October 25, 2022
By: Thomas O’Connell
Citation:
Functional HIIT Fitness, LLC v. F45 Training Incorporated, 2022 WL 17828930 (E.D. Mich. Oct. 25, 2022)
Executive Summary:
In this unpublished decision, United States Magistrate Judge Kimberly G. Altman of the United States District Court for the Eastern District of Michigan issued recommendations on motions to dismiss various claims and defendants in a contract case concerning franchise agreements. The plaintiff, Functional HIIT Fitness, LLC, alleged fraudulent inducement, misrepresentation, and violations of multiple franchise laws against F45 Training Incorporated and its executives. The court partially granted and partially denied the defendants’ motions to dismiss, limiting the scope of claims and dismissing certain defendants based on jurisdictional and substantive grounds.
Relevant Background:
Functional HIIT Fitness, LLC (“Functional HIIT”) entered into franchise agreements with F45 Training Incorporated (“F45”) to operate three fitness studios in Michigan. The agreements, executed in 2019, were governed by Franchise Disclosure Documents (FDDs) that Functional HIIT alleged were outdated or improperly disclosed.
Functional HIIT alleged that F45, through its executives, made financial performance representations that were purportedly misleading and induced the agreements. These representations allegedly promised unrealistic break-even periods and high internal rates of return. Functional HIIT further asserted that the FDDs omitted critical information, including accurate cost estimates for leasehold improvements and equipment, as well as details on additional fees such as music licensing.
The plaintiff also argued that the defendants’ actions violated the Michigan Franchise Investment Law (MFIL), California Franchise Investment Law (CFIL), and other statutory provisions. They contended that these misrepresentations caused significant financial harm and sought damages for breach of contract, fraud, and statutory violations.
F45 and its executives moved to dismiss, citing lack of personal jurisdiction over individual defendants and failure to state claims under Federal Rule of Civil Procedure 12(b).
Decision:
The court’s recommendations addressed multiple aspects:
- The court found insufficient personal jurisdiction over most individual defendants, including Adam Gilchrist, Robert Deutsch, and others, based on their limited contacts with Michigan.
- However, jurisdiction over Marc Marano, F45’s President of U.S. Expansion, was upheld due to his direct involvement in negotiations and alleged misrepresentations targeting the plaintiff in Michigan.
- The court recommended dismissal of certain claims, including those under the MFIL, CFIL, and Delaware Deceptive Trade Practices Act, as the allegations failed to meet statutory requirements.
- Claims for breach of the implied covenant of good faith and fair dealing were also dismissed, with the court considering and rejecting the plaintiff’s argument that such claims were supported by the agreements.
- Claims of fraud and negligent misrepresentation against F45 and Marano were allowed to proceed, as they were sufficiently supported by allegations of specific misleading statements and omissions during the franchise sales process.
Looking Forward:
While this case presents several interesting issues for the franchise community, particularly around compliance with disclosure obligations and financial representations, there are two critical takeaways from the Court’s decision:
- Franchisors must ensure strict compliance with Federal Trade Commission (FTC) rules, particularly regarding the timing, content, and delivery of Franchise Disclosure Documents (FDDs). This case underscores that outdated or incomplete FDDs, even if provided unintentionally, can significantly impact a franchisor’s legal standing.
- The Court’s willingness to allow claims based on alleged financial misrepresentations to proceed highlights the importance of ensuring that all statements made by franchisors—whether verbal, written, or implied—are accurate, compliant with FTC rules, and substantiated by evidence. Even casual remarks or informal communications can carry significant legal weight if deemed to have induced a franchisee’s decision.
While the decision underscores the importance of transparency and compliance, it also demonstrates that courts are likely to scrutinize franchisor practices closely, particularly when franchisees allege financial harm tied to misrepresentation or omissions. This matter highlights the need for franchisors to review and revise franchise agreements, disclosure processes, and communication policies to minimize risk and ensure adherence to legal standards.