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United States District Court, Southern District of California

July 21, 2003


The opinion of the court was delivered by: Barry Moskowitz, District Judge



Plaintiff it's Just Lunch is a franchisor of a dating and matchmaking business. Defendant BLFA is an It's Just Lunch Franchisee that is owned by defendant Angela Stephens. Plaintiff BLFA is an It's Just Lunch franchisee that is owned by defendant Angela Stephens. Plaintiff and defendant BLFA entered into a franchise agreement on October 11, 2002, and on the same day defendant Stephens entered into a Guaranty and Assumption of Obligations Agreement with plaintiff.

Pursuant to the franchise agreement defendants were granted the exclusive right to operate an It's Just Lunch franchise in certain Missouri and Arkansas counties Defendants were provided training and initial promotion and advertisements. Under the agreement defendants were required to pay plaintiff royalty fees and contribute to plaintiff's national marketing and advertisement fund at a rate depending on the franchise's profitability. The [ Page 2]

agreement did provide for a minimum and maximum rate the franchisor could collect any given month.

Defendants' franchise was not profitable, and they failed to make the royalty and advertising fund payments as required under the agreement. Plaintiff's complaint alleges that defendants, by letter dated February 27, 2002, terminated the agreement. Defendants thereafter closed the franchise and ceased its business activity. Plaintiffs complaint further alleges that by e-mail dated March 3, 2003, defendants re-confirmed the termination of the franchise agreement. By letterdated March 3,2003, plaintiff informed defendants that because the business had been abandoned, the franchise agreement had been terminated pursuant to Paragraph 15(B)(4) thereof. Defendants contend that plaintiff terminated the franchise agreement by this letter.

On March 20, 2003, plaintiff filed this complaint, alleging that defendants are in breach of the franchise agreement. Plaintiff seeks compensation for past due royalties and advertising fees in the amount of $10,500, and forfuture lost royalties and fees in the amountof $463,850. Plaintiff also alleges that defendants have been unjustly enriched by the operation of the franchise, in an amount equal to the outstanding monies due under the agreement.


In the 12(b)(6) motion to dismiss, defendants argue thatthe Courtdoes not have subject matter jurisdiction over this case, because plaintiff's complaint does not allege that the amount in controversy exceeds $75,000. According to defendants, the complaint seeks compensation for future royalties and fees, which are not available where the franchisor has breached a franchise agreement. Plaintiff contends that defendants are in breach, and therefore compensation for future royalties is not foreclosed.

a. Legal Standards On a Motion to Dismiss

In reviewing a motion to dismiss for failure to state a claim, the court must construe the claims in the light most favorable to the plaintiff, accept all well-pled factual allegations as true, and determine whether plaintiff can prove any set of facts to support a claim that would merit [ Page 3]

relief. Cahill v. Liberty Mut. Life Ins. Co., 80 F.3d 336, 337-38 (9th Cir. 1996). Dismissal is warranted where plaintiff failed to plead either a cognizable legal theory or allege sufficient facts under a cognizable legal theory. Balistreri v. Pacifica Police Dept., 901 F.2d 696,699(9th Cir. 1990). It is the movant's burden to demonstrate that the plaintiff has not established sufficient facts in support of its claims. Loral Terracom v. Valley Nat'l Bank, 49 F.3d 555, 558 (9th Cir. 1995).

b. Subject Matter Jurisdiction

This case was filed pursuant to 28 U.S.C. § 1332(a). Under section 1332(a) this court has jurisdiction where the parties are completely diverse and where the amount in controversy, excluding interest and costs, exceeds $75,000. The amount in controversy is determined from the face of the pleadings, and the sum claimed in the complaint is controlling so long as it is made in good faith. Crum v. Circus Circus Enterprises, 231 F.3d 1129,1131 (9th Cir. 2000). Dismissal is justified only where it appears to a legal certainty that the claim is really for less than the jurisdictional amount. Id.

Defendants argue that the case should be determined under California law, and that pursuant to Postal Instant Press. Inc. v. Sealy, 51 Cal.Rptr.2d 365 (1996), damages for future profits are not recoverable where the franchisee fails to make royalty payments and the franchisor subsequently terminates the franchising agreement. Plaintiff contends that Nevada law should govern this dispute, because the franchising agreement specified that Nevada law would control any disputes arising under the agreement. According to plaintiff, Nevada allows for the recovery of future profits where the amount of such profits are reasonably certain.

Here, the resolution of the dispute will require a fact-intensive inquiry into which party first terminated, or breached, the franchising agreement. Taking plaintiffs allegations in the complaint as true, as the Court must, defendants terminated the agreement on or about February 27, 2003. Thus, without having to resort to a choice-of-law analysis, the Court concludes that plaintiffs complaint states sufficient fact to survive defendants' motion to dismiss. [ Page 4]

It is clear, and defendants do not contest, that Nevada law allows for the recovery of future profits where the proof of loss is reasonably certain. Fireman's Fund Ins. Co. v. Shawcross, 442 P.2d 907, 912 (Nev. 1968). Moreover, the general rule in California is that future profits are recoverable where the amount is certain, and within the parties' contemplation at the time of contracting. Sealy, 51 Cal.Rptr.2d at 372 n. 5; Grupe v. Glick, 160 P.2d 832,839 (Cal. 1945).

Defendants argue, however, that under Sealy, a franchisor who has terminated the franchise agreement cannot recover for future profits. This observation is correct, but inapposite to the facts as pled in plaintiffs complaint. In Sealy, the franchisee failed to make several royalty payments as specified in the franchise agreement, and the franchisor declared that the franchisee was in breach and terminated the agreement. Sealy, 51 Cal.Rptr.2d at 367. The court found that the franchisor could not recover for future profits where it had terminated the agreement, because the damage was proximately caused by the franchisor's termination rather than by the franchisee's breach.Id. at 369. In addition, the court found that an award of future profits under those circumstances would amount to "unreasonable, unconscionable or grossly oppressive" damages. Id. at 372. According to the court, the possibility of an award of future profits would provide the franchisor with a bludgeon in every contract dispute, because unless the franchisee complies, it is faced with the threat of the franchisor terminating the agreement and being awarded future profits. Id. at 373-75.

The Sealy court expressly refused to considerwhether damages forfuture profits would be available where, as alleged in It's Just Lunch's complaint, the franchisee terminated the agreement. Id. at 369 n. 2. Moreover, the court did not preclude the award of future profits even if the franchisor terminates the agreement, if the franchisee's conduct proximately caused the damages, and the award is neither excessive, oppressive nor disproportionate. Id. at 375. Thus, because Sealy does not preclude an award of future profits under the facts pled in plaintiffs complaint, defendant has not met its burden of showing that plaintiffs claim forfuture profits is without factual support, or that the amount in controversy, to a legal certainty, is less than the jurisdictional amount. [ Page 5]


For the reasons stated herein, defendants' motion to dismiss [6-1] is DENIED.



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