[co-author: Tristen Lindell]

The Michigan Court of Appeals recently affirmed a trial court’s dismissal of certain claims by franchisees Red Fit, LLC and Cali Red, LLC against franchisor Red Effect International Franchise, LLC based on a release of liability and an untimely witness list disclosure. Red Fit, LLC v. Red Effect Int’l Franchise, LLC, 2024 WL 2790504 (Mich. Ct. App. May 30, 2024). Red Fit and Cali Red wanted to swap certain area development agreement territories, so they entered into multiple franchise and area development agreements with infrared therapy fitness concept franchisor, Red Effect, simultaneously with termination agreements (TRAs) terminating earlier area development agreements between the parties and releasing both sides of liability for all prior agreements. When a dispute as to royalties arose and Red Effect attempted to enforce binding arbitration, Red Fit and Cali Red brought a litany of claims against Red Effect. The trial court dismissed several claims on account of the TRA release provisions. On a remaining breach of contract claim that went to trial, the court prohibited Red Fit and Cali Red from calling any witnesses because of their failure to disclose their witness lists before the deadline. With no witnesses to prove damages, Red Fit and Cali Red’s last remaining claim was also dismissed. Red Fit and Cali Red appealed, including arguments that (1) the release provisions should be rescinded, and (2) prohibiting Red Fit and Cali Red from calling witnesses was improper.

The appellate court disagreed with Red Fit and Cali Red on both points. First, Red Fit and Cali Red contended that, because Red Effect failed to timely provide a disclosure document in connection with certain franchise purchases, the TRAs were subject to rescission. However, the court explained that, under relevant California and Michigan franchise laws, rescission is only authorized for agreements that offer or sell a franchise (i.e. a franchise agreement or development agreement, and not the TRAs). The court also rejected the argument that the TRAs were consideration for the parties’ later franchise agreements, as the TRA language clearly dictated otherwise, and the court reasoned that signing the TRAs could be a condition without being consideration. Thus, the court upheld the releases and dismissed the claims predating them. Second, on Red Fit and Cali Red’s remaining breach of contract claim, the court affirmed the trial court’s decision to prohibit Red Fit and Cali Red from calling witnesses at trial because of the untimely witness lists. Applying an eight-factor test for precluding witnesses, the court emphasized Red Fit and Cali Red’s reckless indifference of the filing deadline and the prejudice that Red Effect would suffer due to its lack of knowledge of the witnesses’ testimony.

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