A frozen franchise: Cryotherapy franchise litigation explores fundamental franchise issues
It’s not just for star athletes and celebrities anymore; treatment in cryotherapy chambers appears to be the new craze in wellness and franchising.
Cryotherapy uses liquid nitrogen to maintain a temperature of about 240 degrees below zero in body-size chambers in which clients submerge themselves for up to three minutes to obtain alleged health benefits including better sleep, improved athletic performance, more energy, and faster healing. CryoUSA Import and Sales LLC (CryoUSA) sells franchises to operate whole body cryotherapy chamber treatment centers – and they are popping up around the country. Now CryoUSA and one of its alleged franchisees, Live Cryo, LLC (Live Cryo), are engaged in heated litigation in federal court in Michigan and state court in Texas, disputing claims about whether they had a franchise relationship and whether CryoUSA misrepresented potential earnings from its cryotherapy chambers, among other claims. (See Live Cryo LLC v. CryoUSA Import and Sales, LLC et al., Case No. 17-CV-11888))
The issues at stake in the litigation are fundamental to many franchise relationships.
Initially, the parties disputed whether CryoUSA and Live Cryo even had a franchise relationship. The parties did not sign a document titled “franchise agreement;” instead the parties agreed to a “distribution agreement” for the cryotherapy chambers, and CryoUSA, the franchisor, claimed that such an agreement did not entitle Live Cryo to the benefits of a franchise relationship. When ruling on a motion to dismiss filed by CryoUSA, the Eastern District of Michigan noted that Michigan state law defines a franchise as “a contract or agreement, either express or implied, whether oral or written” where:
- a franchisee is granted the right to sell goods or services under a system prescribed by a franchisor;
- a franchisee may use the intellectual property of the franchisor; and
- the franchisee must pay a franchise fee.
The court noted that because CryoUSA granted Live Cryo the ability to sell cryotherapy services using the Live Cryo chambers, and all of the chambers contained the CryoUSA name and logo, Live Cryo stated a claim as to the first two elements of a franchise. However, Live Cryo was not required to pay a “franchise fee” in the traditional sense; Live Cryo alleged that the payment of the franchise fee was indirect through payment of marked-up prices on the cryotherapy chambers, service fees, and a renewal fee to maintain exclusivity in the state. Whether these fees were actual “franchise fees” posed a closer question, but the court found that there was a question of fact as to this issue.
CryoUSA also moved to dismiss Live Cryo’s claims fraud and fraudulent misrepresentation as to the expected quality of the cryotherapy chambers, as well as the anticipated profitability of a cryotherapy location. The court noted that both of Live Cryo’s claims regarding fraud must be dismissed because Live Cryo failed to plead with particularity, but also because the fraud claims were based on forward-looking projections and future promises. While Live Cryo alleged that that “it was induced to enter into the cryotherapy business based on estimates of its possible future earnings,” the court noted that “these estimates of future profits are merely erroneous conjectures as to future events which are not actionable.” Even though LiveCryo’s fraud claims based on the Michigan Franchise Investment Law could be interpreted more broadly than common law fraud, these claims were also dismissed; Michigan state courts have found that “opinions, sales puffery, and predictions of future events are not actionable under the Michigan Franchise Investment Law as well.” Finally, LiveCryo’s fraud claims were also dismissed because LiveCryo would not be able to prove that it reasonably relied on CryoUSA’s oral representations regarding the cryotherapy chambers and anticipated earnings; these predictions were not integrated in the distribution agreement or anywhere else in writing between the parties.
The LiveCryo cryotherapy business continues to be frozen in time, as the parties continue to litigate many other issues in federal and state court. The LiveCryo/CryoUSA dispute appears to be one to watch for many important franchise issues.