August 14, 2025|Publications
August 14, 2025 | United States District Court for the Eastern District of Pennsylvania | Unpublished Opinion
Executive Summary
In an unpublished decision, Judge Kai N. Scott of the Eastern District of Pennsylvania granted in part and denied in part a motion to dismiss claims brought by Nexus 1, LLC and Nex-Stock, LLC against Stephen Sidwell and Nexii Building Solutions Inc. Plaintiffs sought rescission of a “Certified Manufacturing Agreement” under 16 C.F.R. § 436.2, the FTC’s franchise disclosure rule, arguing that Nexii failed to provide the required disclosures. The court refused, holding that Rule 436.2 does not create a private right of action and cannot be stretched into Pennsylvania public policy. That outcome limits disclosure-based claims under federal law, though franchisees may still have remedies under state franchise statutes that expressly allow rescission or damages. The court also held that Nexii waived its contractual right to arbitration by pursuing overlapping litigation in Delaware, underscoring how easily courts may infer waiver from a franchisor’s litigation conduct.
Relevant Background
The case stems from Nexii’s effort to market its modular building panels through what it described as a turnkey franchise model. Plaintiffs alleged that Stephen Sidwell courted them with promises of a revolutionary business system and extraordinary financial returns. Sidwell claimed Nexii’s panels were strong, lightweight, low-carbon, and already proven in Starbucks and Marriott projects. He presented the company as having accomplished advisors, proprietary technology, a robust sales pipeline exceeding $1 billion, and a fully vetted franchise program that would generate average profits above $20 million annually. Plaintiffs say these assurances proved false, remarking that “unfortunately, [Nexii] was a Theranos, not a Tesla”.
Relying on those assurances, Plaintiffs entered into the Nexii Certified Manufacturing Agreement in 2020 to establish a production facility in Hazleton, Pennsylvania. Nex-Stock later acquired over 68,000 Nexii shares through a separate Share Purchase Agreement. Plaintiffs contend that once they began operations, the reality was starkly different. The cost estimates for outfitting the plant were grossly inaccurate, and Nexii failed to deliver a viable plant layout, causing delays, demolition, and redesigns. Plaintiffs alleged that Sidwell concealed the true condition of prior projects, including significant defects and cost overruns at Starbucks and Marriott sites.
According to Plaintiffs, Nexii’s failings extended across nearly every aspect of promised support. The company allegedly misrepresented its ability to provide workable designs, proper certifications, proprietary software, and a trained engineering team. The equipment list shifted constantly, sometimes omitting critical items and other times including overpriced machinery from which Nexii allegedly collected undisclosed rebates. Plaintiffs further claimed Nexii pressured them to underbid contracts, leading to millions in unreimbursed losses. By late 2022, Nexus issued a Notice of Default. Nexii responded by seeking to exercise its contractual step-in rights to the facility, sparking litigation in both Delaware and Pennsylvania.
Roughly a year into the Pennsylvania case, Nexii—a Canadian company—entered reorganization proceedings in Canada. Those proceedings resulted in the sale of substantially all company assets and a sweeping release of liability, with an exception for claims based on “gross negligence or willful misconduct.” The Canadian order was later adopted by the U.S. Bankruptcy Court in Delaware under Chapter 15. Defendants argued this discharge barred the Pennsylvania action. Plaintiffs countered that their claims fell within the exception, framing the bankruptcy proceedings as part of an effort to shield Nexii while leaving investors uncompensated.
Decision
Judge Scott first addressed the Canadian bankruptcy. Defendants argued that Plaintiffs had only “added the words ‘gross negligence’ and ‘willful misconduct’ to fall within the exception” of the bankruptcy order. The court rejected this characterization, holding that “this is not merely window dressing to fall within the exception.” Instead, Plaintiffs alleged “detailed factual allegations in the Amended Complaint that plausibly demonstrate Defendants’ gross negligence or willful misconduct,” such as Sidwell’s promotion of the Starbucks project while “neglect[ing] to disclose the significant expense to remedy numerous deficiencies in the work”.
The court then considered the Manufacturing Agreement’s ADR clause, which required discussion, mediation, and ultimately arbitration of disputes. Although Defendants insisted this barred the suit, the court concluded that Nexii waived the clause by filing defamation and harassment claims in Delaware. Citing White v. Samsung Elecs. Am., Inc., 61 F.4th 334 (3d Cir. 2023), Judge Scott reiterated that “waiver occurs where a party has intentionally relinquished or abandoned a known right.” She explained that Nexii’s defamation claim, which alleged that Nexus made false statements about whether “Nexii’s products do not work as promised in the Manufacturing Agreement,” was itself a dispute arising out of the Agreement. By choosing to litigate rather than arbitrate, Defendants “acted inconsistently with the ADR procedures and intentionally abandoned their right” to arbitrate.
On forum selection, the court distinguished between two agreements. Fraud claims relating to the Shareholders’ Agreement were dismissed because its clause required disputes to be brought in British Columbia. By contrast, securities fraud claims under Section 10(b) of the Securities Exchange Act survived. Applying Morrison v. Nat’l Australia Bank Ltd., 561 U.S. 247 (2010), and United States v. Georgiou, 777 F.3d 125 (3d Cir. 2015), the court found that irrevocable liability occurred in Pennsylvania, making the purchase a domestic transaction. Moreover, the Exchange Act’s non-waiver provision, Section 29(a), prevented enforcement of a foreign forum clause that would “effectively block Plaintiffs from being able to bring an action in the United States to enforce the substantive obligations set out in Section 10(b)”.
The court also applied Pennsylvania’s “gist of the action” doctrine. Pre-contract misrepresentations, such as Sidwell’s claim that Nexii had signed other certified manufacturers, could proceed as fraudulent inducement because “a precontractual duty not to deceive through misrepresentation or concealment exists independently of a later-created contract.” Post-contract claims, however, were dismissed because they depended on duties “created by the terms of a contract and [that] would not ordinarily exist but for the contract”. Tortious interference claims failed for the same reason.
Finally, the court rejected Plaintiffs’ rescission theory under 16 C.F.R. § 436.2. The rule requires franchisors to provide a disclosure document but creates no private right of action. Echoing Vino 100, LLC v. Smoke on the Water, LLC, 864 F. Supp. 2d 269, 281 (E.D. Pa. 2012), Judge Scott wrote that “defendants’ effort to incorporate into Pennsylvania public policy the specific prohibitions and disclosure requirements of Rule 436 is in effect an attempt by a private party to enforce the terms of Rule 436 against another private party.” Pennsylvania courts, she emphasized, will not void a contract unless its terms themselves violate a statute or “cannot be performed without violation of such statute.” Because Plaintiffs alleged only that Nexii failed to provide disclosures, the claim failed.
Looking Forward
Two key lessons emerge from this decision. First, the court confirmed that 16 C.F.R. § 436.2 does not create a private right of action and cannot be repurposed as Pennsylvania public policy to rescind a contract. That is a favorable outcome for franchisors, because it limits federal disclosure disputes to FTC enforcement. But franchisors must also remain mindful that many states have their own franchise statutes, some of which expressly allow franchisees to pursue rescission or damages. The remedies available will depend on the law of the jurisdiction, making multistate compliance a continuing priority.
Second, the arbitration waiver analysis underscores that franchisors risk losing the protections of ADR clauses if they pursue litigation inconsistent with those agreements. As Judge Scott noted, waiver does not require “a smoking gun” but may be inferred from conduct showing “a preference for litigation over arbitration.” For franchisors that rely on arbitration as a risk-management tool, this case illustrates the importance of aligning litigation strategy with ADR provisions and avoiding steps that may be viewed as inconsistent with arbitration.
In short, the decision reflects both restraint and caution: restraint in declining to expand federal disclosure rules into private remedies, and caution in reminding franchisors that arbitration rights may be more fragile than expected if they choose to litigate.
Thomas O’Connell is a Shareholder at Buchalter APC 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.
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