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Franlogic Scout DevelopmenT, LLC v. Scott Holdings, Inc.

United States District Court, E.D. Pennsylvania

April 30, 2018



          Slomsky, J.


         On September 16, 2016, Petitioners Franlogic Scout Development, LLC, Ed Samane, Lisa Kornstein, Howard Soloway, and Steve Pruitt (“Petitioners”) filed a Petition to Compel Arbitration. (Doc. No. 1.) On December 14, 2016, Respondent Scott Holdings, Inc. filed a Motion to Dismiss the Petition. (Doc. No. 2.) In an Opinion and Order dated July 12, 2017, the Court denied the Petition to Compel Arbitration, granted the Motion to Dismiss, and ordered that the case be closed. (Doc. Nos. 16, 17.) Before the Court are Respondent's Motion to Expand the Time to Move for Attorneys' Fees and Motion for Attorneys' Fees. (Doc. No. 19.) For reasons that follow, the Court will deny the Motions.


         A. Factual Background

         In 2015, Brian and Jacqueline Scott formed Scott Holdings, Inc. to open retail stores in San Francisco, California. (Doc. No. 1 ¶ 15.) On July 30, 2015, Respondent Scott Holdings entered into two agreements with Franlogic Scout Development, LLC (“Franlogic”) to purchase and operate a franchise named “Scout and Molly's, ” which would sell women's clothing and accessories. (Id. ¶¶ 10, 16, 18.) The two agreements are: (1) an Area Development Agreement (“ADA”), and (2) a Franchise Agreement (“FA”). (Id. ¶¶ 16-18.)

         The ADA established the franchisor-franchisee relationship between Franlogic and Scott Holdings. (Doc. No. 14 at 4.) It gave Scott Holdings the “right to develop and establish” two stores within a designated marketing area in San Francisco, California provided that Scott Holdings “open[ed] and commenc[ed] operations of such Stores in strict accordance with the mandatory development schedule.” (Doc. No. 2-2 ¶ 1.) It also required Scott Holdings to pay Franlogic a development fee. (Id. ¶ 2.) In addition, the ADA mandated that Scott Holdings enter into a contemporaneous FA for the first store, as well as a separate FA for each additional store that Scott Holdings opened. (Id. ¶¶ 3-4.) In accordance with the terms of the ADA, the parties entered into a FA for the opening of the first store. (Doc. No. 1-1.)

         Under the FA, Scott Holdings obtained the right to license the Scout and Molly's proprietary system in order to open one retail store. (Id. ¶ 1.) Scott Holdings paid a $50, 000 franchise fee to Franlogic and agreed to pay royalties to Franlogic from revenue generated by the store. (Id. ¶ 3.) The FA required Scott Holdings to find a location to open the first Scout and Molly's store within 120 days of the FA's execution. (Id.)

         Under the ADA and FA, disputes between the parties are handled differently. Although the ADA contains a dispute resolution provision, it does not have an arbitration clause. (See Doc. No. 2-1 ¶¶ 12-13.) The FA has an arbitration clause. (Doc. No. 1-1 ¶ 21(a).) Although the two agreements include different dispute resolution provisions, the ADA controls when a conflict arises. In fact, the ADA expressly states that its terms will control in the event of a conflict between the two agreements. (Doc. No. 2-1 ¶ 27.) The ADA states in pertinent part:

In the event of a conflict between this [Area Development] Agreement and any Franchise Agreements(s), the terms, conditions and intent of this [Area Development] Agreement will control.

(Id.) In the event of a conflict between the ADA and the FA, the terms of the ADA will govern.

         Shortly after purchasing the franchise, Scott Holdings began having problems with opening the Scout and Molly's stores. (See Doc. No. 1-3.) The Scotts felt that Franlogic and its officers made false and misleading representations during their negotiations, underestimating the total cost to set up the stores and miscalculating the amount of time the Scotts would need to spend managing the operation. (Id.)

         On July 26, 2016, Respondent Scott Holdings initiated an action against Franlogic in California Superior Court seeking a rescission of the ADA. (Id.) In particular, Respondent alleges that Petitioners violated provisions of the California Franchise Investment law, engaged in false advertising, and committed unfair trade practices when negotiating with the Scotts to enter into the ADA. (Doc. No. 2-6 ¶¶ 32-37, 49-64.) Respondent alleges that Petitioners made material misrepresentations and induced the Scotts to enter into the ADA, without a full disclosure of the obligations the Scotts would encumber. (Id. ¶¶ 14-15.) In that case, Respondent does not seek relief under the FA in California. (Id.)

         On September 16, 2016, Franlogic filed a Notice of Removal, removing the California case from California Superior Court to the United States District Court for the Northern District of California. (Doc. No. 2-6.) On October 7, 2016, Franlogic filed its Answer to the Complaint. (Id.) That case is still being litigated there. (Id.)

         B. Procedural History

         On September 21, 2016, Petitioners initiated the action before this Court by filing a Petition to Compel Arbitration. (Doc. No. 1.) Rather than filing a motion to compel arbitration in California, Petitioners decided to institute an action in this Court. Petitioners argued that the FA should govern any controversy between Franlogic and Scott Holdings and that under the FA's dispute resolution provision, the parties should proceed to arbitration. (Id. ΒΆΒΆ 21-30.) On December 14, 2016, Respondent filed a ...

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