Pasture Gate Holdings, Inc. v. Gruzd, Bus. Franchise Guide (CCH) ¶ 17,731 (S.D. Cal. May 19, 2025).
Case Summary
In the case of Pasture Gate Holdings, Inc. v. Nadia Gruzd, the U.S. District Court for the Southern District of California addressed claims brought by Pasture Gate Holdings, Inc. (“Plaintiff”) against Nadia Gruzd (“Defendant”) concerning alleged violations of the California Franchise Investment Law (CFIL) and the California Unfair Competition Law (UCL). The Plaintiff, a North Carolina corporation, purchased a franchise business from Gruzd, who was associated with the “AllMed Search” brand, a healthcare recruiting service. The Plaintiff alleged that Gruzd provided incomplete and misleading information in the Franchise Disclosure Document (FDD) and made unlawful financial performance representations, which induced the Plaintiff to purchase the franchise.
Court Decision
The court denied Gruzd’s motion to dismiss the Plaintiff’s claims. The court found that the Plaintiff had adequately pleaded claims under both the CFIL and UCL, and that the Defendant’s objections, including the statute of limitations defense, were not sufficient to warrant dismissal at this stage.
Legal Analysis
CFIL Claims
The Plaintiff’s CFIL claims were based on alleged statutory violations related to disclosures in the MSC-FDD. The Plaintiff argued that Gruzd failed to disclose the existence of a predecessor entity, Unlimited Med Search Franchise System, Inc. (UMFS), which was relevant under Item 1 of the FDD. The court found that the Plaintiff’s allegations were sufficient to support a reasonable inference that UMFS was a predecessor to MSC, thus supporting the claim of inadequate disclosure. Additionally, the Plaintiff alleged that Gruzd failed to disclose litigation related to UMFS under Item 3, which the court found plausible given the allegations of a non-confidential settlement. The Plaintiff also claimed that Gruzd made false financial performance representations not included in Item 19, which the court found were sufficiently alleged.
UCL Claims
The Plaintiff’s UCL claims were based on allegations that Gruzd accessed the Plaintiff’s computer systems without permission, which was outside the scope of the CFIL and FTC Franchise Rule, thus not preempted. The court allowed the Plaintiff to plead for equitable relief in the alternative to damages, as permitted under Rule 8(a)(3).
Significant Legal Principles
The court emphasized the importance of truthful and non-misleading disclosures in franchise sales under the CFIL, which aligns with the FTC Franchise Rule’s requirements. The decision also highlighted that claims under the UCL could be based on conduct not covered by the CFIL or FTC Franchise Rule, allowing for independent claims. The court’s ruling on the statute of limitations underscored that a claim could not be dismissed unless it was clear from the complaint that the statute had run.
In conclusion, the court’s decision to deny the motion to dismiss allowed the Plaintiff’s claims to proceed, emphasizing the necessity for franchisors to adhere to disclosure requirements and the potential for franchisees to seek redress under both state and federal laws.
Detailed Explanation of the Court’s Ruling
The court denied Defendant Nadia Gruzd’s motion to dismiss, concluding that Pasture Gate Holdings, Inc. had adequately alleged claims under both the California Franchise Investment Law (CFIL) and the California Unfair Competition Law (UCL). In doing so, the court carefully applied the Rule 12(b)(6) standard, requiring the plaintiff to plead “enough facts to state a claim to relief that is plausible on its face,” as articulated in Twombly and Iqbal. All well-pleaded factual allegations were accepted as true and construed in the plaintiff’s favor, while conclusory statements or unwarranted inferences were disregarded.
Gruzd asked the court to take judicial notice of documents from another federal case, including a franchise agreement and arbitration award. The court reaffirmed that while it may take notice of the existence of public records, it cannot accept them as evidence of disputed facts at the motion to dismiss stage. For that reason, Gruzd’s request was denied insofar as she sought to use such documents to prove contested matters.
The bulk of the court’s analysis focused on the plaintiff’s four CFIL claims, which alleged that Gruzd’s disclosures and representations in the MSC Franchise Disclosure Document (FDD) were incomplete, misleading, or otherwise unlawful under both the CFIL and the FTC Franchise Rule. Specifically, the court addressed alleged disclosure failures relating to Items 1, 3, 4, and 19 of the FDD. With respect to Item 1, the plaintiff argued that Gruzd failed to disclose a predecessor entity, Unlimited Med Search Franchise System, Inc. (UMFS), which she had previously used to sell AllMed Search franchises before forming MSC. The court found these allegations sufficient to plausibly establish UMFS as a predecessor requiring disclosure, rejecting Gruzd’s claim that the allegation was merely a legal conclusion. Regarding Item 3, the plaintiff alleged that Gruzd failed to disclose prior litigation connected to UMFS that resulted in a settlement. Gruzd argued that she was not “held liable” because there was no formal judgment, but the court clarified that liability can include settlements where a party pays money, reduces debt, or otherwise acts to their detriment. On that basis, the court held that the plaintiff had plausibly alleged an omission.
For Item 4, which concerns bankruptcy disclosures, Gruzd contended that the plaintiff’s claim was time-barred because the omission would have been apparent when the FDD was reviewed in 2020. The court rejected this defense at the pleading stage, explaining that CFIL’s limitations rules—four years from violation, one year from discovery, or ninety days from notice—only permit dismissal where the statute of limitations issue is clear on the face of the complaint. Because inquiry notice was not apparent, the claim was not barred. Finally, as to Item 19, the plaintiff alleged that Gruzd made false profitability claims outside of the FDD. Gruzd argued that disclaimers in the FDD and the franchise agreement barred reliance, but the court explained that CFIL does not require reliance as an element and that such disclaimers could not defeat the claim as a matter of law. The court also rejected her statute of limitations defense for the same reasons articulated with respect to Item 4.
The court then addressed the UCL claims. Gruzd argued they were preempted by the CFIL and that FTC Franchise Rule violations cannot serve as a predicate for UCL actions because the Rule lacks a private right of action. The court disagreed, noting that the CFIL expressly preserves other statutory and common law remedies, citing authority such as Samica Enterprises v. Mail Boxes Etc. to support this point. Moreover, the plaintiff’s UCL claims were not limited to disclosure issues but also alleged that Gruzd accessed the plaintiff’s computer systems without authorization, conduct outside the scope of both the CFIL and the FTC Franchise Rule. This provided an independent basis for UCL liability. Gruzd also argued that the plaintiff could not pursue equitable remedies under the UCL because they had not pleaded a lack of adequate remedies at law. The court rejected this, following Astiana v. Hain Celestial Group, Inc., and held that at the pleading stage a plaintiff may pursue alternative and inconsistent remedies, including equitable relief such as restitution or injunctive relief, even while also seeking damages under other statutes.
Procedurally, the court emphasized that its role at this stage was limited to assessing the sufficiency of the pleadings, not resolving factual disputes or weighing evidence. Because ambiguity remained regarding statutes of limitation, reliance, and disclosure obligations, and because defenses raised by Gruzd required factual development beyond the pleadings, the court declined to dismiss the case. Gruzd’s attempt to introduce records via judicial notice was similarly limited, given the prohibition against using such documents to prove contested facts at this stage.
In conclusion, the court held that Pasture Gate Holdings’ complaint met the plausibility standard, that the statute of limitations defenses could not be resolved against the plaintiff on the face of the pleadings, and that the plaintiff could pursue its UCL theory in parallel with its CFIL claims. The denial of the motion to dismiss was grounded in the sufficiency of the plaintiff’s allegations, the inability of Gruzd’s defenses to prevail as a matter of law, and the court’s interpretation of the statutory framework in a manner that permitted the claims to proceed.
Policy Analysis
The Pasture Gate Holdings, Inc. v. Gruzd decision highlights policy challenges and strengths within current franchise disclosure regimes. The facts of the case demonstrate potential pitfalls: the franchisee claimed the franchisor and its principal distributed incomplete or misleading disclosure documents (the MSC-FDD), omitted major negative facts such as a prior failed franchise system, misstated personal business history, and failed to candidly report prior litigation or bankruptcy histories, all while also making financial performance claims not replicated in the written FDD as required by law.
These alleged omissions went to the core of what prospective franchisees need to assess their risk and opportunity in purchasing a franchise business, illustrating the policy rationale for robust and truthful disclosures: enabling franchisees to make informed choices and deterring deceptive conduct. The court’s ruling emphasized the thoroughness of both federal (FTC Franchise Rule) and state (CFIL) requirements, underscoring that disclosures must go beyond mere formality and ensure all material facts—including adverse histories and litigation—are truthfully represented, with reasonable inferences about what constitutes a “predecessor” or “liability” being construed in the franchisee’s favor for pleading purposes. The case also shows that disclaimers within the FDD and franchise agreements purporting to limit liability for representations outside the document do not necessarily shield franchisors from statutory liability for non-compliance, given the CFIL’s lack of a reliance element in its disclosure provisions.
On the balance between state and federal regulation, the decision strongly evidences that state law (here, the CFIL and California UCL) operates alongside federal requirements without being preempted—even when the same disclosure failures may violate both sets of rules. The court specifically found that California’s statutory scheme allows for supplemental remedies and independent claims, supporting a broad, franchisee-protective regulatory landscape where state law fills gaps and offers direct private remedies that the FTC Franchise Rule—lacking a private right of action—does not.
Importantly, the court also clarified that UCL claims rooted in conduct outside of franchise disclosure duties (e.g., unauthorized computer access) are not foreclosed by federal or state franchise law, further preserving concurrent avenues for relief. Limitations on available relief (e.g., unavailability of damages for UCL claims) reflect a policy of channeling certain disputes into equitable rather than compensatory remedies, yet do not eliminate liability under the broader statutory web. Therefore, the ruling reinforces a policy choice to sustain a “floor” of federally-mandated franchise disclosure while inviting stronger or more expansive state-law protection, collectively increasing compliance incentives for franchisors and empowering franchisees through greater access to remedies.
Main Message for Franchisees or Dealers
This decision underscores that franchisees are protected by both state and federal laws requiring full and truthful disclosure by franchisors, and that omissions or misleading statements in disclosure documents can provide grounds for legal recourse and remedies beyond what is outlined in franchise agreements.
