reasons to follow, the Court 4 disagrees. Foremost, Defendants give no weight to California conflict of law principles, which 5 establish that choice of law provisions cannot circumvent or contravene the fundamental 6 California public policy in favor of protecting franchisees from unfair and deceptive business 7 practices under the CFRA. See generally Bridge Fund Capital Corp., 622 F.3d 996 . 8 b. Conflict of law 9 A federal court sitting in diversity applies the forum state’s choice of law rules. See 10 generally Bridge Fund Capital Corp., 622 F.3d 996 . Since Plaintiff initiated the suit in 11 California, the Court must apply California’s choice of law rules to determine whether to apply 12 California or Texas law to the unconscionability issue. “When an agreement contains a choice of 13 law provision, California courts apply the parties’ choice of law unless the analytical approach 14 articulated in § 187(2) of the Restatement (Second) of Conflict of Laws ... dictates a different 15 result.” Id. Under the Restatement approach, the court must first determine “whether the chosen 16 state has a substantial relationship to the parties or their transaction, ... or whether there is any 17 other reasonable basis for the parties’ choice of law.” Id. (quoting Nedlloyd Lines B.V. v. 18 Superior Court, 3 Cal.4th 459 , 11 Cal.Rptr.2d 330 , 834 P.2d 1148, 1152 (1992)). “If ... either test 19 is met, the court must next determine whether the chosen state's law is contrary to a fundamental 20 policy of California.” Id. If the court finds such a conflict, it “must then determine whether 21 California has a ‘materially greater interest than the chosen state in the determination of the 22 particular issue.’ ” Id. (quoting Restatement (Second) of Conflict of Laws § 187, subd. (2)). If 23 California possesses the materially greater interest, the court applies California law despite the 24 choice of law clause. As clearly articulated in the Court’s Order thus far, California has a 25 materially greater interest. “California has substantial, case-specific interest in protecting its 26 resident franchisees from losing statutory protections against fraud and unfair business practices.” 27 Bridge Fund, 622 F.2d at 1004. 28 /// 1 c. Procedurally and Substantively Unconscionable 2 The Court has found that the mediation provision is unenforceable under CFRA. Thus, 3 the Court declines to determine whether it is unconscionable. On the other hand, considering 4 Plaintiff’s desire to mediate in California according to the California Addendum and CFRA and 5 Defendants’ position that the mediation must occur in Texas, the Court finds there was no 6 meeting of the minds when it comes to the mediation provision. “[T]here was no evidence that 7 the franchisor ‘ever indicated that it would insist upon an out-of-state forum despite the 8 contravening California law’ referred to in the [circular], and the franchisee had no reason to 9 expect that it had agreed to an out-of-state forum,” indicating that “there was no ‘meeting of the 10 minds on the forum selection provision’ ” Roberts, 676 F. Supp. 2d at 950 (quoting Laxmi, 193 11 F.3d at 1097)). “Because there was no meeting of the minds on this provision, they did not 12 become part of the agreement between the parties and they are invalid.” Roberts, 676 F. Supp. 2d 13 at 951. Thus, the Court finds the mandatory out-of-state mediation provision unenforceable and 14 void for violating the CFRA, and Defendants’ Federal Civil Procedure Rule 12(b)(1) arguments 15 and jurisdictional challenge unpersuasive. Therefore, Defendants’ motion to dismiss pursuant 16 Rule 12(b)(1) is DENED. 17 III. DEFENDANTS’ ARGUMENTS UNDER FEDERAL CIVIL PROCEDURE 18 RULE 12(b)(6) 19 In the alternative, and “solely to the extent the Court is not inclined to dismiss” for 20 “failure to mediation or to compel arbitration,” Defendants move for dismissal pursuant Rule 21 12(b)(6) for failure to state a claim on which …, (Doc. 20 at 21, .) Defendants assert Plaintiff did 22 not meet the heightened pleading standard of Federal Civil Procedure Rule 9(b) requiring Plaintiff 23 “to allege facts with particularity in support of its fraud based claims.” (Id. at 21.) Moreover, “the 24 December 2021 assignment included a release by Peterson of all his contractual, statutory and tort 25 claims ‘in any way connected with the Franchise Agreement or the offer and sale,’ of the 26 franchise [;]” therefore, Plaintiff “as an assignee standing in Peterson’s shoes, has no standing to 27 assert any of its fraud based claims against TGG.” (Id. at 22.) 28 /// 1 A. Legal Standard 2 To survive a motion to dismiss under Rule 12(b)(6), the plaintiff must allege “enough 3 facts to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 4 544, 570 (2007). This “facial plausibility” standard requires the plaintiff to allege facts that add 5 up to “more than a sheer possibility that a defendant has acted unlawfully.” Ashcroft v. Iqbal, 556 6 U.S. 662 , 678 (2009). 7 a. Federal Civil Procure Rule 9(b) 8 Federal Civil Procedure Rule 9(b) requires that “[i]n alleging fraud or mistake, a party 9 must state with particularity the circumstances constituting fraud or mistake. Malice, intent, 10 knowledge, and other conditions of a person's mind may be alleged generally.” “Rule 9(b) 11 demands that, when averments of fraud are made, the circumstances constituting the alleged fraud 12 be specific enough to give defendants notice of the particular misconduct.” Vess v. Ciba-Geigy 13 Corp. USA, 317 F.3d 1097, 1106 (9th Cir. 2003) (internal quotations and citation omitted). 14 Fraud-based claims “must be accompanied by ‘the who, what, when, where, and how’ of the 15 misconduct charged.” Id. (quoting Cooper v. Pickett, 137 F.3d 616, 627 (9th Cir. 1997)). 16 Accordingly, Plaintiff must plead each element of the alleged fraud with particularity to satisfy 17 the heightened standard. Plaintiff alleges the following fraud claims in its FAC: fraudulent 18 misrepresentation, negligent misrepresentation, fraudulent inducement, fraudulent nondisclosure, 19 and Texas deceptive trade practices. (See Doc. 11.) 20 Having reviewed Plaintiff’s FAC, the Court finds Plaintiff pleads more than mere 21 conclusory allegations in alleging these claims. Contrary to Defendants’ contention, the FAC 22 provides sufficient factual allegations. See Doc. 11 at ¶¶ 26-35. Plaintiff’s allegations are not 23 bald recitations of the technical elements of fraud or facts that show only that a fraud could have 24 been possible. Rather, the allegations and facts give rise to a strong inference of fraud. In 25 pleading each fraud-based claim, Plaintiff alleged (1) the time, place, and contents of the false 26 representations or omissions, and explain how they were fraudulent, (2) the identity of the person 27 making the misrepresentations, (3) how the misrepresentations misled the plaintiff, and (4) what 28 the speaker gained from the fraud. For examples, the FAC alleges “that prior to entering the 1 | Franchise Agreement, on October 4, 2021, Defendants TGG and Meier not only failed to disclose 2 | the existence of prior California franchises; The representations were made on or around 3 | September 27, 2021 in Orlando, Florida; [and] the falsity was repeated to Peterson by a TGG 4 | representative, Brittany Kruegar.” (See Doc. 20 at 16-17 (citing Doc. 11 fj 22-23, 37).) 5 Moreover, if the Court were to conclude Plaintiff failed to meet the heightened pleading 6 | standard, this would not justify prejudicial dismissal. Leave to amend must be granted unless it is 7 | clear that the complaint’s deficiencies cannot be cured by amendment. Lucas v. Dept’ of Corr., 8 | 66 F.3d 245, 248 (9" Cir. 1995); see also Brown v. DetailXPerts Fran. Sys., LLC, No. 18-CV9 | 02430-SVK, 2020 WL 5106842 , at *3 (N.D. Cal. 2020). Absent bad faith, the Court would grant 10 | leave to amend. For these reasons, the Court finds Plaintiff's alleged fraud-based claims comport 11 | with Rule 9(b)’s heightened pleading standard, and Defendants’ alternative motion for dismissal 12 | under Rule 12(b)(6) for failure to allege facts with particularity is DENIED. 13 ORDER 14 Defendants’ motion to dismiss is DENIED. [15] 16 IT IS SO ORDERED. 17] Dated: _ April 9, 2025 Charis [Tourn TED STATES DISTRICT JUDGE