A Love of Food I, LLC v. Maoz Vegetarian USA, Inc.

• Citation: 70 F.Supp.3d 376
• Decision Date: 30 September 2014
• Docket Number: Civil Action No. 12–CV–1117KBJ
• Parties: A Love of Food I, LLC, Plaintiff, v. Maoz Vegetarian USA, Inc., Defendant.
• Court: U.S. District Court — District of Columbia

70 F.Supp.3d 376

A Love of Food I, LLC, Plaintiff

v.Maoz Vegetarian USA, Inc., Defendant.

Civil Action No. 12–CV–1117KBJ

United States District Court, District of Columbia.

Signed September 30, 2014

Steven K. Fedder, Fedder & Janofsky LLC, Baltimore, MD, for Plaintiff.

Raymond Thomas Mckenzie, Jr., Law Office of Raymond T. McKenzie, Gaithersburg, MD, for Defendant.

MEMORANDUM OPINION

KETANJI BROWN JACKSON, United States District Judge

In 2007, Plaintiff A Love of Food I, LLC (“ALOF” or “Plaintiff”)—a corporate entity that David and Quinn Wallis established—entered into a franchise agreement with Defendant franchisor Maoz Vegetarian USA, Inc. (“Maoz” or “Defendant”). Under the agreement, ALOF was authorized to open a franchise of Maoz's vegetarian quick-service restaurant in the District of Columbia. ALOF did so, and has now brought the instant lawsuit against Maoz, contending that it lost over $900,000 when the franchise failed less than three years after opening. ALOF seeks rescission of the franchise agreement and also compensatory and punitive damages, specifically maintaining that it is entitled to this relief under the New York and Maryland state franchise laws because Maoz (1) failed to register its franchise offering statement with the relevant state authorities; (2) failed to provide that document to ALOF in a timely manner; (3) made statements projecting ALOF's future earnings, despite disclaiming the use of such statements; and (4) made untrue statements of material fact regarding initial start-up expenses. (Am. Compl. ¶ 38 (New York law violations); id. ¶ 30 (Maryland law violations).) ALOF also maintains that Maoz's alleged underestimates of the initial start-up expenses qualifies as fraud in the inducement under common law. (Id. ¶¶ 39–49.)

Before this Court at present are the parties' cross-motions for summary judgment. (Def.'s Mot. for Summ. J. (“Def.'s Mot.”), ECF No. 41; Mot. for Summ. J. (“Pl.'s Mot.”), ECF No. 43.)¹ This Court has carefully considered the parties' evidence and allegations regarding the complex series of state and common law claims made in this case, and will GRANT IN PART and DENY IN PART both parties' cross-motions for summary judgment, as explained in detail below. The birds-eye view of the Court's conclusions is that ALOF is entitled to judgment in its favor with respect to its failure-to-register claims, but the Court concludes as a matter of law that nothing other than nominal damages follows from this technical violation and that rescission of the franchise agreement would not be appropriate on this basis. The Court also finds that ALOF is entitled to judgment under New York state franchise law for Maoz's violation of the technical requirement that a franchisor disclose the offering prospectus in a timely fashion, but again, no damages arose from this technical violation under the circumstances presented here; moreover, because there is no cause of action for such a disclosure violation under Maryland franchise law, ALOF's Maryland disclosure claim must be dismissed. Defendant Maoz is not without its own small victories: this Court concludes that Maoz is entitled to have judgment entered in its favor with respect to ALOF's claim that Maoz unlawfully represented that no statements regarding future earnings had been made to ALOF when, in fact, Maoz had made such statements in the course of the franchise negotiations. But the Court cannot grant summary judgment for either party on the statutory and common law misrepresentation claims that are premised on Maoz's allegedly false representations about start-up cost expenses, because there are genuine issues of fact regarding such material matters as whether Maoz knew its cost estimates were false, whether ALOF was entitled to rely on those estimates, and—with respect to the common law fraud claim only—whether Maoz intended to defraud ALOF. What is left of ALOF's “kitchen-sink” complaint is ALOF's statutory and common law claims that are premised on alleged misrepresentations regarding the projected initial start-up expenses for the franchise (Am. Compl. Count I, ¶ 27, 30(d); Count II, ¶ 35, 38(d); Count III, ¶ 39–49)—claims that the parties must now either settle or prepare for trial. Cf. Batterman v. Leahy, 544 F.3d 370, 373 (1st Cir.2008) (“A kitchen-sink complaint, unless dismissed for some central jurisdictional or pleading flaw, is likely to be hard slogging, requiring that counts be worked through one by one.”).

A separate order consistent with this opinion will follow.

I. BACKGROUND

ALOF is a Delaware-based limited liability company that was formed on May 25, 2007. (ALOF Certificate of Formation, Ex. 2 to Def.'s Mot., at 2.) David and Quinn Wallis—father and son—are the principals of ALOF. (Am.Compl.¶ 8.) Maoz, a Delaware corporation formed in 2004, runs a network of quick-service vegetarian food restaurants within the United States. (Maoz 2007 Uniform Franchise Offering Circular (“2007 Offering Prospectus”), Ex. 1 to Def.'s Mot., ECF No. 41–1, at 5; Yair Marinov Aff. in Supp. of Reargument or Reconsideration (“Marinov Aff.”), Ex. 4 to Def.'s Mot., ECF No. 41–4, ¶ 4.) This case arises out of ALOF's decision to enter into an agreement to open a Maoz franchise in Washington, D.C. (“the Agreement”), and in particular, the conversations and negotiations that occurred between the Wallises and Maoz's Vice President of Marketing and Sales, Yair Marinov, regarding that Agreement. (See generally Dep. of Yair Marinov (“Marinov Dep.”), Ex. 3 to Def.'s Mot., ECF No. 41–3.) The Plaintiff and Defendant negotiated and entered into the Agreement against the backdrop of certain federal and state regulations that govern the sale and purchase of franchises; therefore, a basic understanding of the regulatory scheme in this area is crucial to full consideration of the claims being made in this case.

A. The Federal Franchise Rule And The New York And Maryland Franchise Registration And Disclosure Laws

The Federal Trade Commission (“FTC”) has promulgated regulations titled “Disclosure Requirements and Prohibitions Concerning Franchising and Business Opportunity Ventures,” 16 C.F.R. § 436 (2013) (commonly known as the “Franchise Rule” see John Bourdeau, et al., 62B Am.Jur.2d Private Franchise Contracts § 26 (2d ed.2014) ), which apply nationwide. Before selling a franchise, the Franchise Rule requires a franchisor to provide a prospective franchisee with a detailed disclosure statement—known as a “uniform franchise offering circular” or a “franchise disclosure document”—that includes information like the franchisor's corporate history and current financial condition, the track record of any other franchises, and the background of the franchisor's principal officers. See 16 C.F.R. § 436.5 ; see also FTC v. Jordan Ashley, Inc., No. 93–2257–CIV, 1994 WL 200775, at *3 (S.D.Fla. Apr. 5, 1994) ; Bourdeau, supra, § 26. The disclosure requirements set forth in the Franchise Rule are “designed to protect prospective purchasers from the financial hardships that arise when they purchase franchises and other business opportunity ventures without essential, reliable information about them.” Bourdeau, supra, § 26. The FTC can bring suit to enjoin a franchisor's failure to furnish the required information in violation of the Franchise Rule, see 15 U.S.C. § 53(a) ; see, e.g., FTC v. Sage Seminars, Inc., No. 95–2854, 1995 WL 798938, at *1 (N.D.Cal. Nov. 2, 1995), but no private right of action is available to franchisees under these regulations. See, e.g., Layton v. AAMCO Transmissions, Inc., 717 F.Supp. 368, 371 (D.Md.1989) ; Days Inn of America Franchising, Inc. v. Windham, 699 F.Supp. 1581 (N.D.Ga.1988) ; Freedman v. Meldy's, Inc., 587 F.Supp. 658 (E.D.Pa.1984) ; Mon–Shore Mgmt, Inc. v. Family Media, Inc., 584 F.Supp. 186 (S.D.N.Y.1984).

Along with this national regulatory scheme, a number of states have enacted similar laws, rules, or regulations governing franchise sales. See David J. Kaufmann, Managing Legal Issues In Franchising : An Overview of the Business & Law of Franchising, 2013 WL 3773409 (June 2013) (surveying the states). New York and Maryland are among the states with such rules. See N.Y. Gen. Bus. Law §§ 680 –695 (“New York Franchise Sales Act”); Md.Code, Bus. Reg. §§ 14–201–14–233 (“Maryland Franchise Registration and Disclosure Law”). The purpose of these state laws is identical to the purpose of the Franchise Rule: both aim to protect franchisees. See N.Y. Gen. Bus. Law. § 680(2) (noting that the intent of the New York Franchise Sales Act is to “provid[e] prospective franchisees and potential franchise investors with material details of the franchise offering so that they may participate in the franchise system in a manner that may avoid detriment to the public interest” and to “prohibit the sale of franchises where such sale would lead to fraud or a likelihood that the franchisor's promises would not be fulfilled”); Md.Code., Bus. Reg., § 14–202(b) (noting that the intent of the Maryland Franchise Registration and Disclosure Law is to “(1) give each prospective franchisee necessary information about any franchise offer; (2) prohibit the sale of franchises if the sale would lead to fraud or a likelihood that the franchisor's representations would not be fulfilled; and (3) protect the franchisor-franchisee relationship”).

To that end, both New York's and Maryland's franchise laws require a franchisor to (a) register its offering prospectus with the relevant state authority before offering to sell a franchise to any prospective franchisee, and also (b) disclose the offering prospectus to any prospective franchisee in a timely fashion, see N.Y. Gen. Bus. Law § 683 ; Md.Code, Bus. Reg. § 14–223. However, unlike the Franchise Rule, both state franchise laws create a private right of action allowing individual franchisees to bring suit against franchisors for violating certain procedural provisions and for making false statements to a franchisee. See N.Y....