Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. Cal.: Medical recruiting franchisee’s California franchise law claims keyed to required FTC disclosures survive, (May 20, 2025)

By Justin Marcus Smith, J.D.

It was not clear that the franchisee was made aware, on receipt of a disputed franchise disclosure document, that the document was incomplete and inaccurate.

A putative medical recruiting franchisee adequately pleaded claims that a franchisor principal violated the California Franchise Investment Law (CFIL) and California Unfair Competition Law (UCL) in connection with omitted or misleading disclosures that are required by the FTC Franchise Rule, misleading statements, and alleged unauthorized computer access, held the federal district court in San Diego. The court systematically ruled-out assorted defendant objections to the franchisee’s CFIL claim. Among these, a one-year knowledge limitations period did not facially apply based on mere receipt of an allegedly misleading franchise disclosure document. The plaintiff also had facial grounds for asserting the UCL claim that were independent from the FTC disclosure requirements and CFIL. The court denied the defendant’s motion to dismiss for failure to state a claim (Pasture Gate Holdings, Inc. v. Gruzd, No. 3:24-cv-00886-L-DTF (S.D. Cal. May. 19, 2025)).

Background. Pasture Gate Holdings, Inc. (PGH) claimed fraudulent inducement with respect to its purchase, in or about August 2020, of an “AllMed Search” healthcare professional recruiting franchise from defendant Nadia Gruzd (Gruzd). Among other things, PGH alleged Gruzd made “unlawful financial performance representations and material misrepresentations” about the AllMed Search franchise system; transmitted a Medical Search Consultants LLC (MSC) franchise disclosure document (MSC-FDD) that contained incomplete and misleading information about MSC, AllMed Search, and herself; concealed the financial failures of 30 franchises sold through a prior entity she managed, Unlimited Med Search Franchise System, Inc. (UMFS), which ultimately went bankrupt; and, accessed and manipulated PGH computer systems without PGH knowledge or consent. PGH claimed that Gruzd, the sole defendant listed on the operative complaint, failed to comply with the FTC Franchise Rule requirements for franchise disclosure documents (FDDs) and in so doing violated the CFIL and the UCL.

Gruzd moved for the dismissal of all claims for failure to state a claim. In support of her motion, Gruzd also asked the court to take judicial notice of two documents filed in a different district court case between PGH and MSC: 1) the MSC-FDD; and, 2) the final award in arbitration between PGH and MSC.

Judicial notice. The court declined to take judicial notice of the MSC-FDD and final arbitration award because it concluded Gruzd wanted to introduce the documents not merely to show their existence but to prove their meaning or content. The court noted that a R. 12(b)(6) motion might convert to a motion for summary judgment when a court does not exclude unincorporated items that go beyond the pleadings.

CFIL. The court held that PGH adequately alleged violations of the CFIL by failures to comply with the FTC Franchise Rule. The PGH CFIL claims stemmed from inaccurate or misleading federally -required MSC-FDD disclosures and related Gruzd statements. Specifically, PGH asserted that MSC violated the FTC Franchise Rule by failing to disclose, within a ten-year window, the existence of UMFS, a prior entity that Gruzd allegedly used to sell AllMed Search Franchises.

Gruzd argued, first, that she did not need to disclose UMFS because it was not a predecessor and PGH offered an unsupported legal conclusion about it that the court need not accept as true. However, the court saw from the face of the PGH complaint that Gruzd allegedly ran UMFS to sell AllMed Search franchises. The court concluded that was enough to reasonably infer that UMFS was MSC’s predecessor.

As for the PGH allegation that Gruzd failed to disclose litigation stemming from her putative failure as a medical recruiting franchisor in connection with the name UMFS, Gruzd countered the “held liable” contention was “inconsistent with the record”, and, furthermore, she did not resolve the matter by payment of money. PGH said the other litigation ended with a non-confidential settlement agreement that was not mentioned in the MSC-FDD. The court said “held liable” under the FTC Franchise Rule included the payment of money to resolve claims. Accordingly, the court held the PGH allegations sufficient with respect to Gruzd being “held liable.”

Turning to whether the MSC-FDD failed to disclose franchisor bankruptcies within ten years, Gruzd said PGH would have discovered alleged omissions when PGH reviewed the FDD in 2020. She also said the claim was now time-barred. Neither party disputed that if the four-year CFIL limitations period applied, the PGH claims would be timely, but Gruzd maintained that a CFIL sub-paragraph one-year limitations period, turning on discovery of facts, applied on PGH receipt of the FDD in 2020.

The court concluded it was not apparent from the face of the complaint that PGH was made aware, on receipt of the MSC-FDD, that it was incomplete and inaccurate. Accordingly, Gruzd did not show the PGH claim was time-barred.

As for PGH allegations that “Gruzd made reckless and false financial performance representations about the profitability of an AllMed Search franchised business—none of which were included in Item 19 of the MSC-FDD[,]” Gruzd again asserted expiration of the one-year knowledge limitations period. And again, the court said it was not apparent from the face of the complaint that mere receipt of the MSC-FDD would have charged PGH with sufficient notice or knowledge of falsity.

Gruzd also argued here that both the FDD and the franchise agreement stated that no officer or agent of MSC, including Gruzd, was authorized to make representations about future performance, nor representations beyond the written franchise agreement; therefore, PGH could not have reasonably relied on them. The court said Gruzd offered no legal support for her argument that the disclaimer excused her from CFIL liability. The disclaimer could pertain to reasonable reliance at most, but unlike other parts of the CFIL, CFIL § 31202, pertaining to unlawful statements of material facts in a required disclosure under CFIL § 31101, did not contain a reliance element.

UCL. The court disagreed with Gruzd that CFIL preempted the PGH UCL claim. Any claims beyond CFIL coverage could be brought independently. As for whether the FTC Franchise Rule could not apply because it does not provide a private right of action, the court said the PGH UCL claim was partly based on alleged computer access violations that CFIL and the FTC Franchise Rule did not preempt. As for whether PGH failed to plead inadequacy of legal remedies, the court said a plaintiff can plead conflicting theories in the alternative, and need not choose between damages and equitable relief, under Fed. R. Civ. P. 8(a)(3).

The Case is No. 3:24-cv-00886-L-DTF.

Judge: Lorenz, M.

Attorneys: Alec R. Shelowitz (Zarco Einhorn Salkowski, P.A.) for Pasture Gate Holdings, Inc. George Rikos (Law Offices of George Rikos) for Nadia Gruzd.

Companies: Pasture Gate Holdings, Inc.

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