Franchise 101: Challenging Every Shingle Claim; and A Multistate Twist
Franchisor 101: Challenging Every Shingle Claim
A federal district court in Pennsylvania granted in part and denied in part a franchisor’s motion to dismiss a franchisee’s counterclaims alleging fraudulent inducement, negligent misrepresentation, and breach of contract, among other claims.
The franchisee, Amy and Rusty Hansen (the “Hansens”), entered into two franchise agreements with MDR United LLC (“MDR”), franchisor of the Mighty Dog Roofing system, to operate two franchise locations in Utah. The Hansens subsequently formed an entity to operate their Utah territories and entered into three more franchise agreements through this entity.
In response to a rescission demand, MDR sued the Hansens and their entity for abandonment, competing business violations, misappropriation of confidential information, and unpaid fees. The franchisee counterclaimed, alleging that MDR induced them into the purchase of five franchise units through a fabricated Unit Economics Excel Worksheet (the “Worksheet”) provided with MDR’s franchise disclosure document, which contained financial information not based on actual franchisee data or any reasonable factual basis.
The court first addressed governing law, concluding that the franchise agreements’ Pennsylvania choice-of-law provision applied only to the contractual claims and did not extend to the tort-based counterclaims, because those claims arose out of pre-sale conduct. The choice-of-law clause, however, was limited by its terms to disputes “arising under” the agreements. Applying Pennsylvania conflict-of-law principles, the court determined Utah law governed the fraudulent misrepresentation claims given the franchisee’s Utah residency, the Utah location of the franchises, and where the franchisee suffered alleged injury.
Turning to MDR’s affirmative defenses, the court refused to enforce the contractual releases from the Hansen’s prior assignment to their entity, finding that “claims” in the release language meant existing or accrued claims. As a result, discovery was needed to determine when the counterclaims accrued. The court similarly limited the one-year contractual limitation period to contract-based causes of action, dismissing the franchisee’s contract claim but declining to bar fraud claims.
On the merits, the court permitted the fraudulent misrepresentation claim to proceed in full, noting that under Utah law a party cannot insulate itself from liability for its own fraud through integration clauses or no-reliance provisions. The negligent misrepresentation claim survived only as to statements in the FDD. Of the breach of contract claims, only the allegation that MDR collected call center fees without providing a functioning call center survived.
This decision illustrates that contractual protections such as choice-of-law clauses, no-reliance provisions, integration clauses, releases, and limitation periods have their limits, particularly when franchisees allege affirmative fraud based on pre-sale financial representations. Franchisors should review their FDDs with franchise counsel to ensure that actual data grounds the financial projections shared outside the FDD, and that they draft contractual defenses with sufficient breadth to encompass tort-based claims arising from pre-sale conduct.
MDR United LLC v. Flex Nine Exteriors, Inc., Case No. 2:25-cv-05073-JDW (E.D. Pa. July 9, 2026)
Franchisee 101: A Multistate Twist
A district court in Arizona recently applied the California Franchise Investment Law (“CFIL”) to claims brought by out-of-state franchisees against an Arizona-domiciled defendant. Franchisees from Texas and Georgia alleged that Freeman, a former senior executive at a yoga franchise brand, Yoga Six (“Freeman”), made material misrepresentations regarding franchise profitability and operational readiness. After opening their studios, franchisees experienced membership attrition and substantial losses, ultimately closing their locations.
The franchisees initially filed suit in California state court asserting CFIL claims, but the court dismissed Freeman for lack of personal jurisdiction. They refiled their claims against Freeman in Arizona. Both parties stipulated that California substantive law and the CFIL governed all claims, and Freeman subsequently filed a motion to dismiss all claims in Arizona.
First, the Arizona court dismissed the common-law fraud claim as preempted by CFIL Section 31306, explaining that it applied the version of the statute in effect when the parties entered into their agreements in 2021. Because the claims were based on the same conduct giving rise to the CFIL violations, the fraudulent misrepresentation claims were preempted.
Next, the court addressed the remaining claims brought under the CFIL and barred all claims asserted by the Georgia plaintiff, as well as the Texas plaintiffs’ anti-fraud claims, under CFIL’s statutes of repose. The court explained that these statutes impose absolute time limits of two to four years, regardless of when the alleged injury or violation is discovered. However, the court permitted the Texas plaintiffs’ claims that the FDD omitted material information.
Freeman argued that the CFIL’s statute of limitations barred such claims because their November 2023 California lawsuit demonstrated that they were aware of the alleged violations at that time, triggering the one-year limitations period and requiring them to file in Arizona by November 2024, which they failed to do. The court was unpersuaded and characterized the CFIL’s limitations statute as a “hybrid” statute containing both repose and limitation features and tolled the one-year discovery period during the pendency of the prior California action under Arizona’s cross-jurisdictional tolling statute.
As a final attempt, Freeman argued that the franchisees had waived their right to bring claims against him as agent or representative and could pursue claims only against Yoga Six, the franchisor, the contracting party. The court refused to enforce the waivers and instead held that parties cannot contractually waive liability for fraud, willful injury, or statutory violations. Relying on California Supreme Court precedent, the court applied this public-policy prohibition even though it was “borrowed” law from another jurisdiction.
Franchisees should consult experienced franchise counsel to determine the appropriate forum and legal basis for bringing a potential lawsuit and to determine applicable statute of limitations periods. Notably, the Arizona court’s application of California law demonstrates that statutory protections against fraudulent solicitation cannot necessarily be circumvented by relocating or structuring transactions to avoid a protective state’s laws. It also underscores that contractual provisions shifting liability may not override public-policy protections against fraud, even where a court applies another state’s law.
Enlightened Armadillo Inc. v. Freeman, No. CV-25-02663-PHX-JJT (D. Ariz. May 29, 2026)