September 28, 2023
By: Thomas O’Connell
Citation:
Functional HIIT Fitness, LLC v. F45 Training Incorporated, 2023 WL 6367691 (E.D. Mich. Sept. 28, 2023).
Executive Summary:
In this unpublished decision, Judge F. Kay Behm of the United States District Court for the Eastern District of Michigan denied significant portions of motions to dismiss filed by Defendants F45 Training Incorporated and several associated individuals. The court’s findings focus on allegations by Functional HIIT Fitness, LLC that Defendants violated federal and state franchise laws through deceptive practices and misrepresentations in franchise agreements and disclosure documents. The court allowed key claims to proceed, while dismissing some claims on jurisdictional and procedural grounds.
Relevant Background:
The current proceedings build on prior litigation between Functional HIIT Fitness, LLC (“Functional HIIT”) and F45 Training Incorporated (“F45”), where Magistrate Judge Kimberly G. Altman issued a mixed ruling in 2022. In the earlier decision, several individual defendants were dismissed for lack of personal jurisdiction, and claims involving fraudulent inducement and negligent misrepresentation were allowed to proceed, while others were dismissed for insufficient pleading or statute of limitations issues.
In the present case, Functional HIIT continued to allege that F45 and its executives misrepresented financial projections and provided outdated FDDs during franchise negotiations for three Michigan studios. Functional HIIT asserted that misleading financial performance data, including spreadsheets indicating quick profitability and high returns, were provided outside the FDDs. It also claimed that outdated and non-compliant FDDs were used in violation of Federal Trade Commission (FTC) regulations. Additionally, the failure to disclose significant costs, such as leasehold improvements and additional fees, which differed from representations made during negotiations, formed part of the allegations.
Functional HIIT claimed damages under several theories, including breach of contract, fraudulent inducement, negligent misrepresentation, and violations of federal and state franchise laws.
Decision:
The court issued a mixed ruling:
- Claims against individual defendants, including Adam Gilchrist and Luke Armstrong, were dismissed for lack of personal jurisdiction, as they did not have sufficient “minimum contacts” with Michigan under the state’s long-arm statute (Mich. Comp. Laws § 600.705) and due process requirements, following the framework in Burger King Corp. v. Rudzewicz, 471 U.S. 462 (1985).
- Claims under the Michigan Franchise Investment Law (MFIL), MCL § 445.1501 et seq., were allowed to proceed. The Plaintiff demonstrated plausible allegations that F45 failed to meet the disclosure requirements, as outlined in Neogen Corp. v. Neo Gen Screening, Inc., 282 F.3d 883 (6th Cir. 2002).
- The court held that Plaintiff adequately pled fraud and misrepresentation, citing Ashcroft v. Iqbal, 556 U.S. 662 (2009), for the standard that allegations must be plausible and supported by sufficient facts.
- The Court modified a previous Report and Recommendation (R&R), dismissing Counts V, VI, VII, and VIII, while allowing Counts III and IV to proceed. Notably, the Court rejected certain procedural defenses but ruled that other claims were insufficiently pleaded or barred by statute of limitations.
- Claims of overcharging for heart rate monitors and undisclosed music licensing fees were upheld as sufficient to state a claim.
Looking Forward:
This case provides several valuable insights for franchisors navigating compliance with franchise laws and disclosure obligations. While the court denied the Defendants’ motions to dismiss on key claims, it made clear the significant role proper disclosure and adherence to regulatory frameworks play in avoiding liability.
- The court’s findings underscore that outdated or missing Franchise Disclosure Documents (FDDs) can severely undermine a franchisor’s defense. Ensuring that FDDs are accurate, current, and provided within the regulatory timelines is essential to mitigate risks. Had F45’s disclosures been compliant with the FTC Franchise Rule and state laws, the outcome might have been more favorable.
- Unauthorized financial projections presented outside of the FDD played a central role in the Plaintiff’s claims of misrepresentation. Thus, franchisors must be cautious to confine all financial performance representations to the FDD to avoid similar challenges.
As repeatedly highlighted in cases like this, courts hold franchisors to high standards in ensuring that franchisees are provided with transparent and legally compliant disclosures. This decision serves as a reminder for franchisors to review their agreements, communications, and compliance protocols to address potential vulnerabilities and strengthen their legal position.