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Valvoline Instant Oil Change Franchising, Inc. v. Rfg Oil, Inc.

United States District Court, Ninth Circuit

August 5, 2013

VALVOLINE INSTANT OIL CHANGE FRANCHISING, INC.; ASHLAND CONSUMER MARKETS, a commercial unit of ASHLAND, INC.; ASHLAND LICENSING AND INTELLECTUAL PROPERTY LLC; HENLEY ENTERPRISES, INC.; HENLEY PACIFIC LLC; HENLEY PACIFIC LA LLC; and HENLEY PACIFIC S.D. LLC, Plaintiffs,
v.
RFG OIL, INC., Defendant. RFG OIL, INC., Counter-Claimant,
v.
VALVOLINE INSTANT OIL CHANGE FRANCHISING, INC.; ASHLAND CONSUMER MARKETS, a commercial unit of ASHLAND, INC.; ASHLAND LICENSING AND INTELLECTUAL PROPERTY LLC; HENLEY ENTERPRISES, INC.; HENLEY PACIFIC LLC; HENLEY PACIFIC LA LLC; and HENLEY PACIFIC S.D. LLC, Counter-Defendants.

ORDER GRANTING IN PART AND DENYING IN PART COUNTER-DEFENDANTS' MOTION TO DISMISS RFG'S COUNTERCLAIM [ECF No. 58.]

GONZALO P. CURIEL, District Judge.

INTRODUCTION

The instant case was filed by Plaintiffs Valvoline Instant Oil Change Franchising, Inc. ("VIOCF"), Ashland Consumer Markets, a commercial unit of Ashland, Inc. ("Ashland")[1], Ashland Licensing and Intellectual Property LLC ("ALIP"), Henley Enterprises, Inc., Henley Pacific, LLC, Henley Pacific LA LLC, and Henley Pacific S.D. LLC (collectively "Plaintiffs") against Defendant RFG Oil, Inc. ("RFG") on February 8, 2012 in the United States District Court for the Eastern District of Kentucky, and transferred to this Court on August 22, 2012 pursuant to 28 U.S.C. § 1404(a). (ECF No. 42.) On September 5, 2012, RFG filed a Counterclaim against all Plaintiffs. (ECF No. 47.) Presently before the Court is the Motion of Valvoline Instant Oil Change Franchising, Inc., Ashland Consumer Markets, and Ashland Licensing and Intellectual Property LLC (collectively the "VIOCF Counter-Defendants") to dismiss five counts of RFG's Counterclaim: the First Count for breach of contract; the Fourth Count for intentional interference with prospective economic advantage; the Fifth Count for breach of confidence; the Sixth Count for fraudulent misrepresentation; and the Seventh Count for breach of implied covenant of good faith and fair dealing. (ECF No. 58.) Having considered the parties' submissions and for the reasons set forth below, the Court GRANTS the VIOCF Counter-Defendants' Motion to Dismiss as to Counts One, Five, Six, and Seven, and DENIES the VIOCF Counter-Defendants' Motion to Dismiss as to Count Four.

BACKGROUND[2]

In 1990, RFG opened its first location as a Valvoline Instant Oil Change franchisee with VIOCF as franchisor. By 2011, RFG owned and operated approximately forty (40) oil change and quick lube centers in and around Southern California, all of which were Valvoline Instant Oil Change franchises. Each of RFG's franchise locations was governed by a series of License Agreements, Sign and Equipment Leases, and Supply Agreements (collectively referred to as "Valvoline Agreements") that were entered into between RFG and VIOCF, Ashland, and ALIP.

Pursuant to each of the License Agreements, VIOCF promised not to grant a license to another Valvoline franchisee within a two mile radius of the store to which the License Agreement pertained. Furthermore, from about 1991 to 1999 VIOCF and RFG entered into a Development Agreement in which "VIOCF granted RFG exclusive rights to all of San Diego County and portions of Los Angeles County." (ECF No. 47 ¶ 22.) Although VIOCF did not renew the Development Agreement after 1999, "VIOCF verbally assured RFG that it would continue to have exclusive rights to San Diego County." (Id. ¶ 23.) From 1999 to 2010, VIOCF advised RFG of preliminary discussions with potential franchisees in Southern California, and would not grant franchise licenses to potential franchisees if RFG objected to the location as an encroachment on RFG's territory.

In late 2010, RFG acquired 16 new Valvoline franchises for the Southern California market. As part of the transaction, "VIOCF agreed to provide RFG with substantial financial assistance, cash incentives, credits to amounts due VIOCF and Ashland, and commitments for future financial assistance for replacing the signs for the 16 new Valvoline stores." (Id. ¶ 28.) However, RFG alleges "VIOCF failed to provide the promised financial assistance for the new locations and RFG began to experience financial struggles." (Id. ¶ 29.)

In late 2010, the Henley defendants, [3] another VIOCF franchisee primarily operating on the East Coast, Florida and the Midwest, began communicating an interest to VIOCF about expanding its store locations to Southern California. Specifically, Henley wanted to purchase seventy-two (72) EZ-Lube store locations in Southern California and convert them to Valvoline franchises. At least fourteen (14) of the desired EZ-Lube locations were located within a two mile radius of an RFG Valvoline franchise, which prevented Henley from converting all 72 EZ-Lube locations into Valvoline franchises while the RFG-VIOCF License Agreements were still in force.

In late 2010, Henley began negotiating with RFG for the purchase of RFG's Valvoline locations. Henley represented that it wanted to enter into a new venture with RFG, and that as part of this venture RFG would own and operate RFG's locations as well as the 72 EZ-Lube locations. However, RFG alleges Henley never wanted to enter into a new venture with RFG and simply wanted to acquire RFG's locations at the lowest possible cost. Furthermore, RFG alleges "VIOCF conspired with Henley to oust RFG from the Southern California market by wrongfully attempting to terminate RFG's license agreements and withholding VIOCF's normal financial support to its franchisee, RFG" because VIOCF would "greatly benefit" from Henley entering the Southern California market. (Id. ¶ 3.)

In January 2011, VIOCF notified RFG of an alleged breach of the Valvoline Agreements, based on RFG's alleged failure to timely pay for products from VIOCF. RFG disputed that it was in breach of the Valvoline Agreements.

During the twenty-three (23) years that RFG had been a Valvoline franchisee, RFG had occasionally been unable to pay VIOCF in full pursuant to the terms of the Valvoline Agreements. On each of those prior occasions RFG and Valvoline were able to negotiate extensions, credits, or financing so that VIOCF was ultimately paid in full by RFG. This time, however, VIOCF demanded that RFG commence paying in advance for VIOCF products. In addition, "VIOCF assured RFG that it would not take action on the alleged breaches, as long as RFG continued negotiating with Henley regarding the sale of the RFG locations and RFG continued to pay VIOCF for royalties and product purchases." (Id. ¶ 45.)

Subsequently, RFG pre-paid for Valvoline products that were not delivered. In addition, VIOCF "over-charged RFG for products and VIOCF refused to adjust the prices." (Id. ¶ 46.) This led RFG to purchase Valvoline products from other merchants at retail prices, after it had already pre-paid for a product that was never delivered, resulting in severe financial hardship for RFG in the daily operations of its Valvoline locations.

Further, RFG alleges "VIOCF was providing Henley with confidential information regarding RFG's business operations including, but not limited to, daily car count averages, its average ticket, RFG's negotiation strategy (which RFG gad [sic] previously disclosed to VIOCF in confidence) and RFG's financial information in order to give Henley an advantage over RFG." (Id. ¶ 49.)

By late 2011, Henley needed to finalize its purchase of the 72 EZ-Lube locations, but Henley could not convert all of these locations to Valvoline franchises because RFG had not transferred its locations to Henley.

On November 29, 2011, VIOCF informed RFG that it would "terminate" RFG's License Agreements effective November 30, 2011. VIOCF told RFG that Ashland demanded immediate payment of over $14 million and would take immediate action to close RFG's remaining Valvoline locations, but that if RFG signed a termination agreement and executed a "We Feature Agreement, "[4] RFG could have a ninety (90) day extension on the closing of the Valvoline stores.

RFG was told that it had until December 5, 2011 at noon to execute the documents. RFG had several conversations with VIOCF representatives regarding the agreements and requested modifications, but RFG never executed the final documents.

On December 5, 2011, three hours after the noon deadline passed, and not having received the executed agreements from RFG, VIOCF and Ashland presented RFG with a revised Termination Agreement and We Feature Agreement. On December 6, 2011, David Gong, one of two shareholders for RFG, executed the Termination agreement and the We Feature Agreement, subject to modifications that Mr. Gong made to the We Feature Agreement. Jeff Gong, the other shareholder of RFG, did not execute ...


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