CryoUSA Import and Sales, CryoUSA Franchising, LLC, Cryo USA Holding, LLC, and CryoUSA Mobile, LLC, are Texas corporations. Together, they obtain, supply, and provide training to operate cryotherapy chambers. Cryotherapy chambers use liquid nitrogen to maintain a temperature of 240 degrees below zero.
Clients enter the cryotherapy chamber to allegedly gain health benefits such as more restful sleep, improved mood, and better athletic performance.
Live Cryo, LLC, is a Michigan corporation that entered an agreement with the CryoUSA corporations on July 15, 2016. The agreement provided that Live Cryo could exclusively distribute cryotherapy chambers in Michigan for a 24-month period. The agreement also provided that Live Cryo had to purchase 15 chambers within the first six months to maintain the exclusive dealership status. In addition, CryoUSA was to control all marketing and training, with all cryotherapy chambers bearing its mark. Relevant to this case, the agreement also contained a choice-of-law provision that called for the application of Texas law in any legal dispute.
Live Cryo found that the cryotherapy chambers did not work as described. For example, an HVAC technician hired to examine the chambers concluded that it never reached 166 degrees below zero. Experiencing various difficulties, Live Cryo sued the CryoUSA corporations, alleging the defendants had engaged in fraud and were in violation of the Michigan Franchise Investment Law (MFIL). In its defense, CryoUSA argued that Texas law should apply because of the choice-of-law provision in the agreement. Live Cryo contended that MFIL made void the choice-of-law provision. In response, CryoUSA argued that MFIL did not apply because Live Cryo was not a franchisee.
JUDGE STEEH Defendants seek dismissal of Counts I and II, which assert claims under the MFIL, arguing that plaintiff is not its franchisee, and that the parties share a distribution agreement, not a franchise agreement. Under MCL § 445.1502(3), a “franchise” is defined as “a contract or agreement, either express or implied, whether oral or written, between 2 or more persons to which all of the following apply:”

(a) A franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services under a marketing plan or system prescribed in substantial part by a franchisor;

(b) A franchisee is granted the right to engage in the business of offering, selling, or distributing goods or services substantially associated with the franchisor’s trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchisor or its affiliate;

(c) The franchisee is required to pay, directly or indirectly, a franchise fee.
All three elements must be present in order for a relationship to be governed by the MFIL. According to the First Amended Complaint, all three factors are alleged as follows. First, Paragraph 3.1 of the Distribution Agreement gives defendants control over the marketing aspect of the business. Paragraph 3.1 provides:
Marketing. Distributor shall be allowed to further the promotion, marketing, sale and other distribution of the Products in the Territory and to keep CryoUSA informed of marketing developments.
Second, all products sold by plaintiff contains the CryoUSA name and logo and CryoUSA specifically provides plaintiff with a license to use marks, including “Cryosense” and “CryoUSA E Tablet.” It appears that plaintiff satisfactorily alleged the first two elements. The court turns now to the third factor which presents the closest question.
As to the third factor, plaintiff alleges three methods of indirect payment of a franchise fee: (1) defendants charge a “mark up” on the purchases of their chambers, (2) defendants require that training fees of \($250\) be paid in order for any warranty to be honored, and (3) plaintiff must pay \($10,000\) to renew the Distribution Agreement. Defendants respond that plaintiff has failed to allege payment of a franchise fee within the strictures of Iqbal because (1) the chambers were sold at a bona fide wholesale price, (2) the training fee was part of the purchase fee of every chamber and additional training was optional and the amount of the fee was insufficient to amount to a hidden charge for the right to do business, and (3) the \($10,000\) renewal fee is not a hidden franchise fee because the only thing plaintiff loses upon non-renewal is the loss of exclusivity — the right to be the sole cryotherapy chamber distributor in the entire state of Michigan.
The MFIL defines “franchise fee” as “a fee or charge that a franchisee or subfranchisor is required to pay or agrees to pay for the right to enter into a business under a franchise agreement, including but not limited to payments for goods and services.” MCL. § 445.1503. Although a franchise fee may include payments for goods or services, MFIL specifically exempts “[t]he purchase or agreement to purchase goods, equipment, or fixtures directly or on consignment at a bona fide wholesale price.” Having set forth the statutory definition of franchise fee, the court considers now defendants’ arguments that plaintiff has failed to adequately plead the existence of any such fee.
As to defendants’ first argument, whether or not the chambers were sold at a bona fide wholesale price is an issue of fact that cannot be decided at the pleadings stage. However, the court tends to agree with defendants that the training fee is probably insufficient to amount to a franchise fee. It appears unlikely the \($250\) training fee at issue here would meet that standard. The court turns now to the question of whether the \($10,000\) renewal fee amounts to an indirect franchise fee.
Defendants claim the \($10,000\) fee cannot be considered because MFIL does not apply to “the renewal or extension of an existing franchise where there is no interruption in the operation of the franchised business by the franchise.” The court is not convinced that Section 445.1503(3) informs this court’s decision about whether plaintiff pays an indirect franchise fee. Section 445.1503(3) does not address franchise fees at all, but defines the terms “offer” and “offer to sell.”
Specifically, Section 445.1503(3) states:
(3) “Offer” or “offer to sell” includes an attempt to offer to dispose of or solicitation of an offer to buy, a franchise or interest in a franchise for value. The terms defined in this act do not include the renewal or extension of an existing franchise where there is no interruption in the operation of the franchised business by the franchisee.
The Michigan Court of Appeals has explained that the above exclusion of renewal or extensions of a franchise agreement from the definitions of the terms “offer” and “offer to sell,” indicates the Legislature’s intent to restrict liability under MFIL to conduct at the time of a sale.
A careful review of the First Amended Complaint indicates that plaintiff bases its MFIL claims on alleged misrepresentations at the time of the sale.
Accordingly, at this pleadings stage, plaintiff has sufficiently pled that it paid an indirect franchise fee based on the alleged “mark up” of the cryotherapy chambers and the \($10,000\) renewal fee. Also, the First Amended Complaint attaches a copy of CryoUSA’s website page which advertises, “Own a Franchise.” In addition, one of the defendants is known as CryoUSA Franchising, LLC. Based on the allegations of the First Amended Complaint, a question of fact exists as to whether the parties bear the relationship of franchisor and franchisee.
Having found that a question of fact exists as to whether the parties entered into a franchise agreement, the court turns now to the question of whether the forum selection clauses in the parties’ Agreements are void. Defendants argue the provision voiding such clauses does not apply because Texas law governs…
[U]nder Section 187 of the Restatement (Second) of Conflict of Laws, Michigan has a substantially greater interest than Texas in protecting the rights of its franchisees and preventing them from being haled into an inconvenient forum far from the place when they operated their franchise. As the Sixth Circuit noted in Banek, the Michigan legislature prohibited such clauses in franchise agreements because, “the Michigan legislature understood the burdens of being forced to arbitrate a claim in a foreign forum are significant.” Accordingly, the court will not enforce the forum selection clause set forth in the parties’ Agreements and will allow plaintiff’s claims to proceed on the merits here.
CRITICAL THINKING:
What are the underlying assumptions in the statement “Michigan has a substantially greater interest than Texas in protecting the rights of its franchisees and preventing them from being haled into an inconvenient forum far from the place when they operated their franchise”? In other words, what is necessary for the statement to be true?
ETHICAL DECISION MAKING:
Based on the facts of the case, create a business plan Cryo-USA appears to be following. What values are implicit in the plan? How would you analyze Live Cryo’s ethical behavior? Do you think Live Cryo should avoid its end of the contract because it could not generate revenue as quickly as CryoUSA said was possible?