Arruda v. Curves Intl

Case: 20-50734 Document: 00515916531 Page: 1 Date Filed: 06/28/2021
United States Court of Appeals
for the Fifth Circuit United States Court of Appeals
Fifth Circuit
FILED
June 28, 2021
No. 20-50734 Lyle W. Cayce
Clerk
Bonita Arruda; BV Boomers, Inc.; Heather’s Fitness
Center, L.L.C.; Fit and Firm Forever, L.L.C.; Carolyn
Deegan, et al.,
Plaintiffs—Appellants,
versus
Curves International, Inc.; Curves NA, Inc.; North
Castle Partners, L.L.C.,
Defendants—Appellees.
Appeal from the United States District Court
for the Western District of Texas
USDC No. 6:20-CV-92
Before Jones, Southwick, and Costa, Circuit Judges.
Per Curiam:*
Plaintiff franchisees sued franchisor for breach of contract and
violations of the Racketeer Influenced and Corrupt Organizations Act
(“RICO”), alleging mail and wire fraud as the predicate acts to support the
*
Pursuant to 5th Circuit Rule 47.5, the court has determined that this
opinion should not be published and is not precedent except under the limited
circumstances set forth in 5th Circuit Rule 47.5.4.
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No. 20-50734
RICO claims. The district court dismissed the RICO claims on the pleadings
and refused to retain jurisdiction over the state-law claims. On appeal,
Plaintiffs challenge only the ruling on the RICO claims. We AFFIRM.
FACTUAL AND PROCEDURAL BACKGROUND
Plaintiffs are former franchisees who owned and operated 30-minute-
fitness and weight-loss centers using the “Curves for Women” name. They
sued Curves International, Inc., Curves NA, Inc., and North Castle Partners,
L.L.C., alleging breach of contract and violations of RICO.
The first 32 counts are breach-of-contract claims; the RICO claims are
Counts 33 and 34. The two counts differ only in the addition of Curves NA
as a defendant in Count 34 for those plaintiffs who signed or renewed
franchise agreements after the formation of Curves NA.
Plaintiffs’ complaint alleged that the Defendants concealed
information from franchisees. They essentially claim that the Defendants
made two critical omissions in at least two different documents, and that
these omissions suffice as predicate acts of mail and wire fraud for RICO
purposes. Because this appeal is from the grant of a Rule 12(b)(6) motion to
dismiss, we accept the Plaintiffs’ well-pled factual allegations as true. We
summarize the key ones.
First, when North Castle purchased and assumed control of Curves
International, 1 Plaintiffs allege it drafted the “Operating Blueprint,” which
disclosed an intent to “prune 1,000+” Curves locations. Second, in 2015
1
The complaint explains that North Castle purchased a majority control of Curves
International Holdings, Inc., in 2012, and that same year Curves Holdings acquired 100%
interest in Curves International.
2
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pursuant to a market study, Defendants became aware that the Curves name
had a “negative halo,” and “franchise locations would continue to close at a
rate of more than 15% per year if nothing was done.” Even in light of this
information, North Castle “decided that it would make no further
investment in the Curves brand, thereby ensuring the further collapse of the
Curves franchise system.”
Plaintiffs claim that these two items of information — the decision to
prune and the results of the marketing study — should have been disclosed
in at least two documents. First, they claim that disclosure was required in
the Franchise Disclosure Documents (“FDDs”) that the Federal Trade
Commission requires franchisors to provide to prospective franchisees 14
calendar days before signing a franchise agreement. 16 C.F.R. §§ 436.2(a),
436.5(a)(6)(iv). Second, Plaintiffs claim that the information should have
been disclosed in a letter dated February 9, 2016, from North Castle’s
“industry advisor,” Marty Sharma, that was sent to all current “Franchisee
Partners.” That letter outlined areas of positive changes the franchisor
claimed to make to the franchise “while at the same time, Defendants knew
that the franchise system would fail.” The failure to share these results in
the FDDs or the Sharma letter, as well as in “other electronic
communications,” especially while affirmatively representing to make
positive changes, is the basis for Plaintiffs’ RICO claims.
Plaintiffs sued in the United States District Court for the Western
District of Texas, asserting that the court had subject-matter jurisdiction
over the case because the RICO claim presented a federal question, and the
court could exercise supplemental jurisdiction over Plaintiffs’ state-law
breach-of-contract claims. 28 U.S.C. §§ 1331, 1367. The district court
concluded that Plaintiffs had not stated a viable RICO claim. It held that
Plaintiffs had not alleged a predicate act because Plaintiffs did not sufficiently
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allege facts establishing that the Defendants had a duty to disclose the
omitted information, nor did they plead predicate acts of mail and wire fraud
with adequate particularity. It also held that many of the Plaintiffs “lacked
standing” because causation was not met for Plaintiffs whose franchise
agreements predated any omission by the Defendants. The district court
dismissed the RICO claims. Because only the state-law claims were left, the
court declined to exercise supplemental jurisdiction and dismissed the
remaining claims as well. Plaintiffs timely appealed.
DISCUSSION
We review the district court’s dismissal under Federal Rule of Civil
Procedure 12(b)(6) de novo, accepting the Plaintiffs’ well-pled facts as true
and viewing the facts in their favor. Molina-Aranda v. Black Magic Enters.,
L.L.C., 983 F.3d 779, 783 (5th Cir. 2020). We may affirm a Rule 12(b)(6)
dismissal on any grounds supported by the record. Walker v. Beaumont Indep.
Sch. Dist., 938 F.3d 724, 734 (5th Cir. 2019).
The complaint must provide the grounds entitling the Plaintiffs to
relief, “requir[ing] more than labels and conclusions, and a formulaic
recitation of the elements of a cause of action will not do.” Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 555 (2007). It must state a plausible claim for relief
— one that may be inferred from the complaint’s factual allegations. Ashcroft
v. Iqbal, 556 U.S. 662, 678 (2009). Because Plaintiffs here rely on fraud as
the predicate act for RICO, their complaint is subject to the heightened
pleading standard of Federal Rule of Civil Procedure 9(b), requiring a
plaintiff to “state with particularity the circumstances constituting fraud.”
Williams v. WMX Techs. Inc., 112 F.3d 175, 177 (5th Cir. 1997); Fed. R. Civ.
P. 9(b). This requires “at a minimum” that a plaintiff provide the “‘who,
what, when, where, and how’ of the alleged fraud.” U.S. ex rel. Thompson v.
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Columbia/HCA Healthcare Corp., 125 F.3d 899, 903 (5th Cir. 1997) (quoting
Williams, 112 F.3d at 179).
The issue in this case is whether Plaintiffs alleged facts with sufficient
particularity to support that the Defendants engaged in the predicate acts of
mail and wire fraud. Specifically, the case turns on whether the Defendants’
omissions violated an affirmative duty to disclose information to the
Plaintiffs.
RICO provides a private right of action, including “threefold the
damages” for “[a]ny person injured in his business or property by reason of
a violation of section 1962 of this chapter.” 18 U.S.C. § 1964(c). The “by
reason of” language requires a plaintiff to show the defendant’s violation was
a but-for cause and a proximate cause of the plaintiff’s injury. Bridge v.
Phoenix Bond & Indem. Co., 553 U.S. 639, 654 (2008). 2 A plaintiff asserting a
RICO claim under Section 1962(c) must allege “(1) conduct (2) of an
enterprise (3) through a pattern (4) of racketeering activity.” Sedima,
S.P.R.L. v. Imrex Co., Inc., 473 U.S. 479, 496 (1985) (footnote omitted). A
“‘pattern of racketeering activity’ requires at least two acts of racketeering
activity.” 18 U.S.C. § 1961(5). Plaintiffs here rely on the racketeering
activity of mail and wire fraud as the predicate acts. § 1961(1)(B).
For the predicate act of mail fraud, a plaintiff must allege: (1) a scheme
to defraud; (2) interstate or intrastate use of the mails; (3) use of the mails in
2
These requirements are at times referred to as “RICO standing,” but “courts
should avoid using that term.” Gil Ramirez Grp., L.L.C. v. Hous. Indep. Sch. Dist., 786 F.3d
400, 409 n.8 (5th Cir. 2015) (alteration in original) (quoting Lexmark Int’l, Inc. v. Static
Control Components Inc., 572 U.S. 118, 128 n.4. (2014)). “Proximate causation is not a
requirement of Article III standing . . . . [rather,] [i]t is an element of the cause of action
under the statute, and so is subject to the rule that ‘the absence of a valid . . . cause of action
does not implicate subject-matter jurisdiction.’” Lexmark, 572 U.S. at 134 n.6 (quoting
Steel Co. v. Citizens for a Better Env’t, 523 U.S. 83, 89 (1998)).
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connection with the scheme to defraud; and (4) actual injury to the plaintiff.
Landry v. Air Line Pilots Ass’n Int’l AFL-CIO, 901 F.2d 404, 428 (5th Cir.
1990), opinion modified on denial of reh’g (Apr. 27, 1990). The elements of
wire fraud are the same, except that wire fraud requires interstate use of the
wire. § 1343.
We focus on the first element, which is a scheme to defraud. A
plaintiff may rely on nondisclosure as “proof of a scheme to defraud only
where the defendant is under a duty to disclose.” United States v. Harris, 821
F.3d 589, 600 (5th Cir. 2016). “The gravamen of the offense is the scheme
to defraud, and any ‘mailing that is incident to an essential part of the scheme
satisfies the mailing element,’” Bridge, 553 U.S. at 647 (quoting Schmuck v.
United States, 489 U.S. 705, 712 (1989)), but “the compensable [RICO]
injury necessarily is the harm caused by predicate acts sufficiently related to
constitute a pattern,” Sedima, 473 U.S. at 497.
Plaintiffs claim that the Federal Trade Commission’s Franchise Rule
imposed a duty on Defendants to disclose the decision to prune franchises
and the kind of information that was contained in the marketing study. The
Franchise Rule requires franchisors to furnish prospective franchisees with
disclosure documents at least 14 calendar days before the prospective
franchisee signs the franchise agreement. 16 C.F.R. § 436.2(a). Specifically,
Plaintiffs rely on the part of the Franchise Rule that says, “Disclose . . . [t]he
general market for the product or service the franchisee will offer. In
describing the general market, consider factors such as whether the market is
developed or developing, whether the goods will be sold primarily to a certain
group, and whether sales are seasonal.” § 436.5(a)(6)(iv).
Plaintiffs’ position is that the Franchise Rule required the Defendants
to disclose in their FDDs “from August 2012 through present” that the
Curves name had a “negative halo” and that the franchise system was failing.
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Even if the Franchise Rule would cover such omissions, Plaintiffs concede
the Federal Trade Commission Act (“FTCA”) provides no private right of
action. E.g., Fulton v. Hecht, 580 F.2d 1243, 1248 n.2 (5th Cir. 1978)
(“[T]here is no private cause of action for violation of the FTC Act.”). Other
circuits agree. Morrison v. Back Yard Burgers, Inc., 91 F.3d 1184, 1187 (8th
Cir. 1996); R.T. Vanderbilt Co. v. Occupational Safety & Health Rev. Comm’n,
708 F.2d 570, 574 n.5 (11th Cir. 1983); Holloway v. Bristol-Myers Corp., 485
F.2d 986, 1002 (D.C. Cir. 1973); Carlson v. Coca-Cola Co., 483 F.2d 279, 280–
81 (9th Cir. 1973).
In a similar situation, the Eleventh Circuit rejected the theory that a
violation of the Safety Act, which provides no private right of action, could
serve as the basis for an affirmative duty for mail-fraud (and thus civil-RICO)
purposes. Ayres v. Gen. Motors Corp., 234 F.3d 514, 521–22 (11th Cir. 2000).
In reaching this conclusion, that court relied on a prior decision of the D.C.
Circuit, which similarly rejected that a violation of the Service Contract Act
(“SCA”) amounted to mail fraud to support a RICO claim. Danielsen v.
Burnside-Ott Aviation Training Ctr., Inc., 941 F.2d 1220, 1229 (D.C. Cir.
1991). Though previous circuits had held that the SCA did not include a
private right of action, the question whether a violation of the SCA gave rise
to a private civil action under RICO had not been explicitly answered. Id. at
1227. The D.C. Circuit found the lack of a private right of action significant:
“If there is no implied cause of action for damages, how much the less for
treble damages?” Id. at 1228.
Congress’s omission of a private right of action in the FTCA controls.
A violation of the Franchise Rule does not itself constitute a predicate act of
mail or wire fraud to support a RICO claim.
An argument appeared in Plaintiffs’ opening brief that was not
presented to the district court. The argument is that “the conduct which
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Plaintiffs allege violated the Franchise Rule is also fraud under Texas
common law,” citing Four Brothers Boat Works, Inc. v. Tesoro Petroleum Co.,
Inc., 217 S.W.3d 653 (Tex. App.—Houston [14th Dist.] 2006, pet. denied).
Specifically, they argue that Texas law imposes a duty to disclose not only
when a confidential or fiduciary relationship exists but also under other
circumstances identified in Four Brothers. See id. at 670–71. They rely on
Four Brothers to suggest that the omission of the information from the Sharma
letter was a predicate act. After the Defendants responded that this argument
was raised too late, Plaintiffs replied that their reliance on Four Brothers was
not new but simply a “further discussion of Plaintiffs’ position that failure to
disclose under the [Franchise] Rule can be the basis of a fraud claim under
Texas law, an issue always before the District Court.”
Recharacterizing the issue as a follow-on to other arguments does not
persuade. Plaintiffs never presented to the district court that a state-law duty
could be the basis of the federal RICO claim or that violation of the Franchise
Rule evidenced fraud under Texas law. These arguments are therefore
waived, and we do not consider them. See LeMaire v. La. Dep’t of Transp. &
Dev., 480 F.3d 383, 387 (5th Cir. 2007).
In conclusion, Plaintiffs have not sufficiently pled the predicate acts
of mail or wire fraud because they have not shown that the Defendants had a
duty to disclose the information that Plaintiffs rely on as the basis for their
claim. As the district court stated, we must be wary of transforming business-
contract or fraud disputes into federal RICO claims. “Breach of contract is
not fraud, and a series of broken promises therefore is not a pattern of fraud.
It is correspondingly difficult to recast a dispute about broken promises into
a claim of racketeering under RICO.” Perlman v. Zell, 185 F.3d 850, 853 (7th
Cir. 1999).
AFFIRMED.
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