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The Franchise Memorandum

Court Examines Pleading Requirements for Fraud

A New York court recently denied a franchisor’s motion to dismiss claims brought by its franchisee. Schwartzco Enters., LLC v. TMH Management, LLC, 2014 U.S. Dist. LEXIS 160856 (E.D.N.Y. Nov. 17, 2014). Schwartzco brought multiple causes of action alleging that the franchisor and related individuals participated in a fraudulent scheme in the sale of franchise and area developer rights for The Meat House system, violating numerous state laws and regulations. According to Schwartzco, the franchisor made material misrepresentations, including providing false financial statements and earnings claims to induce Schwartzco to invest. One claim alleged misrepresentations by an individual defendant, Brown, in violation of the New York Franchise Sales Act, which is designed to prevent fraud in the sale of franchises. In response, Brown brought a motion to dismiss under Rule 9(b) of the Federal Rules of Civil Procedure, which requires a party alleging fraud to state the circumstances of the fraud with particularity. The court decided that it did not need to address whether the proposed claim against Brown was subject to Rule 9(b), because Schwartzco set forth factual allegations sufficient to state violations under either the heightened pleading requirements or the general liberal notice pleading requirements.

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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