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Live Cryo LLC v. Cryousa Import and Sales, LLC

United States District Court, E.D. Michigan, Southern Division

September 15, 2017

LIVE CRYO, LLC, Plaintiff,



         This lawsuit arises out of the parties' agreement whereby defendants provided cryotherapy chambers to plaintiff Live Cryo, LLC. (“Live Cryo”) for use at its Michigan locations. Cryotherapy chambers, which use liquid nitrogen to maintain a temperature of about 240 degrees below zero, are used by clients for alleged health benefits. One of the defendants herein, defendant CryoUSA Import and Sales LLC, filed a related lawsuit in Texas state court three days before plaintiff Live Cryo filed this federal lawsuit. As a result, defendants argue that this court should abstain under the Colorado River doctrine. Alternatively, defendants seek dismissal of all claims under Federal Rule of Civil Procedure 12(b)(6) for failure to state a claim. After defendants filed their motion for abstention or dismissal, plaintiff filed a First Amended Complaint without leave of court. As such, plaintiff alleges defendants' motion is now moot.

         In their reply brief, defendants assert that the time period for filing an amended complaint without leave of court had expired. Nevertheless, they agree to have the court consider the First Amended Complaint in deciding their motion to dismiss, and urge the court to consider their motion this way rather than elevating form over substance and delaying resolution of the issues pending here for a second round of briefing. Because plaintiff had an adequate opportunity to respond to defendants' arguments, and filed its First Amended Complaint and Response brief in response to defendants' motion to dismiss, the court finds it appropriate to adjudicate the present dispute on the merits. For the reasons set forth below, the court shall grant defendants' motion to dismiss for failure to state a claim with respect to the tort and quasi-contract claims, and shall deny the motion as to the breach of contract and breach of warranty claims. Oral argument was heard on August 29, 2017 and informs the court's decision here.

         I. Background

         Because the court is addressing a motion to dismiss, the factual allegations set forth below are those set forth in the First Amended Complaint. Plaintiff Live Cryo, LLC is a Michigan corporation. Defendants CryoUSA Import and Sales (“Cryo Import”), CryoUSA Franchising, LLC, CryoUSA Holding, LLC, and CryoUSA Mobile, LLC are Texas corporations. Defendants Eric Rauscher and Mark Murdock are the owners of defendant corporations. Plaintiff alleges that the parties entered into a franchise agreement. Defendants, on the other hand, deny this and assert that the two share a distribution agreement, as the parties' agreement is entitled.

         Whole body cryotherapy exposes the entire body to temperatures as cold as 240 degrees below zero for about three minutes. The alleged benefits of cryotherapy are more restful sleep, improved mood, enhanced athletic performance, increased energy, a stronger immune system, and faster healing of injuries and muscle aches. Defendants market themselves as experts in whole body cryotherapy businesses. Plaintiff alleges that it entered into a franchise agreement with the defendants following its attendance at a seminar meeting in Texas in 2016. The agreement is memorialized in writing in a document entitled, “Distribution Agreement, ” and which was executed on July 15, 2016.

         According to the First Amended Complaint, at the business meeting, they received a fifty-three page booklet which included a return on investment worksheet on one of the pages. The investment worksheet projected that plaintiff could earn as much as $30, 350 per month, assuming fifty clients per day at a cost of $45.00 per session. The workbook further represented that most locations average 10 clients a day within 90 days, that some locations reach the 25 per day mark fairly quickly, and that its Dallas location averages about 50 clients per day. Plaintiff does not allege that the statements regarding the Dallas location and others were fraudulent, only that they were designed to induce reliance on plaintiff's part.

         Plaintiff claims that there was no factual basis for the prediction that it could replicate the Dallas location's success, or that it could service as many as 25 clients per day. Plaintiff also claims that representations about the effectiveness of the chambers were fraudulent, and that the chamber at its West Bloomfield location only operated properly for seven days since its January 16, 2017 opening. Plaintiff hired an HVAC technician to examine the chamber, and he concluded that it never reached below negative 166 degrees Fahrenheit on any of the five tests he performed.

         The Distribution Agreement provides that plaintiff may exclusively distribute cryotherapy chambers in Michigan for a twenty-four month period that may be renewed upon the payment of $10, 000. The Distribution Agreement further provides that plaintiff must purchase 15 chambers within the first six months to maintain its exclusive dealership status. The Agreement provides that defendants control marketing and training, and all of its chambers bear its name and mark. In order to purchase a chamber, plaintiff executes a Purchase Agreement. The cost of a chamber is $50, 000.

         Defendants train and certify five individuals on chamber operations as part of the purchase price, charge $250.00 for each subsequent person trained, and require that only trained and certified individuals operate the chambers in order for the limited warranty to remain in effect.

         The Distribution Agreement contains a choice-of-law provision and forum selection clause:

10.3 Venue/Governing Laws. This Agreement is governed by the laws of the State of Texas. Any legal action concerning this Agreement shall be brought in the state and federal courts in Dallas, Texas.

(Doc. 4-1 at PgID 160). The Purchase Agreement also contains a choice-of-law provision and forum selection clause. Specifically, Paragraph 12.4 of the Purchase Agreement provides:

         12.4 Governing Law and Forum Selection

This Agreement shall be construed in accordance with the Law of Texas, without regard to its conflicts of laws provisions. The exclusive forum for any litigation arising from or relating to the Agreement and/or for resolving any related disputes shall be Dallas County, Texas state district court (the “Dallas Courts.”) All parties irrevocably consent to the exclusive jurisdiction of the Dallas Courts for such purposes.

(Doc. 4-2 at PgID 172).

         Plaintiff experienced numerous difficulties with the chambers. On April 26, 2017, plaintiff sent Rauscher and Murdock a letter, through counsel, alleging that defendants had engaged in fraud, were in violation of the Michigan Franchise Investment Law (“MFIL”), had breached the Purchase Agreement, and had breached the warranty. On May 2, 2017, Cryo Import brought suit against plaintiff in the state district court of Dallas County, Texas. Before receiving notice of that lawsuit, plaintiff filed this action in Wayne County Circuit Court on May 4, 2017, which defendants timely removed here.

         In the Texas lawsuit, Cryo Import alleges breach of contract arising out of the parties' Distribution Agreement on the grounds that plaintiff did not live up to its end of the bargain to purchase a sufficient quota of cryotherapy machines, and breached the Purchase Agreements by failing to comply with its obligations to submit timely warranty claims and repairs. In their First Amended Complaint filed in federal court, plaintiff has pled eleven claims: (I) violation of the MFIL, Mich. Comp. Laws § 445.1501 et seq., (II) violation of the MFIL, Mich. Comp. Laws § 445.1532, (III) fraud, (IV) silent fraud, (V) innocent misrepresentation, (VI) tortious interference with business relationship with Orchard Fitness, (VII) tortious interference with business relationships with its customers, (VIII) breach of warranty, (IX) breach of contract, (X) promissory estoppel, and (XI) unjust enrichment.

         II. Standard of Law

         Rule 12(b)(6) allows the Court to make an assessment as to whether the plaintiff has stated a claim upon which relief may be granted. Under the Supreme Court's articulation of the Rule 12(b)(6) standard in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 554-56 (2007), the court must construe the complaint in favor of the plaintiff, accept the allegations of the complaint as true, and determine whether plaintiff's factual allegations present plausible claims. “‘[N]aked assertions' devoid of ‘further factual enhancement'” are insufficient to “‘state a claim to relief that is plausible on its face.'” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Twombly, 550 U.S. at 557, 570). To survive a Rule 12(b)(6) motion to dismiss, plaintiff's pleading for relief must provide “‘more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.'” D'Ambrosio v. Marino, 747 F.3d 378, 383 (6th Cir. 2014) (quoting Twombly, 550 U.S. at 555). Even though the complaint need not contain “detailed” factual allegations, its “‘factual allegations must be enough to raise a right to relief above the speculative level on the assumption that all of the allegations in the complaint are true.'” New Albany Tractor, Inc. v. Louisville Tractor, Inc., 650 F.3d 1046, 1051 (6th Cir. 2011) (quoting Twombly, 550 U.S. at 555).

         III. Analysis

         A. Choice of Law

         Defendants argue that the Distribution Agreement's and Purchase Agreement's choice-of-law provisions calling for the application of Texas law, and forum selection clauses requiring litigation related to the Agreements to be filed in Texas, require dismissal of this action. Plaintiff has not responded to the argument that Texas law would govern their claims under the choice-of-law provision in the Agreements. An analysis of whether Texas or Michigan law controls is important to the court's determination of whether plaintiff's claims survive defendants' motion to dismiss.

         Federal courts sitting in diversity apply the choice of law principles of the forum state. See Wallace Hardware Co. v. Abrams, 223 F.3d 383, 391 (6th Cir. 2000) (citing Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487 (1941)). Michigan's conflict of law rules follow the approach articulated in 1 Restatement (Second) of Conflict of Laws § 187, which provides that a contractual choice-of-law provision will govern unless the chosen state, here Texas, has no substantial relationship to the parties or the transaction, or Michigan has a materially greater interest and application of Texas law would be “contrary to a fundamental policy” of Michigan. Banek Inc. v. Yogurt Ventures USA, Inc., 6 F.3d 357, 361 (6th Cir. 1993).

         Here, Texas has sufficient ties to the Distribution Agreement as plaintiff's corporate representatives traveled to Texas to obtain information about cryotherapy and to analyze the business opportunity there, and defendants are Texas corporations who are located in Texas. Also, there has been no showing that a dominating public interest of Michigan would be contravened by permitting the contractual dispute to be resolved under the law of Texas. Accordingly, the parties' choice-of-law clause in the Agreements may be enforced with respect to the parties' contractual dispute, and Texas law governs the contractual claims. The court notes that neither side has suggested breach of contract claims are analyzed differently under Texas or Michigan law.

         The question then becomes whether the choice-of-law provision in the parties' Agreements govern plaintiff's tort claims under MFIL, common law fraud, tortious interference with business relationships, promissory estoppel, and unjust enrichment. The choice-of-law provision in the Distribution Agreement provides: “This Agreement is governed by the laws of the State of Texas.” The Purchase Agreement provides that “[t]he Agreement shall be construed in accordance with the Law of Texas.” The Sixth Circuit has at least twice addressed similar issues in determining whether a choice-of-law provision is limited to contractual claims arising out of the agreement or whether it also applies to tort claims.

         In Moses v. Bus. Crd Express, Inc., 929 F.2d 1131, 1140 (6th Cir. 1991), the Sixth Circuit found that a choice-of-law provision applied to plaintiff's fraud and misrepresentation claims and was not limited to purely contractual claims. In that case, the choice-of-law provision in the parties' agreement stated, “This Franchise and License Agreement and the construction thereof shall be governed by the laws of the state of Michigan.” Id. at 1139. In reaching its conclusion, the court distinguished the choice-of-law provision from one analyzed by the Fifth Circuit in Caton v. Leach, 896 F.2d 939 (5th Cir. 1990), which the Fifth Circuit construed narrowly, holding the provision only applied to contractual claims and did not apply to plaintiff's tort and quantum meruit claims where the clause provided that “[t]his agreement shall be construed under the laws of the State of California.” Caton, 896 F.2d at 942 (emphasis added). The choice-of-law provision in Caton mirrors the clause at issue here. Thus, under the Sixth Circuit's holding in Moses, the choice-of-law provision requiring the application of Texas law is limited to contract claims and does not cover plaintiff's tort and quasi-contract claims.

         The Sixth Circuit addressed a similar issue in Banek, supra, and held that a choice-of-law provision in a franchise agreement was sufficiently broad to cover plaintiff's claims for fraud and misrepresentation. 6 F.3d at 363. In that case, the choice-of-law clause provided, ”[t]his Agreement was made and entered into in the State [of] Georgia and all rights and obligations of the parties hereto shall be governed by and construed in accordance with the laws of the State of Georgia.” 359. The court also found that the fraud and misrepresentation claims were directly related to the franchise agreement, and ...

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