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JTH Tax, Inc. v. Hines

United States District Court, E.D. Virginia, Norfolk Division

December 15, 2017

JTH TAX, INC., d/b/a Liberty Tax Service, Plaintiff,
v.
CHARLES HINES, Defendant.

          UNITED STATES MAGISTRATE JUDGED REPORT AND RECOMMENDATION

          ROBERT J. KRASK UNITED STATES MAGISTRATE JUDGE.

         This matter is before the Court on plaintiff JTH Tax, Inc., d/b/a Liberty Tax Service's ("Liberty") motion to dismiss or, in the alternative, stay pro se defendant, Charles Hines' ("Hines") second amended counterclaim pending arbitration, ECF No. 88. The motion was referred to the United States Magistrate Judge pursuant to the provisions of 28 U.S.C. § 636(b)(1)(B) and Federal Rule of Civil Procedure 72(b). ECF No. 94. For the reasons that follow, the Court recommends that Liberty's motion to dismiss the second amended counterclaim be GRANTED in part and DENIED in part, and Liberty's motion to stay the counterclaim pending arbitration be GRANTED.

         I. FACTUAL HISTORY

         Liberty is a Delaware corporation and its principal place of business is located at its headquarters in Virginia Beach, Virginia. Second Amended Counterclaim ("SAC") ¶ 1, ECF No. 82; Compl. ¶ 1, ECF No. 1. Hines resides in the state of Maryland. SAC ¶ 2; Compl. ¶ 2. Liberty is in the business of selling franchises engaged in the preparation of tax returns. SAC ¶ 4; Compl. ¶ 7. During 2012, Hines signed three, separate franchise agreements with Liberty to establish and operate tax service franchises within three, specified territories located in Maryland. SAC ¶¶ 5-9; Compl. ¶¶ 9-11; ECF Nos. 1-5, 1-6, 1-7. Attached to the end of each franchise agreement is a separately signed one-page "Maryland Addendum" that includes an arbitration clause. ECF No. 1-5 at 21; ECF Nos. 1-6, 1-7 at 23.

         Hines operated a Liberty franchise office from 2012 through 2015, and a second from 2014 through 2015. SAC ¶¶ 5, 7. Hines also operated three Liberty kiosks located inside Walmart stores for four months in 2014. SAC ¶¶ 8-9. Hines' Liberty offices and kiosks were all located in Maryland. SAC ¶¶ 5, 7-9.

         On June 3, 2015, Liberty "[a]bandoned Hines' Franchise Agreements and [t]erminated him, based on multiple breaches, including, advertising outside of his franchise territory, and failure to pay amounts owing." SAC ¶ 10; see also Compl. ¶ 12.

         II. PROCEDURAL HISTORY

         On December 23, 2015, Liberty filed this action against Hines seeking injunctive relief and damages for alleged breach of the franchise agreements, trademark infringement, past due accounts receivable, and breach of the promissory notes. ECF No. 1. Following extensions of time to file a responsive pleading, ECF Nos. 5, 10, 37; and denial of Hines' motion to dismiss and motion for change of venue, ECF No. 31, Hines submitted an answer on November 10, 2016, and corrected the defect with the answer on December 12, 2016, ECF Nos. 41, 45. Following the denial of Liberty's motion for default judgment, ECF No. 50; denial of Liberty's motion to dismiss and motion to strike, and Hines being granted leave to file an amended counterclaim, ECF No. 65; and the grant of Liberty's motion to dismiss the amended counterclaim without prejudice to Hines filing a second amended counterclaim in an effort to comply with Rules 8(a)(2), 8(d)(1), and 10(b), ECF No. 80; Hines submitted a second amended counterclaim subject to defect on August 11, 2017. ECF No. 82. Hines alleges that Liberty breached the franchise agreements (Count I), committed fraud (Counts II and III), violated the Franchise Rule, 16 C.F.R. § 436.5(t)(6) (Count IV), and operated a failed system (Count V). Id. Hines also included other omnibus claims and general points (Count VI). Id. The second amended counterclaim was ordered filed on August 28, 2017, and Liberty was ordered to file a responsive pleading within 21 days. ECF No. 85.[1]

         On September 18, 2017, Liberty filed a motion to dismiss Hines' second amended counterclaim or, in the alternative, stay the counterclaim pending arbitration. ECF No. 88. Hines filed an "initial response and memorandum" in opposition to Liberty's motion to dismiss on September 28, 2017. ECF No. 92. On October 6, 2017, the Court denied Hines' motion to stay or pause the case for 14 days to allow Hines to file an additional opposition to Liberty's motion to dismiss. ECF No. 96.

         On October 10, 2017, Liberty filed a motion for leave to file a reply brief, which was submitted on October 9, 2017, after the deadline of October 5, 2017. ECF Nos. 97, 98. Hines submitted an additional opposition to Liberty's motion to dismiss on October 12, 2017. ECF No. 101. The additional opposition was filed subject to defect due to Hines failing to obtain leave of Court to so file. ECF No. 101. Due to the failure to comply with Local Civil Rule 7(F)(1) in filing the memoranda, the Court has not relied upon any information provided in Liberty's reply or Hines' additional opposition.[2] Liberty's motion for leave to file a reply brief after the deadline, ECF No. 98, is DENIED.

         III. CHOICE OF LAW

         The franchise agreements, which form the basis of Hines' relationship with Liberty, each contain a choice of law provision dictating that Virginia law controls any claims arising under or relating to such agreements. ECF Nos. 1-5, 1-6, 1-7 at 16. Paragraph 15(a) of the franchise agreements states:

This Agreement is effective upon its acceptance in Virginia by our authorized officer. Virginia law governs all claims which in any way relate to or arise out of this Agreement or any of the dealings of the parties hereto. However, the Virginia Retail Franchising Act does not apply to any claims by or on your behalf if the Territory shown on Schedule A below is outside Virginia.

Id.

         While Hines does not specifically attack the choice of law provision, he continues to insist that the correct venue for the case is Maryland, his residence and the location of the franchises at issue. SAC ¶ 3.[3] Hines also alleges Liberty has violated both Virginia and Maryland consumer protection acts and franchise protection acts.[4] SAC ¶¶ 74-75.

         Prior to addressing Liberty's motion to dismiss, the Court must determine the applicable law. "Virginia law looks favorably upon choice of law clauses in a contract, giving them full effect except in unusual circumstances." ColganAir, Inc. v. Raytheon Aircraft Co., 507 F.3d 270, 275 (4th Cir. 2007) (quoting Hitachi Credit Am. Corp. v. Signet Bank, 166 F.3d 614, 624 (4th Cir. 1999)); see also Artistic Stone Crofters v. Safeco Ins. Co., 726 F.Supp.2d 595, 600-01 (E.D. Va. 2010) (citing Colgan, 507 F.3d at 275, and adhering to choice of law clause); Hooper v. Musolino, 364 S.E.2d 207, 211 (Va. 1988) (applying the choice of law provision providing for the application of North Carolina law because the state "was reasonably related to the purpose of the agreement").

         "[T]o avoid the operation of a choice-of-law provision ... the party resisting the clause must establish by clear and convincing evidence that the clause itself, as opposed to the contract as a whole, was the product of impropriety, " such as overreaching or fraud. Zaklit v. Global Linguist Sol, LLC, No. I:14cv314, 2014 WL 3109804, at *7 (E.D. Va. July 8, 2014) (citing Ash-Will Farms v. L.L.C. v. Leachman Cattle Co., Nos. 02-195, 02-200, 2003 WL 22330103, at *3 (Va. Cir. Ct. Feb. 13, 2003); Global One Commc'n, L.L.C. v. Ansaldi, No. CI65948, 2000 WL 1210511, at *2 (Va. Cir. Ct. May 5, 2000) ("Virginia does not presume the unenforceability of contracts entered into by parties of unequal bargaining power but rather presumes contracts to be valid, and the burden is on the party challenging the validity to establish that the provision in question is unfair, unreasonable, or affected by fraud or unequal bargaining power.")). Although Hines generally argues that his franchise agreements with Liberty are invalid due to a lack of consideration, SAC ¶¶ 19, 22, 47, 76, 77, 102, 110, and should be invalidated on grounds of unconscionability, SAC ¶¶ 22-26, 41-46, 60, such arguments are insufficient to establish clear and convincing evidence of fraud or overreaching by Liberty with respect to the choice-of-law provision at issue. Zaklit, No. I:14cv314, 2014 WL 3109804, at *8. This is particularly so here, where the dispute between the parties has a genuine connection to Virginia.[5] Because Hines has failed to show fraud or overreaching by Liberty with respect to the choice-of-law provision, the Court finds that Virginia law applies to the breach of contract claims raised in Hines' second amended counterclaim.

         "Where a choice of law clause in the contract is sufficiently broad to encompass contract-related tort claims, " courts will apply the choice of law provision to related non-contract claims. Hitachi Credit Am. Corp., 166 F.3d at 628; see also Zaklit, No. I:14cv314, 2014 WL 3109804, at *9-l 1. The choice of law provision in the franchise agreements at issue here was intended to have a broad scope, providing that Virginia law applies to "all claims which in any way relate to or arise out of this Agreement or any of the dealings of the parties hereto, " with the exception of the Virginia Retail Franchising Act. ECF Nos. 1-5, 1-6, 1-7 at 16. Accordingly, Virginia law applies to Hines' related non-contract claims.

         The only portions of Hines' second amended counterclaim not governed by Virginia law are his counts alleging violations of state statutes. The franchise agreements provide that "the Virginia Retail Franchising Act does not apply to any claims by or on your behalf if the Territory shown on Schedule A below is outside Virginia." Id. More importantly, the terms of the Virginia Retail Franchising Act provide that that Act applies "only to a franchise the performance of which contemplates or requires the franchisee to establish or maintain a place of business within the Commonwealth of Virginia." Va. Code Ann. § 13.1-559 (2009). Moreover, the Maryland Franchise Registration and Disclosure Law applies to the sale of a franchise where the franchise fee exceeds $100.00 and the franchisee is a resident of Maryland or the franchised business will be or is operated in Maryland. Md. Code Ann., Bus. Reg. § 14-203(a) (1992). The parties agree that Hines is a resident of Maryland, SAC ¶ 2; Compl. ¶ 2, and that the franchises at issue were located in Maryland, SAC ¶¶ 5-9; Compl. ¶¶ 9-11. Therefore, the Maryland Franchise Registration and Disclosure Law applies to the transactions at issue, and will govern Hines' allegations of Liberty's violations of state statutes.

         IV. STANDARD OF REVIEW FOR MOTION TO DISMISS

         Federal Rule of Civil Procedure 12(b)(6) permits a court to dismiss complaints, or claims within complaints, upon which no relief can be granted. Fed.R.Civ.P. 12(b)(6); Sonnier v. Diamond Healthcare Corp., 114 F.Supp.3d 349, 354 (E.D. Va. 2015). In order to survive a motion to dismiss, a counterclaim must contain "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). This pleading standard requires that the counterclaim state a claim for relief that is "plausible on its face." BellAtl Corp. v. Twombly, 550 U.S. 544, 570 (2007). In essence, "[a] claim has facial plausibility when the [counterclaimant] pleads factual content that allows the court to draw the reasonable inference that the [plaintiff] is liable for the misconduct alleged." Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009). Ascertaining whether a counterclaim states a plausible claim for relief is a "context-specific task" that requires the court to "draw on its judicial experience and common sense." Id. at 679.

         A motion to dismiss pursuant to Rule 12(b)(6) challenges "the sufficiency of a [counterclaim]; it does not resolve disputes over factual issues, the merits of a claim, or the applicability of a defense." SunTrust Mortg., Inc. v. Simmons First Nat 7 Bank, 861 F.Supp.2d 733, 735 (E.D. Va. 2012) (citing Republican Party of N.C. v. Martin, 980 F.2d 943, 952 (4th Cir. 1992)). Therefore, "[i]n ruling on a 12(b)(6) motion, a court 'must accept as true all of the factual allegations contained in the [counterclaim]' and 'draw all reasonable inferences in favor of the [counter-claimant].'" Kensington Volunteer Fire Dep't, Inc. v. Montgomery Cty., Md, 684 F.3d 462, 467 (4th Cir. 2012) (quoting E.I. du Pont de Nemours & Co. v. Kolon Indus., Inc., 637 F.3d 435, 440 (4th Cir. 2011)). The factual allegations, however, "cannot be mere speculation, and must amount to more than 'a sheer possibility that a [party] has acted unlawfully.'" Brack v. Conflict Kinetics Corp., 221 F.Supp.3d 743, 747 (E.D. Va. 2016) (quoting Iqbal, 556 U.S. at 678). "A pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action will not do . . . [n]or does a [counterclaim] suffice if it tenders naked assertion[s] devoid of further factual enhancement." Iqbal, 446 U.S. at 678 (internal quotations omitted); see also Nemet Chevrolet, Ltd. v. Consumeraffairs.com, Inc., 591 F.3d 250, 255 (4th Cir. 2009). However, courts do construe pro se complaints liberally. Estelle v. Gamble, 429 U.S. 97, 106 (1976); Beaudett v. City of Hampton, 775 F.2d 1274, 1277-78 (4th Cir. 1985).

         Apart from the general pleading standard set forth in Rule 8(a) of the Federal Rules of Civil Procedure, Rule 9 sets forth pleading requirements for "special matters." Fed.R.Civ.P. 9. Subsection (b) of Rule 9, which establishes the pleading requirements for "fraud or mistake" provides that:

(b) In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake. Malice, intent, knowledge, and other conditions of a person's mind may be alleged generally.

         Fed. R. Civ. P. 9(b). Under Rule 9(b), the circumstances that must be pled with particularity are "the time, place, and contents of the false representations, as well as the identity of the person making the misrepresentation and what he obtained thereby." Harrison v. Westinghouse Savannah River Co., 176 F.3d 776, 783-84 (4th Cir. 1999) (citation and internal quotation marks omitted). A plaintiffs failure to plead fraud with particularity under Rule 9(b)'s pleading requirements "is treated as a failure to state a claim under Rule 12(b)(6)." Id. at 783 n.5.

         V. ANALYSIS

         The Court will first address Liberty's motion to dismiss Counts I though VI of Hines' second amended counterclaim, and then will address Liberty's motion to stay the counterclaims pending arbitration.

         A. Motion to Dismiss the Second Amended Counterclaim

         1. Count I-Breach of the Franchise Agreements

         In Count I, Hines alleges Liberty breached the franchise agreements by: (a) violating the Franchise Rule provision in the Federal Trade Commission Act, 16 C.F.R. § 436.5(t)(6) (SAC ¶¶ 13-14, 16, 19); (b) failing to generate enough customers through their brand to allow Hines to comply with the franchise agreements (SAC ¶¶13, 16); (c) failing to provide consideration for the $40, 000.00 franchise fee and royalties (SAC ¶ 19); and (d) breaching the implied covenant of good faith and fair dealing (SAC ¶¶ 16, 20).

         Under Virginia law, to establish a breach of contract, Hines must demonstrate: (1) a legally enforceable obligation of Liberty to Hines; (2) Liberty's violation or breach of that obligation; and (3) injury or damage to Hines caused by Liberty's breach of the obligation. Sunrise Continuing Care, LLC v. Wright, 671 S.E.2d 132, 135 (Va. 2009) (citing Filakv. George, 594 S.E.2d 610, 614 (Va. 2004)).

         a. The Franchise Rule

         Although first raised in Count I, Hines references 16 C.F.R. § 436.5, or "the Franchise Rule, " throughout his second amended counterclaim. SAC ¶¶ 13-14, 16, 19, 68-72, 87, 109, 111-12, 136(a). In Count I, Hines alleges that Liberty violated this rule when it failed to cite the Franchise Rule in the franchise agreements, and failed to notify Hines of his rights and of the fact that the territory he was purchasing had previously failed as a Liberty franchise. SAC ¶¶ 14, 19. Hines alleges that he would not have purchased a Liberty franchise if he had been provided with this information. SAC ¶ 14.

         In Count III, Hines alleges that Liberty violated the Franchise Rule by failing to include in the franchise disclosure document the identification of, and contact information for, the previous franchise owners of the territories Liberty was selling to Hines. SAC ¶¶ 69-70.

         In Count IV, Hines alleges Liberty violated the Franchise Rule, SAC ¶¶ 87, 109, 111-12, by reselling failed territories, which is the "foundation of income generation for Liberty Tax and John Hewitt, " SAC ¶¶ 93-99. Hines specifies that John Hewitt violated the Franchise Rule provision "willingly, purposefully, and by calculation." SAC ¶ 87.

         In Count VI, Hines cites the Franchise Rule in his list of omnibus and general points. SAC ¶ 136(a).

         In each of these counts, regardless of the heading under which the allegations fall, Hines is alleging that Liberty violated the Franchise Rule. The District Court for the District of Columbia provides the following helpful explanation of the "Franchise Rule":

The Federal Trade Commission ("FTC") has promulgated regulations titled "Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures, " 16 C.F.R. § 436 (2013) (commonly known as the "Franchise Rule" see John Bourdeau, et al, 62B Am. Jur. 2d Private Franchise Contracts § 26 (2d ed. 2014)), which apply nationwide. Before selling a franchise, the Franchise Rule requires a franchisor to provide a prospective franchisee with a detailed disclosure statement-known as a "uniform franchise offering circular" or a "franchise disclosure document"-that includes information like the franchisor's corporate history and current financial condition, the track record of any other franchises, and the background of the franchisor's principal officers. See 16 C.F.R. § 436.5; see also FTC v. Jordan Ashley, Inc., No. 93-2257-CIV, 1994 WL 200775, at *3 (S.D. Fla. Apr. 5, 1994); Bourdeau, supra, ยง 26. The disclosure requirements set forth in the Franchise Rule are "designed to protect ...

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