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The Franchise Memorandum

Court Allows Claims Based on Fraudulent Cost Projections

In A Love of Food I, LLC v. Maoz Vegetarian USA, Inc., 2011 U.S. Dist. LEXIS 73539 (D. Md. July 7, 2011), the federal district court in Maryland this month declined to dismiss several claims brought by a Maryland-based franchisee under the New York Franchise Sales Act (NYFSA) and the Maryland Franchise Registration and Disclosure Law (MFDL). The franchisee alleged that Maoz, a New York-based franchisor of quick-service vegetarian restaurants, had made misrepresentations in its UFOC that induced the franchisee to enter into the franchise agreement. Specifically, the franchisee alleged that it had to spend more than twice the high end of Maoz’s cost projections in the UFOC to establish its franchise in Washington, DC.

In analyzing Maoz’s motion to dismiss, the Maryland court first looked at whether the NYFSA applied to the Washington, DC franchise. Although a “close” question, the court found that important aspects of the franchise transaction took place in New York. The parties held initial discussions in New York about the potential sale of the franchise, and the franchise agreement and UFOC were both mailed from New York to the franchisee. Finding that Maoz’s offer to sell the franchise originated in New York, the court refused to dismiss the NYFSA claims. In analyzing the franchisee’s fraud and MFDL claims together, the court determined that “the time, date, place, and contents of the allegedly fraudulent cost projections” were “consistently specific” enough to satisfy the heightened pleading burden under Rule 9(b). Satisfied that the pleading requirements for fraud had been met, the court turned to whether the franchisee had a cognizable fraud claim. The court viewed the fraud claims to be strong, noting that the cost projection in the UFOC could have been underestimated by 85% or more. The court also found that certain language in the UFOC specifically encouraged the franchisee to rely on Maoz’s estimates, but whether the cost estimates were statements of fact or statements of opinion required a “context-sensitive inquiry.” The court concluded that all the claims were sufficiently pled.

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