United States District Court, E.D. Virginia, Norfolk Division
UNITED STATES MAGISTRATE JUDGED REPORT AND
J. KRASK UNITED STATES MAGISTRATE JUDGE.
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.
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.
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.
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.
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.
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.
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. Liberty's motion for leave to file a
reply brief after the deadline, ECF No. 98, is DENIED.
CHOICE OF LAW
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
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.
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. Hines also alleges Liberty
has violated both Virginia and Maryland consumer protection
acts and franchise protection acts. SAC ¶¶ 74-75.
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
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. 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.
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.
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.
STANDARD OF REVIEW FOR MOTION TO DISMISS
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.
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).
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"
(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.
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.
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.
Motion to Dismiss the Second Amended Counterclaim
Count I-Breach of the Franchise Agreements
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).
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
The Franchise Rule
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.
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.
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.
Count VI, Hines cites the Franchise Rule in his list of
omnibus and general points. SAC ¶ 136(a).
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
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, § 26. The disclosure
requirements set forth in the Franchise Rule are
"designed to protect ...