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Massey, Inc. v. Moe's Southwest Grill, LLC

United States District Court, N.D. Georgia, Atlanta Division

February 3, 2015

MASSEY, INC., et al., Plaintiffs,
v.
MOE'S SOUTHWEST GRILL, LLC, et al., Defendants.

ORDER

RICHARD W. STORY, District Judge.

This case came before the Court for a bench trial beginning January 12, 2015. After reviewing the record and considering the evidence and arguments of counsel, the Court enters the following findings of fact and conclusions of law.

Findings of Fact

I. Creation and Development of Moe's Southwest Grill

1. Formed in July 2000 as a Georgia limited liability company, Moe's Southwest Grill, LLC ("Moe's") is in the business of franchising fast, casual Mexican food restaurants.

2. In approximately January 2001, Moe's began marketing its franchise to potential franchisees. From approximately 2001 to 2007, Moe's franchised the "Moe's Southwest Grill" restaurants, growing from 17 stores at the end of 2001 to 343 stores at the end of 2006.

3. Prior to joining the Moe's franchise, each prospective franchisee received a Uniform Franchise Offering Circular ("UFOC"), which described in detail the Moe's franchise system, including but not limited to information regarding Moe's, its predecessors and affiliates, the franchise's business experience, all ongoing litigation, the investment and financing requirements of franchisees, and both franchisor and franchisee's ongoing obligations.

4. In keeping with the standard in the industry, Moe's regular business practice was to update its UFOC in the first quarter of each calendar year.

5. To become a Moe's franchisee, potential franchisees were required to execute both a Market Development Agreement and a Franchise Agreement. The standard Moe's Market Development Agreement was marked as Exhibit C to each UFOC, and detailed the franchisee's obligations as a developer of the Moe's franchise and granted a franchisee the right to develop one or more Moe's franchises.

6. The standard Moe's Franchise Agreement was marked as Exhibit D to each UFOC, and detailed the obligations of Moe's and the franchisee with respect to the operation of a specific Moe's franchise.

7. Each Moe's franchisee executed a single Market Development Agreement, which covered all of the franchises operated by the franchisee. By contrast, each Moe's franchise is operated under a separate Franchise Agreement. For example, if a franchisee sought to operate three Moe's franchises, that franchisee was required to execute a single Market Development Agreement and three separate Franchise Agreements.

8. The relevant Moe's Market Development Agreements executed by Plaintiffs contain the following language:

12. FRANCHISE AGREEMENTS.
(a) Upon the due performance by Developer within the time periods set forth, of all of the requirements set forth above (including, without limitation, payment of the Development Fee and Franchise Fee, and satisfaction of all construction and training requirements) with respect to any MOE'S SOUTHWEST GRILL restaurant contemplated by this Agreement, Franchisor, except as set forth below, will execute, issue and deliver to Developer Franchisor's then-current form of Franchise Agreement to operate such MOE'S SOUTHWEST GRILL restaurant; provided, however, that, in the event that this Agreement is for the development of more than one (1) MOE'S SOUTHWEST GRILL restaurant, the Franchise Fees and royalties payable under any Franchise Agreement for a MOE'S SOUTHWEST GRILL restaurant to be built and operated within the Territory shall be at the rate set forth in Exhibit A. In addition, in the event that this Agreement is for the development of more than one (1) MOE'S SOUTHWEST GRILL restaurant, during the term of this Agreement or any renewal hereof, with respect to any Franchise Agreement executed for a MOE'S SOUTHWEST GRILL restaurant to be built and operated within the Territory, Franchisor agrees that:...
(b)... Developer shall comply with Franchisor's then-current franchising policies and procedures for issuance of each Franchise Agreement.... If and when any Franchise Agreement contemplated in this Agreement is executed by Franchisor, it shall supersede this Agreement and govern the relations between the parties with respect to the particular restaurant.

(Def.'s Tr. Ex. 28).

9. The relevant Moe's Market Development Agreements executed by Plaintiffs further provide:

24. ENTIRE AGREEMENT. This Agreement contains the entire agreement between the parties hereto and there are no representations, inducements, promises, agreements, arrangements or undertakings, oral or written, between the parties that have been relied upon by either party other than those set forth herein. No agreement of any kind relating to the matters covered by this agreement shall be binding upon either party unless and until the same is made in writing and executed by both Developer and Franchisor.
25. DEVELOPER'S ACKNOWLEDGMENTS. Developer understands and acknowledges that there are significant risks in any business venture and that the primary factor in Developer's success or failure under this Agreement will be Developer's own efforts. IN ADDITION, DEVELOPER ACKNOWLEDGES THAT FRANCHISOR AND ITS REPRESENTATIVES HAVE MADE NO REPRESENTATIONS TO DEVELOPER OTHER THAN OR INCONSISTENT WITH THE MATTERS SET FORTH IN THE UNIFORM FRANCHISE OFFERING CIRCULAR PROVIDED TO DEVELOPER AND THAT DEVELOPER HAS UNDERTAKEN THIS VENTURE SOLELY IN RELIANCE UPON THE MATTERS SET FORTH IN THE UNIFORM FRANCHISE OFFERING CIRCULAR AND DEVELOPER'S OWN INDEPENDENT INVESTIGATION OF THE MERITS OF THIS VENTURE.

(Id.)

10. The relevant Moe's Franchise Agreements executed or assumed by Plaintiffs contain the following language:

7. Standards and Uniformity of Operation. Franchisee recognizes the mutual benefit to Franchisee, Franchisor and other Franchisees of Franchisor of the uniformity of appearance, service, products and advertising of the MOE'S System and understands that such uniformities are necessary for the successful operation of the MOE'S SOUTHWEST GRILL restaurants. Franchisee also acknowledges that products sold under the MOE'S name and restaurants using the MOE'S System have a reputation for excellence. This reputation has been developed and maintained by Franchisor, and Franchisee acknowledges that it is of the utmost importance to Franchisor, and to all other Franchisees that such reputation be maintained. To this end Franchisee covenants and warrants with respect to the operation of the MOE'S SOUTHWEST GRILL restaurant at the Franchised Site that Franchisee and its employees will comply with all of the requirements of the MOE'S System and will throughout the term of the agreement:
(a) Operate the restaurant and prepare and sell all products sold therein in accordance with the specifications, standards, business practices and policies of Franchisor now in effect or hereafter promulgated by Franchisor for its Franchisees, and comply with all requirements of the MOE'S System as they are now or hereafter established....
(g) Use only ingredients, supplies, furnishings and equipment that conform to the standards and specifications designated by Franchisor. Such items may be purchased from any source that can supply items that meet such standards and specifications.

(Def.'s Tr. Ex. 29).

11. The relevant Moe's Franchise Agreements executed by all Plaintiffs except Parde Roswell further provide:

34. Entire Agreement. This agreement and any addendum hereto contains the entire agreement between the parties hereto relating to the operation of the restaurant at the Franchised Site and there are no representations, inducements, promises, agreements, arrangements or undertakings, oral or written, that have been relied upon by the parties other than those set forth herein. No agreement of any kind relating to the matters covered by this agreement shall be binding upon either party unless and until the same is made in writing and executed by all interested parties.
35. Franchisee's Acknowledgments.
(a) Franchisee assumes sole responsibility for the operation of the business Franchised hereunder and acknowledges that, while Franchisor may furnish advice and assistance to Franchisee from time to time during the term of this agreement, Franchisor has no legal or other obligation to do so except as specifically set forth herein. In addition, Franchisee acknowledges that Franchisor does not guarantee the success or profitability of the business Franchised hereunder in any manner whatsoever and shall not be liable therefor; in particular, Franchisee understands and acknowledges that the success and profitability of the business Franchised hereunder depend on many factors outside the control of either Franchisor or Franchisees (such as interest rates, unemployment rates, demographic trends and the general economic climate), but principally depend on Franchisee's efforts in the operation of the business.
Franchisee understands and acknowledges that there are significant risks in any business venture and that the primary factor in Franchisee's success or failure in the business Franchised hereunder will be the Franchisee's own efforts. IN ADDITION, FRANCHISEE ACKNOWLEDGES THAT FRANCHISOR AND ITS REPRESENTATIVES HAVE MADE NO REPRESENTATIONS TO FRANCHISEE OTHER THAN OR INCONSISTENT WITH THE MATTERS SET FORTH IN THE UNIFORM FRANCHISE OFFERING CIRCULAR PROVIDED TO FRANCHISEE, AND THAT FRANCHISEE HAS UNDERTAKEN THIS VENTURE SOLELY IN RELIANCE UPON THE MATTERS SET FORTH IN THE UNIFORM FRANCHISE OFFERING CIRCULAR AND FRANCHISEE'S OWN INDEPENDENT INVESTIGATION OF THE MERITS OF THIS VENTURE.

(Id.)

12. The Parde Roswell Moe's Franchise Agreement executed in 2007 contains substantially the same language:

34. Entire Agreement. This agreement and any addendum hereto contains the entire agreement between the parties hereto relating to the operation of the restaurant at the Franchised Site and there are no representations, inducements, promises, agreements, arrangements or undertakings, oral or written, that have been relied upon by the parties other than those set forth herein and in the Uniform Franchise Offering Circular. No agreement of any kind relating to the matters covered by this agreement shall be binding upon either party unless and until the same is made in writing and executed by all interested parties.
35. Franchisee's Acknowledgments.
(a) Franchisee assumes sole responsibility for the operation of the business Franchised hereunder and acknowledges that, while Franchisor may furnish advice and assistance to Franchisee from time to time during the term of this agreement, Franchisor has no legal or other obligation to do so except as specifically set forth herein. In addition, Franchisee acknowledges that Franchisor does not guarantee the success or profitability of the business Franchised hereunder in any manner whatsoever and shall not be liable therefor; in particular, Franchisee understands and acknowledges that the success and profitability of the business Franchised hereunder depend on many factors outside the control of either Franchisor or Franchisees (such as interest rates, unemployment rates, demographic trends and the general economic climate), but principally depend on Franchisee's efforts in the operation of the business.
(b) Franchisee understands and acknowledges that there are significant risks in any business venture and that the primary factor in Franchisee's success or failure in the business Franchised hereunder will be the Franchisee's own efforts. IN ADDITION, FRANCHISEE ACKNOWLEDGES THAT FRANCHISOR AND ITS REPRESENTATIVES HAVE MADE NO REPRESENTATIONS TO FRANCHISEE OTHER THAN OR INCONSISTENT WITH THE MATTERS SET FORTH IN THE UNIFORM FRANCHISE OFFERING CIRCULAR PROVIDED TO FRANCHISEE, AND THAT FRANCHISEE HAS UNDERTAKEN THIS VENTURE SOLELY IN RELIANCE UPON THE MATTERS SET FORTH IN THE UNIFORM FRANCHISE OFFERING CIRCULAR AND FRANCHISEE'S OWN INDEPENDENT INVESTIGATION OF THE MERITS OF THIS VENTURE.

(Def.'s Tr. Ex. 54.)

13. In each year's UFOC from 2001-2003, Item 8 of the Moe's UFOC states in relevant part:

You must purchase certain paper products including, among other things, plates, cups, boxes and containers bearing the "MOE'S SOUTHWEST GRILL" name or other trade names or service marks through certain designated suppliers who are authorized to manufacture these products. You must purchase certain hardware and software for the operation of a MOE'S SOUTHWEST GRILL restaurant. Those suppliers are not affiliated with us. Neither we nor any of our affiliates will derive any income from these purchases.
We do not negotiate purchase agreements with suppliers for the benefit of franchisees. Due to the volume of purchases made from suppliers by the Company and its franchisees, certain suppliers provide discounts to the Company and its franchisees. The Company does not negotiate for these discounts and does not monitor the amount of any discounts to franchisees.

(Def.'s Tr. Ex. 1-3.)

14. The 2001-2003 UFOCs also provided:

The following table lists important provisions of the Market Development Agreement. You should read these provisions in the Market Development Agreement attached to this offering circular as Exhibit C....

(Id.)

15. The 2001-2003 UFOCs also provided:

The following table lists important provisions of the Franchise Agreement. You should read these provisions in the Franchise Agreement attached to this offering circular as Exhibit D....

(Id.)

16. The 2001-2003 UFOCs do not identify SOS or Tony LaGratta as an affiliate of Moe's, nor do they disclose that Mr. Sprock has any ownership interest in SOS.

17. The 2004 UFOC, issued on March 18, 2004, made the following disclosure in Item 8 concerning SOS and Mr. Sprock's role therein:

Systems Opportunities Savings ("SOS") provides food brokerage services to MOE's franchisees. Franchisees are able to use SOS on a voluntary basis. We do not derive revenue, directly or indirectly, from SOS in connection with the services SOS provides to our franchisees. H. Martin Sprock, III, our Manager, Chief Executive Officer and President, is projected to become a minority equity holder in SOS during fiscal year 2004.

(Def.'s Tr. Ex. 4.)

18. The foregoing disclosure made no reference to affiliates, and "we" is defined in the UFOC as Moe's Southwest Grill, LLC.

19. The 2005 UFOC, issued on April 1, 2005 and subsequently distributed to prospective and existing franchisees, disclosed the relationship between Mr. Sprock and SOS and specified Mr. Sprock's ownership interest in SOS. The 2005 UFOC stated that Mr. Sprock was a 50% equity holder in SOS and that SOS was a supplier of food brokerage services to Moe's franchisees.

20. The 2005 UFOC provided at Item 8:

One of our approved suppliers, Systems Opportunities Savings ("SOS") provides food brokerage services to MOE's franchisees. SOS is indirectly related to us through Martin Sprock, our Chief Executive Officer and President, who is a 50% equity holder in SOS. Individually, Mr. Sprock also holds a small minority interest in two other suppliers in our system: Atlanta Lighting and Kudzu International. We do not derive revenue, directly or indirectly, from any of these suppliers in connection with the services or products they provide to our franchisees.

(Def.'s Tr. Ex. 5.)

21. Again, the foregoing disclosure made no reference to affiliates, and "we" is defined in the UFOC as Moe's Southwest Grill, LLC.

II. Formation of the Moe's Supply Chain Management Program

22. As of 2000-2001, Mr. LaGratta was the paid employee of another Sprock-sponsored concept, Planet Smoothie, for which he managed food supply and distribution services and negotiated purchasing contracts.

23. Seeking to retain Mr. LaGratta's services, Mr. Sprock and Mr. LaGratta discussed the concept of a food services management company - one which would not necessarily be limited to the Moe's account. Mr. Sprock offered to help the company obtain clients. These discussions occurred before Moe's established the relationship with CRM.

24. Mr. LaGratta and Mr. Sprock had a "loose understanding" that Mr. LaGratta would form an independent company to manage the Moe's supply chain, and that Mr. Sprock would be involved in that company and possibly receive revenue therefrom.

25. Mr. LaGratta reached out to Steve Salzberg to discuss the possibility of Moe's utilizing CRM as a food distributor.

26. CRM was formed in 1984 and is 100% owned by Mr. Salzberg. Mr. Salzberg does not own (in whole or in part) or operate any of the Defendants.

27. Mr. Sprock supported CRM's involvement in the Moe's supply chain. He believed that CRM's aggregate clientele provided it with a level of purchasing power when negotiating pricing and other terms with food suppliers that a fledgling franchise system such as Moe's would not have. In fairness to Mr. Sprock, his primary motivation in supporting the proposed supply chain was to help assure the success of the franchisees, not to create a separate revenue source for himself. Mr. Sprock was attempting to grow the Moe's brand as quickly as possible which required happy, satisfied franchisees. His ultimate success depended upon this growth as he would ultimately sell the brand to someone else.

28. The purchasing power of CRM through its Chain Links Buying Group between 2001 and 2007 is estimated at between $250, 000, 000 and $300, 000.000. At no time since CRM participated in the Moe's system has Moe's ever accounted for more than 25-30% of the revenues of CRM.

29. CRM agreed to help Mr. LaGratta create and run the food supply chain and distribution network for Moe's.

30. International Jobbers ("IJ") was identified by CRM and Mr. LaGratta as a distributor for Moe's franchisees for particular regions such as North Georgia.

31. As a distributor, IJ was capable of receiving and delivering orders of various food products for certain Moe's franchisees. The Plaintiff franchisees would place orders with IJ in lieu of contacting individual suppliers and having to coordinate delivery schedules for each different supplier.

32. In 2001, CRM and IJ agreed that IJ would pay CRM a brokerage commission in the amount of 2% (the "CRM Commission") of all qualifying Moe's franchisee purchases paid to IJ. This 2% commission is CRM's customary charge. Certain products (Coca-Cola beverages and Economics Labs household cleaning products) were exempted from the CRM Commission.

33. In 2001, CRM agreed to pay Mr. LaGratta half the CRM Commission attributable to the Moe's account. At that time, there were no sources of revenue to CRM from the food supply chain and distribution network for Moe's other than the CRM Commission.

34. At no time prior to 2005 did Defendants know that CRM had negotiated any compensation - fees, commissions, discounts, or the like - for itself or for SOS with any food manufacturers. Specifically, at no time prior to 2005 were any of the named Defendants aware of any compensation or marketing allowance arrangement between CRM and any food suppliers.

35. Mr. Sprock was aware of the relationship between Mr. LaGratta and CRM, including the commission structure, and he approved of it.

36. On August 28, 2002, Mr. LaGratta formed SOS Foodservice Consultants, LLC ("SOS"), a company through which he continued his work on behalf of the Moe's food supply and distribution chain. SOS also performed similar services for accounts other than Moe's. Mr. Sprock was not aware that he had been listed by Mr. LaGratta as a member of SOS in its August 28, 2002 Articles of Incorporation. But Mr. Sprock did understand that he had a one-half interest in SOS.

37. By late 2002, CRM began making payments to SOS rather than Mr. LaGratta.

38. The agreement between Mr. LaGratta and Mr. Sprock was formalized in 2004. The 2004 SOS operating agreement provides that Mr. Sprock and Mr. LaGratta will share equally any profits after payment of all SOS expenses and salaries to Mr. and Mrs. LaGratta in the amount of $150, 000.00. It was not limited to SOS's share of any commissions relating to the Moe's account. Mr. Sprock was compensated from SOS's share of the CRM Commissions and his compensation did not result in CRM or SOS charging any additional fees or commissions. Moe's never - directly or indirectly - received any share of the CRM Commission.

39. In 2001-2003, Mr. Sprock received no income related to purchases by any of the Plaintiffs.

40. Mr. Sprock received his first distribution from SOS on August 25, 2004.

41. After Mr. Sprock began receiving distributions from SOS in 2004, the CRM Commissions (shared with SOS) dropped from 2% of qualifying purchases to 1.5% in May 2005, and then ultimately to 1% in July 2006, as the size of the Moe's franchise system grew significantly in that time frame.

42. At all relevant times, Mr. LaGratta has been the manager of SOS. Mr. LaGratta never owned any interest in Moe's, nor was he ever an officer or director of Moe's. Mr. LaGratta made all operational decisions relating to SOS.

43. Mr. Sprock performed no functions for SOS except to recommend it to potential clients in the restaurant industry. Also, he brought other Raving Brands franchisors with which he was personally involved as an owner-operator to SOS as additional clients (including Boneheads Seafood Grill, Doc Green's Gourmet Salads, Mama Fu's Asian Noodle House, and Shane's Rib Shack).

44. Mr. Sprock had no ownership in CRM. Mr. Sprock never had the power or right to control CRM, nor did he ever attempt to exercise control over CRM.

45. There was no discussion between Mr. Salzberg and Mr. LaGratta about sharing any revenue streams with Moe's or Mr. Sprock. In fact, Mr. Salzberg believes he did not become aware of ...


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