The Franchise Memorandum

A federal court in Michigan recently determined that Pennsylvania’s “gist of the action” doctrine, which is similar to the economic loss rule, did not bar franchisees’ fraud claims. Nutrimost Doctors, LLC v. Sterling, 2018 WL 1570624 (E.D. Mich. Mar. 30, 2018). Franchisor Nutrimost Doctors sued its three franchisee chiropractors claiming that they had purposely submitted contaminated samples of Nutrimost’s supplements to a laboratory in an attempt to void the franchise agreements. Nutrimost had the supplements tested by a different facility that detected no contamination, prompting it to sue the franchisees for fraud and other claims. The franchisees counter-sued alleging breach of contract and tort claims, including fraud. According to the franchisees, Nutrimost had fraudulently represented prior to entering into the franchise agreements that its program was “guaranteed” to result in weight loss of at least “25 pounds in 40 days,” that its system was based on “revolutionary breakthrough technology,” and presented photos of individuals who had purportedly lost weight. The parties had agreed that Pennsylvania law would govern their dispute.

Nutrimost moved to dismiss the fraud claims, contending that they were precluded by Pennsylvania’s “gist of the action” doctrine, a legal theory that precludes a party from recasting a breach of contract claim as a tort claim. The court disagreed with Nutrimost that the doctrine applied, because the fraudulent statements were made before the parties entered into the franchise agreements, and the doctrine is inapplicable where the statements are made to fraudulently induce a party to enter into a contract. The court also rejected Nutrimost’s alternative argument that the statements were mere “puffery” that removed them from the realm of fraud. The court found that these representations were “specific and measurable” claims about Nutrimost’s system. The court therefore refused to dismiss them.