Jul 20, 2020 - Franchise, Dealer & Antitrust Decisions in One Sentence by |

Virtual Healthcare Franchsiee’s Fraud Claims Based on Franchisor’s Financials Must be Reasserted

 A virtual healthcare franchisee’s common law fraud claim that the franchisor of a cloud-based marketplace for telehealth services fraudulently induced the franchisee to invest in the franchise and in so doing also violated the anti-fraud provision of the New York Franchise Sales Act (NYFSA) based on statements allegedly made at a Franchise Expo regarding future performance were mere puffery under Missouri law, and to the extent other similar claims were based on the franchisor’s misrepresentations made during the negotiations and execution of the parties’ franchise agreement (including specific representations about future revenue and expense ‘projections’), the allegations were insufficient to sufficiently identify which individual defendants made which statements; further, issues of fact remained as to whether the franchisee’s alleged reliance on the representations made by the defendants was reasonable.

 CHARLES FABIUS, ET AL., PLAINTIFFS V. MEDINEXO USA, LLC, ET AL., DEFENDANTS, U.S. District Court, E.D. Missouri, Eastern Division. No. 4:19CV2526 JCH. Dated April 3, 2020

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 Excerpts from case:

 

DISCUSSION

 Fraud In The Inducement

 As noted above, in Count III of their Complaint Plaintiffs assert a claim for fraud in the inducement. (Compl., ¶¶ 86-92). Specifically, Plaintiffs allege as follows:

  1. In the initial meeting between Mr. Fabius and defendants Toro and Adelman, the defendants made several false, misleading and fraudulent statements and representations of material facts to him, including unsupported statements about the potential earning capacity as a [] Medinexo franchisee.
  2. Subsequently during the negotiation of the parties’ franchise agreement, defendants again provided plaintiffs with false, misleading and fraudulent information in the form of a “Budget Example” that provided a completely fabricated two-year earnings projection.

 

( Id., ¶¶ 87, 88).

 

Under Missouri law, in order to succeed on their claim for fraudulent inducement Plaintiffs must establish facts in support of the following elements: “(1) that [Defendants] made certain material representations to [Plaintiffs]; (2) such representations were false when made; (3) that [Defendants] knew the representations were false; (4) that the representations were made with the purpose of deceiving [Plaintiffs]; (5) that [Plaintiffs were], in fact, deceived; (6) [Plaintiffs] reasonably relied on the representations in signing the [Franchise Agreement]; and (7) [Plaintiffs] suffered damage as a proximate result of the fraudulent misrepresentations.” Bracht v. Grushewsky, 448 F.Supp.2d 1103, 1110 (E.D. Mo. 2006) (citing Trotter’s Corp. v. Ringleader Restaurants, Inc., 929 S.W.2d 935, 939 (Mo. App. 1996)). “As with any cause of action, ‘[a] failure to establish any one of the essential elements of fraud is fatal to recovery.”’ Argus Health Systems, Inc. v. Benecard Services, Inc., No. 10-00187-CV-W-JTM, 2011 WL 5570064, at *2 n. 4 (W.D. Mo. Nov. 16, 2011) (quoting Emerick v. Mutual Benefit Life Ins. Co., 756 S.W.2d 513, 519 (Mo. 1988) (en banc)).

 

In their Motions to Dismiss, Defendants claim Plaintiffs’ fraud in the inducement claim is subject to dismissal for several reasons. The Court will address Defendants’ assertions in turn.

 

  1. Statements Made At The Franchise Expo

 

As noted above, Plaintiffs assert Defendants stated at the Franchise Expo that, during the first year of operation Fabius would earn approximately $75,000, during the second year he would earn approximately $400,000, and he “would make so much money” as a Medinexo franchisee that he would not consider renewing the franchise agreement after five years. (Compl., ¶ 20). In their Motions to Dismiss Defendants argue these alleged misrepresentations are not actionable, because they constituted “mere puffery.” ( See Adelman’s Memo in Support, P. 6; Memorandum in Support of Defendants Medinexo USA, LLC’s and Jorge Toro’s Motion to Dismiss (“Medinexo’s Memo in Support”), PP. 5-6).

 

Under Missouri law, “predictions of future success and profitability…are not misrepresentations of past or existing fact and cannot be the subject of a fraud action.” Trotter’s Corp., 929 S.W.2d at 940.

To constitute fraud, the alleged misrepresentation must relate to a past or existing fact. Mere statements of opinion, expectations, and predictions for the future are insufficient to authorize a recovery for fraudulent misrepresentation. In particular, predictions and opinions regarding future profitability of a business cannot form a basis for fraud as a matter of law.

 

Id. (citations omitted). See also Morrison v. Back Yard Burgers, Inc., 91 F.3d 1184, 1186 (8 th Cir. 1996) (applying Arkansas law8 , and holding that representations relating solely to future events, such as projections related to franchise profits, cannot support an action for fraud); VT Investors v. R & D Funding Corp., 733 F.Supp 823, 837-38 (D. N.J. 1990) (holding a statement that the company in which plaintiffs invested would “in the near future, realize a positive cash flow in excess of $60,000 per month”, could only be characterized as non-actionable puffery “because it is such an emphatic statement of opinion”).

 

In response to Defendants’ motions Plaintiffs do not dispute, but rather appear to concede, that the statements regarding potential profitability allegedly made during the Franchise Expo cannot serve as the basis for a claim of fraud, as they constituted at most puffery on Defendants’ part. Specifically, Plaintiffs claim they do not allege only that Defendants “made vague statements of potential[] profitability that in some circumstances could amount to mere ‘puffery’; rather defendants provided what appeared to be an empirical analysis in support of these representations and agreed to append them to the parties’ agreement.” (Plaintiffs’ Adelman Opp., P. 12 (emphasis added), citing Franchise Agreement, Exh. C, “Budget Example”).9

 

Upon consideration, the Court agrees the statements allegedly made at the Franchise Expo constituted mere puffery, insufficient to sustain a claim of fraud in the inducement. The Court finds this to be especially true because, as noted by Defendant Adelman, Plaintiffs allege Defendants made the initial profit representations “without knowledge of Plaintiffs’ business plans, experience, and expected level of investment in the franchise.” (Adelman’s Memo in Support, P. 7). Under these circumstances, this portion of Defendants’ Motions to Dismiss will be granted.

 

  1. Misrepresentations Made During the Negotiation And Execution Of The Franchise Agreement

 

As noted above, in their Complaint Plaintiffs further allege that during the negotiation of the Franchise Agreement, Defendants provided ”  additional written financial performance representations , once again, making specific representations about and providing additional future revenue and expense ‘projections.”’ (Compl., ¶ 34 (emphasis in original)). Plaintiffs claim the executed Franchise Agreement incorporated by reference one such representation, a “Budget Example” expressly stating earnings projections for the first two years of franchise operation. ( Id., ¶ 35). Plaintiffs maintain Defendants included said projections despite knowing that the data as provided was deceptive, overstated and not based in facts. ( Id., ¶¶ 36-38).

 

In their Motions to Dismiss, Defendants assert that with these allegations Plaintiffs fail to state a claim for relief, for two reasons.

 

  1. The Alleged Statements Attributed To The Various Defendants Are Not Pleaded With Sufficient Particularity

 

Allegations of fraud are subject to a heightened pleading requirement under Federal Rule of Civil Procedure 9(b), which states in relevant part as follows: “In alleging fraud or mistake, a party must state with particularity the circumstances constituting fraud or mistake.” To meet the requirements of Rule 9(b), a pleading must include “such matters as the time, place and contents of false representations, as well as the identity of the person making the misrepresentation and what was obtained or given up thereby.” Abels v. Farmers Commodities Corp., 259 F.3d 910, 920 (8 th Cir. 2001) (internal quotations and citations omitted). “In other words, the complaint must plead the who, what, where, when, and how of the alleged fraud.” Drobnak v. Andersen Corp., 561 F.3d 778, 783 (8 th Cir. 2009) (internal quotations and citations omitted).

 

In their Motions to Dismiss, Defendants contend Plaintiffs’ fraud in the inducement claim fails because they rely on collective allegations rather than individualized statements of fact. (Adelman’s Memo in Support, P. 5; Medinexo’s Memo in Support, P. 8). In other words, Defendants claim Plaintiffs impermissibly attribute the alleged misrepresentations to Defendants Toro and Adelman together, without specifying which individual in fact made the statements or provided the allegedly fraudulent materials. ( Id.).

 

In their response to Defendants’ motions, Plaintiffs do not deny that they group Defendants Adelman and Toro together in their fraud in the inducement claim. ( See, e.g., Plaintiffs’ Adelman Opp., PP. 12-13). Instead, Plaintiffs persist in their failure to distinguish between Defendants, stating that “at the initial meeting between Mr. Fabius and defendants Toro and Adelman, the defendants made three very specific statements regarding potential profitability and/or financial success as a franchisee [].” ( Id., P. 12 (emphasis added)).

 

Upon consideration, the Court finds Plaintiffs have not stated their claim for fraud in the inducement with sufficient particularity to satisfy the heightened pleading requirements of Rule 9(b). See Level One Technologies, Inc. v. Penske Truck Leasing Co., L.P., No. 4:14CV1305 RWS, 2015 WL 1286960, at *7-8 (E.D. Mo. Mar. 20, 2015). This failure becomes especially important in light of Defendant Adelman’s contention that he is not specifically alleged to have had any involvement in the supposed “financial performance representations”, or provision of the “Budget Example”, the sole remaining instances of purported fraud. ( See Adelman’s Memo in Support, P. 6). Rather than dismiss Plaintiffs’ Complaint outright, however, the Court will grant Plaintiffs leave to file an Amended Complaint, in which they state with particularity the misrepresentations attributable to each Defendant.

 

  1. Any Purported Reliance By Plaintiffs Was Not Reasonable

 

Defendants finally argue that Plaintiffs’ fraud in the inducement claim is subject to dismissal because Plaintiffs could not reasonably have relied on Defendants’ speculative approximations of future performance. (Adelman’s Memo in Support, PP. 7-8; Medinexo’s Memo in Support, PP. 6-9). As support for this contention, Defendants note Plaintiffs allege the following in their Complaint: that at that time he encountered Defendants, Fabius had a background and experience in the telehealth business, and considered himself well qualified to own and operate the kind of franchised virtual healthcare business being sold by Defendants (Compl., ¶ 17); that Fabius performed due diligence prior to making his franchise investment, including approaching certain professions that performed analyses of franchised businesses, and retaining counsel to review the form franchise agreement and FDD provided by Defendants ( Id., ¶ 24); that Item 19 of Medinexo’s FDD specifically stated that neither Medinexo nor its employees made any representations about a franchisee’s future financial performance or past financial performance of company-owned or franchised outlets ( Id., ¶ 32); and that Fabius himself acknowledged lingering concerns regarding Medinexo’s lack of historical data ( Id., ¶ 24).

 

Upon consideration, the Court finds an issue of fact remains as to whether Plaintiffs’ alleged reliance on representations made by Defendants was reasonable. The Court notes Item 26 of the parties’ Franchise Agreement provides in relevant part as follows: ” Other than Exhibit D hereto, You have not relied on any warranty or representation or guaranty, expressed or implied, as to the potential success or projected income or profits of the business venture contemplated hereby, and You acknowledge that, other than Exhibit D hereto, Our sales staff, personnel, employees, officers and representatives are not permitted to make claims or statements as to earnings, sales, income, profits, prospects or chances of Your success that are not disclosed in Our Franchise Disclosure Document, nor are they authorized to represent or estimate sales figures as to any particular franchise.” ( See Franchise Agreement, ECF No. 33-1, P. 44 (emphasis added)). The Court agrees with Plaintiffs that the quoted provision creates an issue of fact as to whether the parties carved out an exception to Item 19 of Medinexo’s FDD, sufficient to permit Plaintiffs reasonably to rely on the Budget Example as a projection of future income and expenses. While it ultimately may prove difficult for Plaintiffs to demonstrate the requisite reasonable reliance in light of Fabius’s admitted expertise in the subject matter at issue, his engagement in extensive due diligence, his review of the disclosure documents, his participation in the negotiation of the integrated Franchise Agreement, and his execution of the Franchise Agreement despite his admitted concerns regarding Medinexo’s lack of historical data, the Court finds it inappropriate to deem such reliance absent as a matter of law at this time. This portion of Defendants’ Motions to Dismiss will therefore be denied.

 

 

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