Judge Armen Tamzarian, Case Number: 23STCV02119, Date: 2023-09-08 Tentative Ruling

Judge: Armen Tamzarian, Case: 23STCV02119, Date: 2023-09-08 Tentative Ruling

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Case Number: 23STCV02119 Hearing Date: September 8, 2023 Dept: 52

Defendants Sergio Bayeh, Piara Pizza Franchise Group, Inc., and Piara Pizza LLC’s Demurrer to First Amended Complaint

Defendants Sergio Bayeh aka Fayez A. Bayeh aka Serujo Beyeh aka Fayez A. Elbayeh, Piara Pizza Franchise Group, Inc., and Piara Pizza LLC demur to the first three causes of action alleged in the first amended complaint by plaintiffs Kenji Morinaga and People’s Pizza LLC.

Franchise Investment Law

Plaintiffs’ first three causes of action allege violations of the Franchise Investment Law (FIL), Corporations Code section 3100, et seq. Defendants argue plaintiffs have no standing to sue under that law because they do not qualify as “franchisees.” The law “grant[s] standing to sue for violations of the Franchise Investment Law to franchisees or subfranchisors.” (Dameshghi v. Texaco Refining & Marketing, Inc. (1992) 3 Cal.App.4th 1262, 1284, overruled on other grounds by Trope v. Katz (1995) 11 Cal.4th 274 (Dameshghi).) It does not apply to “a ‘prospective’ franchisee,” such as “to redress allegedly misleading ‘offerings’ of a franchise.” (Id. at pp. 1284-1285.)

The first amended complaint alleges sufficient facts to make plaintiffs “franchisees” of the demurring defendants. “A ‘franchisee’ is a person to whom a franchise is granted.” (Corp. Code, § 31006.) “ ‘Franchise’ means a contract… by which: (1) A franchisee is granted the right to engage in the business of offering, selling or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor; and (2) The operation of the franchisee’s business pursuant to such plan or system is substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising or other commercial symbol designating the franchisor or its affiliate; and (3) The franchisee is required to pay, directly or indirectly, a franchise fee.” (Corp. Code, § 31005(a).)

Courts liberally construe these elements. “[R]emedial or protective statutes such as the Franchise Investment law are liberally construed to effect their object and quell the mischief at which they are directed. [Citations.] With regard to the statutory definition of ‘franchise,’ this means each element should be construed liberally to broaden the group of investors protected by the law and to carry out the legislative intent.” (Kim v. Servosnax, Inc. (1992) 10 Cal.App.4th 1346, 1356 (Kim).)

Plaintiffs allege sufficient facts for the first element. They alleged the contract “granted Plaintiffs the right to engage in the business of offering, selling or distributing goods or services—pizza, other foods, and restaurant and food–related services—under a marketing plan and system prescribed in substantial part by the Defendants.” (FAC, ¶ 70.) “[T]he marketing plan and system required the Plaintiffs to submit to centralized management and uniform standards regarding the quality and price of goods sold, restricting the use of advertising and marketing, food and beverage offerings and ingredients,” such as “a particular flour that Plaintiffs were required to purchase from a specified vendor and supplier at a specified pricing.” (Ibid.)

Plaintiffs allege sufficient facts for the second element. On the prior demurrer, the court concluded the complaint had not alleged sufficient facts for this element. The initial complaint alleged, “[N]o such thing as a ‘Pizza Orgasmica franchise’ existed and the Defendants had no rights to the name or trademark ‘Pizza Orgasmica.’ ” (Comp., ¶ 69.) The first amended complaint now alleges, “[N]o such thing as a ‘Pizza Orgasmica franchise’ had been registered as required and the Defendants did not have lawful rights to the name or trademark ‘Pizza Orgasmica’ as they had represented to Plaintiffs.” (FAC, ¶ 60.)

People v. Kline (1980) 110 Cal.App.3d 587 (Kline) is instructive. There, the Court of Appeal broadly construed the first element of a “franchise”: whether the contract was to distribute “goods or services under a marketing plan or system prescribed in substantial part by a franchisor.” (Corp. Code, § 31005(a)(1).) The defendant argued the transaction was not a franchise “because there was no ‘marketing plan or system’ ” and any system “was not ‘prescribed in substantial part by a franchisor.’ ” (Kline, supra, 110 Cal.App.3d at p. 593.) The court rejected this argument, reasoning that “the specified intent of the law was to prevent” a sale “where the seller’s failure to provide full information ‘would lead to fraud or a likelihood that the franchisor’s promises would not be fulfilled.’ ” (Id. at pp. 594-595.)

The court further stated, “A sale for a fee of a business substantially associated with the seller’s trademark, service mark, trade name, logotype, advertising or other commercial symbol, which the seller represents will constitute a franchise and will include a marketing plan or system to be prescribed in substantial part by the seller is the unlawful sale of an unregistered franchise.” (Kline, supra, 110 Cal.App.3d at p. 595.) “[N]othing in sections 31005 or 31110 indicates that the Legislature intended an agreement to be considered a franchise, and thus subject to the registration provisions, only if the seller has fully prescribed a promised marketing plan or system prior to an offer or sale. To the contrary, if the Franchise Investment Law were so construed, a franchisor could circumvent the registration provisions by selling or offering to sell a franchise but omitting to prescribe a promised marketing plan or system until after the sale.” (Ibid.)

Defendants’ argument is like the one the court rejected in Kline. They argue plaintiffs allege they purchased an imaginary “Pizza Orgasmica” franchise from franchisors of a different business, Piara Pizza. These allegations, however, constitute selling a business “the seller represents will constitute a franchise” (Kline, supra, 110 Cal.App.3d at p. 595) and would be associated with the sellers’ trademark or service mark. Kline also relied, in part, on guidelines by the Commissioner of Corporations stating, “ ‘If the franchisor in his advertising to prospective franchisees claims to have available a successful marketing plan, the element of a marketing plan presumably will be present.’ ” (Id. at p. 594.) Here, defendants may have had no right to the trademark or service mark “Pizza Orgasmica,” but they allegedly claimed they did. (FAC, ¶¶ 51, 60, 71.)

Moreover, though Kline did not expressly discuss the issue, it includes numerous indications that the defendant had not yet established any business using the franchisor’s proposed service mark. The agreement required the franchisee to “build a prototype Aunt Hilda’s kiosk” (Kline, supra, 110 Cal.App.3d at p. 590), thus suggesting the franchisee’s kiosk would be the first location to use the service mark “Aunt Hilda’s.” The court stated the franchisor “was proposing a similar operation” as those described in “a newspaper article about franchises” (id. at p. 591) rather than selling the right to operate new locations of an existing franchise. The court further noted it was “doubtful that the sale in question was of a ‘business opportunity’ ” because that term is defined “as the sale or lease ‘of the business and goodwill of an existing business enterprise or opportunity.’ ” (Id. at p. 594, fn. 3.) It would not be dispositive that the franchisors of Piara Pizza had never done business under the Pizza Orgasmica brand.

Guidelines issued by the Department of Financial Protection and Innovation (DFPI) further support this conclusion. Courts may “look to” administrative “guidelines and opinions … for further insight” into the FIL. (Kim, supra, 10 Cal.App.4th at p. 1353; accord Kline, supra, 110 Cal.App.3d at p 593.) The DFPI’s “Guidelines for the Uniform Franchise Disclosure Document (‘UFFD’) Required for the Uniform Franchise Registration Application” require franchisors to “[d]isclose whether the franchisor knows of either superior prior rights or infringing uses that could materially affect the franchisee’s use of the principal trademarks in the state where the franchised business will be located.” (DFPI-310.111 (Rev. 10-20), p. 46, item 13(9).) The DFPI’s guidelines thus contemplate that franchisors might sell the right to use trademarks they are not entitled to use because someone else has “superior prior rights.”

Finally, plaintiffs allege sufficient facts for the third element: a franchise fee. Plaintiffs allege they “were required to pay” and did pay “an initial or set-up fee” (FAC, ¶ 72) of $50,000, followed by three other fees of $5,000, $20,000, and $15,000 (¶ 60).

Defendants’ reliance on Dameshghi is misplaced. There, the plaintiff “never became a ‘franchisee’ within the meaning of Corporation Code section 31006” (Dameshghi, supra, 3 Cal.App.4th at p. 1284) where the transaction was never consummated—the plaintiff ultimately did not pay for the right to operate any business (id. at pp. 1272-1273). The court also “question[ed] whether Dameshghi’s transaction … should properly be considered to be the kind of direct contact between franchisor and franchisee that is regulated by the Franchise Investment Law” because the deal was for a different franchisee “to assign an existing lease and franchise” to the plaintiff rather than a direct offer by the franchisor to sell a franchise to the plaintiff. (Id. at p. 1284.) Here, plaintiffs allege they directly paid defendants for the right to operate a Pizza Orgasmica franchise.

Statute of Limitations for Second Cause of Action

Plaintiffs do not allege sufficient facts for the second cause of action. The statute of limitations bars this claim. A demurrer should be sustained where “the complaint shows on its face that the statute [of limitations] bars the action.” (E-Fab, Inc. v. Accountants, Inc. Services (2007) 153 Cal.App.4th 1308, 1315.) “[T]he defect must clearly and affirmatively appear on the face of the complaint; it is not enough that the complaint shows merely that the action may be barred.” (Id. at p. 1316.) The court must determine which statute of limitations applies and when the claim accrued. (Ibid.)

Generally, “a cause of action accrues at ‘the time when the cause of action is complete with all of its elements.’ ” (Fox v. Ethicon Endo-Surgery, Inc. (2005) 35 Cal.4th 797, 806 (Fox).) The discovery rule, however, “postpones accrual of a cause of action until the plaintiff discovers, or has reason to discover, the cause of action.” (Id. at p. 807.) “A plaintiff has reason to discover a cause of action when he or she ‘has reason at least to suspect a factual basis for its elements.’ ” (Ibid.) “Rather than examining whether the plaintiffs suspect facts supporting each specific legal element of a particular cause of action, we look to whether the plaintiffs have reason to at least suspect that a type of wrongdoing has injured them.” (Ibid.)

This cause of action alleges defendant sold a franchise “without first providing” a copy of the franchise disclosure document at least 14 days before plaintiffs executed “any binding franchise or other agreement.” (Corp. Code, § 31119(a).) An action for violation of Corporations Code section 31119 must be brought by the earliest of three deadlines: “the expiration of four years after the act or transaction constituting the violation, the expiration of one year after the discovery by the plaintiff of the fact constituting the violation, or 90 days after delivery to the franchisee of a written notice disclosing any violation of Section 31110 or 31200.” (Corp. Code, § 31303.)

A court in the Eastern District of Michigan applied this statute and found the plaintiff “knew of the critical facts (i.e., the dates that he signed the franchise agreement, paid compensation to [the franchisor], received an offering circular and contract from [franchisor], etc.) two years before he brought suit. The only thing of which he was unaware was the legal significance of those facts.” (Powell v. Coffee Beanery, Ltd. (E.D. Mich. 1996) 932 F.Supp. 985, 987 (Powell). The court finds Powell persuasive.

The face of the first amended complaint shows plaintiffs discovered the facts constituting the violation no later than September 1, 2021. Plaintiffs allege they paid the defendants a $50,000 franchise fee that day. (FAC, ¶ 60.) Defendants therefore were required to provide the franchise disclosure document 14 days before that. Plaintiffs suffered the alleged harm when they paid the fee.

Plaintiffs argue, “Powell did not address either of the following questions present here: (a) when did the plaintiffs discover that documents provided to them by the defendants did not comprise a franchise disclosure document filed with the Commissioner, and (b) when did plaintiffs discover any facts to have required registration of the franchise they purchased, and consequently the filing with the Commissioner and provision to the plaintiffs, of a franchise disclosure document, under the Franchise Investment Law?” (Opp., pp. 20-21.)

As in Powell, question (a) is about the legal significance of the facts, not the facts themselves. Plaintiffs knew the documents’ contents. Whether those documents “comprise a franchise disclosure document” turns on the legal significance of those contents.

As for question (b), plaintiffs provide no authority that the discovery rule only applies after the plaintiff knows all facts precluding the application of every potential exception or defense to a cause of action. Under the discovery rule, a cause of action accrues when plaintiffs have “inquiry notice,” meaning they “are required to conduct a reasonable investigation after becoming aware of an injury, and are charged with knowledge of the information that would have been revealed by such an investigation.” (Fox, supra, 35 Cal.4th at p. 808; accord Deveny v. Entropin, Inc. (2006) 139 Cal.App.4th 408, 423 [“inquiry notice is sufficient to trigger the running of the limitations period under” different statute with identical one-year discovery provision].) That plaintiffs paid $50,000 for a franchise without receiving a sufficient franchise disclosure document was enough to give them “reason to at least suspect that a type of wrongdoing has injured them.” (Fox, supra, 35 Cal.4th at p. 807.)

Ruling out potential exemptions falls within the scope of the inquiry plaintiffs are charged with doing—particularly because here, all exemptions rely on facts that are either: (1) publicly available, (2) about the franchisee, or (3) apparent from the transaction itself. (Corp. Code, §§ 31101(d) [based on facts about franchisor but requiring notice of exemption filed with commissioner], 31102 [“sale of a franchise by a franchisee”], 31103 [“transaction relating to a bank credit card plan”], 31104 [petroleum businesses], 31105 [non-resident franchisee], 31106 [franchisee’s business experience], 31107 [exemption when franchisee receives disclosure of franchisor’s pending application for renewal or amendment], 31108 [“adding of a new product or service line to the existing business of a prospective franchisee”], 31109 [franchisee’s wealth and business experience], 31109.1 [subsequent offers after registered offer].)

The court therefore concludes that, no later than September 1, 2021, plaintiffs had inquiry notice of the alleged violation of Corporations Code section 31119. Under Corporations Code section 31303, plaintiffs were required to file this action within one year. Plaintiffs filed this action on January 31, 2023, more than one year later.

Disposition

Defendants Sergio Bayeh aka Fayez A. Bayeh aka Serujo Beyeh aka Fayez A. Elbayeh, Piara Pizza Franchise Group, Inc., and Piara Pizza LLC’s demurrers to plaintiffs’ first and third causes of action are overruled. The demurrer to plaintiffs’ second cause of action is sustained with 20 days’ leave to amend.