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Missouri Federal Court Grants in Part and Denies in Part a Motion to Dismiss Fraud Allegations, but Creates Uphill Battle for Franchisee to Establish Reliance

A federal court in Missouri has held that a franchisee’s fraud claim cannot be based upon the franchisor’s alleged prediction of future success at a franchise expo, but allowed other fraud claims to be re-pled while questioning the likelihood that the franchisee will successfully demonstrate reasonable reliance. Fabius v. Medinexo USA, LLC, 2020 WL 1666468 (E.D. Mo. April 3, 2020). Fabius, a franchisee of the Medinexo franchise system, alleged that Medinexo made several oral and written financial performance representations outside of the FDD, both at a franchise expo and during the sales process, which falsely projected his future success as a franchisee. Such statements included estimates regarding the amount Fabius would earn during the first two years, and a budget analysis with earnings projections attached to the franchise agreement. Fabius brought suit against Medinexo claiming, in part, fraud in the inducement. Medinexo moved to dismiss.

The court dismissed the fraud claim without prejudice, holding that the oral predictions of future success are not misrepresentations of past or existing facts, and therefore could not support a fraud claim. The court also found such statements to be mere puffery because Medinexo allegedly made these statements at the expo without knowing Fabius’s background, experience, or expected level of investment. However, the court granted leave to permit Fabius to amend his complaint to add specificity for its other claims of fraud, but signaled that it may be difficult for Fabius to demonstrate reliance on such statements. The fact that, prior to signing the franchise agreement, Fabius had experience in the relevant industry, conducted due diligence on the system, had an attorney review the FDD, and signed the franchise agreement — despite concerns about Medinexo’s lack of historical data — all seemed to weigh against Fabius in the eyes of the court. Nevertheless, the court concluded that fact questions remained on the issue of reliance, and ruled that this element would not require dismissal if Fabius amended his complaint to state with particularity which misrepresentations were attributable to each defendant.

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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