June 17, 2026|Franchise Frontlines
June 17, 2026 | U.S. District Court, E.D. Wisconsin | Slip Copy – only the Westlaw citation is currently available (2026 WL 1746951)
Executive Summary
In a slip-copy decision available only on Westlaw (2026 WL 1746951), United States Magistrate Judge Stephen C. Dries of the Eastern District of Wisconsin granted in part a Rule 12(b)(6) motion by The Marcus Corporation, Marcus Investments, and Verlo Mattress executive Dirk Stallman — the plaintiffs and counter-defendants — to dismiss counterclaims brought by their franchisee, MKD Investment Holdings, LLC. MKD, which had purchased Verlo mattress franchises in the San Antonio area, alleged pre-sale misrepresentations — among them that Verlo’s Franchise Disclosure Document (FDD) understated the Item 7 estimated initial investment and overstated Item 19 financial performance, and that the brand was financially backed by the Marcus family — and pleaded counterclaims under the Wisconsin Franchise Investment Law (WFIL), the Wisconsin and Texas Deceptive Trade Practices Acts, common-law negligent and intentional misrepresentation, and Wisconsin civil theft. The counter-defendants argued that MKD had dealt with non-party Verlo rather than with them, that the franchise agreements’ integration and no-reliance provisions defeated reliance-based theories, that statutory exemptions barred the deceptive-trade claims, and that the fraud counts failed Rule 9(b)’s particularity requirement. The court agreed in substantial part, dismissing the Wisconsin DTPA claim (no representation made “to the public”), the Texas DTPA claim (high-value-transaction exemption), the negligent-misrepresentation claim (barred by the no-reliance and integration clauses), and the civil-theft claim (no alleged ownership interest) with prejudice, while dismissing the WFIL and intentional-misrepresentation counts without prejudice for failure to plead fraud with particularity and granting MKD leave to amend by July 10, 2026.
Relevant Background
MKD Investment Holdings, LLC is a two-member limited liability company based in San Antonio, Texas. According to the counterclaims, MKD began exploring franchise opportunities in 2022 and was introduced to Verlo, a mattress-store franchisor headquartered in Milwaukee, Wisconsin. Dirk Stallman was an executive of Verlo, and Marcus Investments LLC was Verlo’s controlling member, whose members were Gregory, David, and Andrew Marcus; the counterclaims did not allege The Marcus Corporation’s specific legal relationship to Verlo or to Marcus Investments. Notably, Verlo itself was not a party to the action. The dispute traces to a December 2024 AAA arbitration demand MKD filed against Verlo, Stallman, and the Marcus entities; in August 2025 Stallman and the Marcus entities sued in federal court seeking a declaration that they were not obligated to arbitrate, all parties consented to magistrate-judge jurisdiction, and in February 2026 MKD filed the six counterclaims at issue.
MKD alleged that the counter-defendants heavily promoted Verlo during recruitment as part of The Marcus Corporation and Marcus Investments, with financial backing by the Marcus “family,” including a “Why Invest In Verlo” video in which David Marcus called Verlo “a Marcus family company,” and that Marcus family members personally attended Verlo “Discovery Days.” MKD further alleged that Verlo’s FDD, dated May 2022, understated Item 7 initial-investment estimates — for example, listing $17,400 per location for leasehold improvements against MKD’s actual outlays of roughly $250,000 to more than $900,000 — and that Item 19’s approximately $1.3 million average annual net-sales figure was misleading because the sampled stores were concentrated in or around Wisconsin, where Verlo had established brand recognition. The court noted that Item 19 itself disclosed the sample composition and warned in bold that individual results may differ, and that Item 20 confirmed the systemwide store counts.
MKD and Verlo entered three franchise agreements, dated July 2022 and December 2023, each of which incorporated a franchisee disclosure questionnaire. In that questionnaire MKD acknowledged that it had reviewed the franchise agreements and FDD, that any prior oral or written statements not set out in the franchise agreement would not be binding, and that no one speaking for the company had made promises concerning advertising, marketing, training, or support contrary to the disclosure document. MKD ultimately struggled financially, closed its Verlo stores, and alleged that the Marcus “acclaim and influence” highlighted during recruitment never materialized and that the counter-defendants overcharged franchisees for required products.
Decision
The court addressed Rule 9(b) first, treating it as a threshold problem for every fraud-grounded counterclaim. It found that MKD’s counterclaims lacked the “who, what, when, where, and how” that Rule 9(b) demands, because they referred to the counter-defendants collectively and attributed statements interchangeably to non-party Verlo and to “counter-defendants” generally without identifying the speaker, time, place, or content. Citing Vicom, Inc. v. Harbridge Merchant Services, the court reiterated that Rule 9(b) is not satisfied where a pleading “vaguely attributes the alleged fraudulent statements to ‘defendants'” and that, with multiple defendants, the pleading “should inform each defendant of the nature of his alleged participation in the fraud.” The court observed that MKD attributed only a single statement to David Marcus — who was not even a named counter-defendant — and otherwise lumped the parties together, so the fraud allegations did not satisfy the standard.
On the WFIL count, the parties disputed the statute’s geographic scope. The court adopted the disjunctive reading from Cousins Subs Systems, Inc. v. Better Subs Development, Inc., reasoning that giving meaning to the statute’s exception clause required interpreting WFIL to reach offers not directed to or received by an offeree in Wisconsin, and thus — on this reading — rejected the counter-defendants’ argument that the law did not apply because MKD received no offer in Wisconsin. The court accordingly held the WFIL count survived on the merits but dismissed it without prejudice solely for failing Rule 9(b). By contrast, the Wisconsin DTPA claim was dismissed with prejudice because the alleged statements were not made “to the public”: relying on Kailin v. Armstrong and again on Cousins Subs, the court noted that MKD had not alleged Discovery Day was open to the public rather than to a category of people with a particular relationship to Verlo, and that a publicly accessible video does not make a statement within it a statement “to the public.” The Texas DTPA claim was dismissed with prejudice under the Section 17.49(g) high-value-transaction exemption; the court treated MKD’s multiple franchise agreements as one “project” of opening Verlo stores in the San Antonio area involving total consideration exceeding $500,000, and considered the exemption at the pleading stage because the relevant facts appeared on the face of the counterclaims.
The court then divided the two common-law misrepresentation counts. The negligent-misrepresentation claim was dismissed with prejudice: because “no-reliance clauses are enforceable, and integration clauses work to exclude oral communications from the written contract,” and because “[i]ntent is irrelevant to this analysis,” the franchise agreements’ clauses defeated the reliance element as a matter of law. The court expressly distinguished the intentional-fraud count, however, noting that “exculpatory clauses are not enforceable when the fraud is carried out intentionally or recklessly”; it therefore dismissed that count without prejudice, reasoning it was “conceivable” MKD could replead it with sufficient particularity. Finally, the civil-theft count was dismissed with prejudice because MKD did not allege that the counter-defendants held an ownership interest in the money supposedly taken, and because Verlo, the contracting party, was not before the court. Granting leave to amend the two surviving counts by July 10, 2026, the court cautioned that its review had not revealed any “obvious actionable statements or omissions.”
Looking Forward
Although this is a single magistrate-judge decision applying Wisconsin and Texas law on a motion to dismiss, its treatment of no-reliance and integration provisions offers a useful, and appropriately bounded, defense-side data point for franchisors facing pre-sale and FDD-fraud counterclaims. On this record the court held that the franchise agreements’ no-reliance and integration clauses — reinforced by a franchisee disclosure questionnaire in which the franchisee acknowledged that unwritten statements were not binding — defeated the reliance element of a negligent-misrepresentation claim as a matter of law, and that intent was irrelevant to that analysis. The important caveat for franchisors is that the same court held these clauses did not bar the intentional-misrepresentation count, because exculpatory provisions are unenforceable against fraud carried out intentionally or recklessly. The defensive lesson is to draft precise no-reliance and integration provisions and to document the franchisee’s acknowledgment of them, while recognizing that such clauses may dispose of negligence-based reliance theories but should not be assumed to immunize a system against a well-pleaded intentional-fraud claim.
The statutory-scope and exemption holdings are similarly instructive as defensive filters, and they transfer by analogy to other jurisdictions with comparable statutes. Here the court dismissed the Wisconsin DTPA claim because private, relationship-based recruiting at a Discovery Day was not a representation “to the public,” a limitation that resembles the public-dissemination and consumer-transaction thresholds found in many state deceptive-trade statutes. The Texas DTPA claim failed under a $500,000 high-value-transaction exemption, with the court aggregating related franchise agreements as a single “project” and applying the exemption at the pleading stage because the numbers appeared on the face of the counterclaims. Franchisors defending large multi-unit deals may find it worthwhile to test early whether an asserted consumer-protection statute reaches private commercial negotiations at all, and whether it carves out high-value or business-to-business transactions — defenses that, where available, can resolve claims cleanly and with prejudice.
Rule 9(b) supplied the third theme, and the decision underscores both its force and its limits. The court found the counterclaims deficient because they lumped a franchisor’s parent, controlling member, and executive together — and blended them with statements attributable to a non-party operating franchisor — without identifying who said what, when, and how; that pleading posture is a recurring vulnerability franchisors can press when affiliates and non-parties are grouped indiscriminately. At the same time, a Rule 9(b) dismissal ordinarily comes with leave to amend, so it tends to narrow and delay fraud theories rather than end them. Two further observations in the opinion, offered here only as this court’s own remarks on this record, may aid defense counsel in analogous matters: the court suggested that much of the alleged “fraud” reflected a “misapprehension about the imprimatur of the Marcus Corporation” and that it would be “difficult to show” the parent-involvement statements amounted to an actionable guarantee, and the court flagged, unprompted, a potential three-year WFIL statute-of-limitations issue running from execution of the franchise agreement. Franchisors and their counsel should keep attribution defenses, limitations periods, and the substance-versus-puffery line in view when evaluating exposure to franchisee misrepresentation counterclaims.
Thomas O’Connell is a Partner at Buchalter LLP and Chair of the firm’s Franchise Practice Group. For questions about this article or media inquiries, you can contact Tom at toconnell@buchalter.com.
This article is based solely on the opinion of the Court in this matter. The author has not conducted any independent investigation into the facts. For the avoidance of doubt, each statement related to the law and facts in this article is drawn from the Court’s opinion in this case. It was drafted with the assistance of an artificial intelligence system. AI systems can make mistakes, including in describing legal authority. Readers should independently confirm any legal authority before relying on it.
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