Federal District Court Offers Broad Ruling on a Franchisor and Individual Officer’s Motion to Dismiss

A franchisee, Functional HIIT Fitness, has filed suit in U.S. District Court in the Eastern District of Michigan against a franchisor, F45 Training Incorporated, and five of its officers: Adam Gilchrist, Robert Deutsch, Marc Marano, Luke Armstrong, and Nick Abrahams. In Functional HIIT Fitness, LLC v. F45 Training Inc. et al., F45 operated exercise studios and sold franchises for the same business. Functional HIIT bought three franchises based in Michigan. Functional HIIT’s claims centered on alleged misrepresentations the individual defendants made prior to execution of the franchise agreements at issue and F45’s performance of the terms of those agreements. Defendant Marano specifically made multiple representations about the future performance of the franchises to the plaintiff prior to execution of the franchise agreements.

The defendants all moved to dismiss Functional HIIT’s complaint. The opinion analyzes four of the five individual defendants’ objections to personal jurisdiction: Gilchrist, Deutsch, Armstrong, and Abrahams. There is no discussion of Marano in this regard or even if he moved to dismiss on these grounds. Presumably, the nature of his communications with the plaintiff were enough to establish jurisdiction.

Gilchrist, Deutsch, Armstrong, and Abrahams were not Michigan residents; instead, they were all Australian citizens. Deutsch was the only one of the four who lived there. Armstrong and Gilchrist resided in Texas, and Abrahams lived in California.

The Court held that merely being officers of F45 was insufficient to create personal jurisdiction. Rather, the plaintiff needed to present evidence of their personal actions giving rise to the claims at issue for the Court to potentially exercise personal jurisdiction. Two emails that Armstrong sent to Functional HIIT were not enough because they were merely form responses to inquiries about the purchase of a franchise.

Additionally, the appearance of Gilchrist’s name in the franchise agreement was merely in his role as CEO of F45 and not suggestive of some individual action outside the scope of his duties on behalf of the corporation. Similarly, the plaintiff’s allegations about Deutsch failed to explain how his actions were outside the scope of his corporate duties. While Abrahams did correspond over email with Functional HIIT and via form, the plaintiff was unable to tie his specific communications to the actual claims at issue, so that was insufficient to establish jurisdiction as well.

Next, the Court grappled with which state law to apply to the claims at issue: Michigan’s or Delaware’s. The franchise agreements contained a Delaware choice of law clause. On this basis, F45 sought dismissal of claims for violation of the Michigan Franchise Investment Law and the California Franchise Investment Law. The Court analyzed whether application of Michigan or Delaware law was appropriate. (The opinion did not explain why the Court did not consider application of the California statute.)

While there are differences between Delaware and Michigan franchise law, the key inquiry is whether application of Delaware law would erode the protections otherwise available that the Michigan law would provide. On this basis, the Court found Delaware law lacked notice and disclosure requirements that the Michigan statute required for the protection of franchisees. Because Michigan has a strong interest offering these protections, application of Delaware law would violate a fundamental goal of the Michigan Franchise Investment Law.

The Court then considered whether the substantive claims for breach of contract, fraud, negligent misrepresentation, and unjust enrichment could survive. The complaint provided enough detail to support the claims for breach of contract, fraud, and negligent misrepresentation. The Court denied F45’s motion to dismiss those claims. It dismissed the claim for unjust enrichment because the plaintiff had conceded the franchise agreements were valid contracts. When a valid contract exists, a plaintiff cannot advance a claim for unjust enrichment. The claim for violation of the Michigan Franchise Investment Law survived because of the application of Michigan — and not Delaware — law to the case. For this same reason, the Court dismissed the claim for violation of the California Franchise Investment Law.

An executive of a franchisor should take care not to act outside the scope of their duties as an officer of the company and specifically refrain from making specific, unwarranted representations about a franchise’s potential future performance. Additionally, a court may disregard a choice of law clause in favor of applying a state franchise statute which adds protections that the alternative forum’s law does not.