The Franchise Memorandum

A federal court granted partial summary judgment in favor of a former franchisee after finding clear but technical violations of the Maryland and New York registration and disclosure laws, but refused to award damages. A Love of Food I v. Maoz Vegetarian USA, Inc., 2014 U.S. Dist. LEXIS 138962 (D.D.C. Sept. 30, 2014). After approximately two years of operations, franchisee A Love of Food's quick-service restaurant went out of business as a result of large operating losses and significantly higher than expected outof-pocket expenditures. A Love of Food brought suit against its franchisor, Maoz Vegetarian, alleging numerous violations of applicable registration and disclosure laws, including Maoz's failure to register the franchise offering with applicable state authorities and failure to timely provide disclosure. Because A Love of Food's principal place of business was in Maryland, and Maoz's offer to sell the franchise originated from New York, both Maryland and New York franchise laws applied.

Maoz had prepared an offering prospectus and provided a copy to A Love of Food, but never registered the prospectus in Maryland. Although Maoz did apply for registration in New York, its application was not approved until after the franchise sale. As a result, the court concluded that Maoz violated both states' disclosure requirements. But it also found that the failure to register and timely disclose was not material to A Love of Food's investment decision. Further, the court held that the business losses sustained by A Love of Food were primarily attributable to its own conduct and not caused by Maoz's failure to register or timely disclose, as the franchisee had, among other things, expended significant amounts on developing the franchised restaurant at a location that was not approved by Maoz. Therefore, the court found that the plaintiff was not entitled to any award of damages or rescission of the franchise agreement.