The Franchise Memorandum

A federal court in the Northern District of Georgia recently ruled in favor of the franchisor of the Moe's Southwest Grill, and related parties, in a case brought by several Moe's franchisees, alleging that Moe's made written and oral misrepresentations related to the profits that Moe's derived from franchisees' purchase of food supplies. Massey, Inc. v. Moe's Southwest Grill, LLC, 2015 U.S. Dist. LEXIS 12281 (N.D. Ga. Feb. 3, 2015). The franchisees alleged that Moe's offering circular falsely represented that neither Moe's nor its affiliates would derive income from franchisees' purchases of required supplies, and that representatives of Moe's made similar precontractual representations. The franchisees alleged that these representations were false because the CEO of Moe's had an interest in an approved food supplier, and other approved food suppliers were, allegedly, Moe's affiliates. Based on these allegations, the franchisees asserted fraud and negligent misrepresentation claims, a RICO claim under Georgia law, and a claim under the Tennessee Consumer Protection Act.

After a bench trial, the court ruled for Moe's on all claims. First, the court held that the common law misrepresentation claims arising from the offering circular failed because the representations did not concern food suppliers. Second, the court held that even if the representations concerned food suppliers, they related to future performance rather than a present fact and, therefore, were not actionable representations. Third, the court found that merger clauses in parties' agreements barred common-law misrepresentation claims premised on precontractual oral representations. The court held that the RICO claims failed for the same reasons as the common-law misrepresentation claims. Finally, the court held that Moe's did engage in an unfair or deceptive trade practice under the Consumer Protection Act. The FTC regulations required Moe's to disclose "[w]hether the franchisor or its affiliates will or may derive revenue or other material consideration from required purchases or leases by franchisees," and, at the time the offering circular was provided, it had been contemplated that Moe's CEO would have an interest in a supplier. But the court concluded that the franchisees had not proved damages, in part because evidence introduced at trial demonstrated that Moe's food supply chain structure actually benefited the franchisees.