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Martrano v. Quizno's Franchise Co.

June 15, 2009

JOE MARTRANO AND TERRY SHALLENBERGER, ET AL., PLAINTIFFS,
v.
THE QUIZNO'S FRANCHISE CO., LENIHAN L.L.C., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Magistrate Judge Lisa Pupo

OPINION AND ORDER

I. OVERVIEW

As set forth below, this is a prospective State-wide class action for relief in consequence of the Defendants' alleged illegal and exploitive manipulation of a fast-food "toasted sandwich" franchise system.

Plaintiffs attest that they and other Pennsylvania Quiznos franchisees (the "Franchisees") were (a) fraudulently induced to purchase Quiznos franchises by Defendants' misrepresentations and omissions as to the true nature of the contractual relationship and the financial prospects (which were allegedly substantially diminished by, e.g., Defendants' intentional over-saturation of the market, arbitrary definition of "trade areas", and misrepresented or undisclosed business practices); and (b) subjected to illegal, deceptive and/or exploitive practices, including (i) exploitive charges for needed and even unneeded products/services which franchisees are required to purchase from Quiznos-related and certain other suppliers; (ii) mandated acceptance of customer merchandise discount coupons, without franchisor reimbursement; (iii) misuse of "advertising fees" charged to franchisees; and (iv) policies/practices regarding, e.g., inspections and operational standards, designed to decrease/eliminate Quiznos obligation to compensate franchisees for their purchases of mandated products, and utilized to punish/rebuke franchisees openly critical of Defendants, in implicit suppression of franchisees' speech and association.

The Second Amended Complaint (hereafter the "Complaint") largely mirrors allegations made against all or many of the Defendants in other State-wide (or, in one case, national) class actions previously filed.*fn1 The over-arching allegation of these Complaints is that Defendants, not content with the profitability of a nationwide network of honestly/legitimately franchised "toasted sandwich" businesses, operated and expanded the Quiznos franchise empire via fraudulent and exploitive sales/contracting and business practices; and with (a) disregard for the long-term viability of its individual franchise stores, and (b) the primary intent of inflating Quiznos short-term/apparent profitability and, correspondingly, its sale value.*fn2 Defendants maintain here, as elsewhere, that (a) they made explicit disclosures to each prospective franchisee and (b) the franchise documents - including the Uniform Franchise Offering Circular (the "UFOC") and the Franchise Agreement, each of which Plaintiffs signed*fn3 - contain disclosures, extensive non-reliance/disclaimer provisions, and significant limitations on litigation; and are determinative.*fn4

Currently pending before the Court are the Defendants' Motions to Dismiss. This Court will grant the Defendants' Motions to Dismiss Plaintiffs' claims for antitrust violations and violations of Pennsylvania criminal code provisions. It will deny said Motions as to all other matters. In so holding, the Court concurs with the Westerfield Court's ultimate rejection of Defendants' contentions that they are entitled to dismissal of the franchisees' RICO and/or fraud in the inducement claims on the basis of the franchise documents. The Court is troubled by some of what it has read;*fn5 and it notes that (taking the allegations in the light most favorable to Plaintiffs), one or more of those documents could ultimately be found not only to have been obtained through fraud on - or an unconscionable exploitation of - the Plaintiffs, but even to have been obtained by Defendants for the purpose of facilitating a subsequent fraud on the Court.

II. RELATED LITIGATION

There has been significant litigation between Quiznos and its franchisees in the United States and Canada over the past several years. The actions are principally of two types: (1) those on behalf of some/all of the more than 3,000 individuals who purchased franchise opportunities but were unable to open a store within the contractual time frame and were deemed by Quiznos to have forfeited their investment monies;*fn6 and (2) franchisees who, like Plaintiffs sub judice, suffered losses in their operation of a Quiznos store allegedly due to Defendants' conduct.

The Defendants are, as here, generally represented by Cheng Cohen LLC. In actions on behalf of the latter group of franchisees (those similarly situated to the Plaintiffs before this Court), the Plaintiffs are commonly represented by Marks & Klein, LLP. And of these cases, the most pertinent and persuasive is Westerfield v. Quiznos Franchise Co., L.L.C. (E.D. Wis.), No. 06-C-1210, before Judge William Griesbach.

In Westerfield, the plaintiffs (a prospective class action of Wisconsin franchisees) sued a similarly extensive group of Quiznos-affiliated entities and individuals, (a) alleging violations of the Racketeer Influenced and Corrupt Organization Act, 18 U.S.C. § 1962 (c) ("RICO");*fn7 violations of antitrust laws; breach of contract; unjust enrichment; breach of the duty of good faith and fair dealing; fraudulent inducement; promissory fraud; strict liability misrepresentation; economic duress; illusory contract; breach of fiduciary duty; and violations of Wisconsin statutes regarding fair dealership, deceptive trade practices and franchise investments; and (b) seeking declaratory judgment. In November, 2007 Judge Griesbach initially granted Defendants' Motion to Dismiss on plaintiffs' RICO, antitrust, and fraudulent inducement claims, and declined to exercise pendant jurisdiction over the remaining state law claims. See Westerfield v. Quiznos Franchise Co., L.L.C., 527 F. Supp.2d 840 (E.D. Wis. 2007).

On reconsideration five months later, however, Judge Griesbach determined that he had manifestly erred in concluding that plaintiffs' claims of reasonable reliance on Defendants' alleged fraudulent misrepresentations and omissions were fatally undermined, as a matter of law, by the disclosures, disclaimers and non-reliance provisions of the franchise documents. Rather, Judge Griesbach determined, there are fact questions necessarily "left for trial, or at least a more complete development of the record", and the franchise documentation is not dispositive, where (1) plaintiff's allegations fall within RICO's broad prohibition against false or misleading statements made in expectation of benefit from another's detrimental reliance; and (2) applicable state law includes the Restatement (Second) of Contracts provision that "exculpatory clauses are unenforceable on public policy grounds where the alleged harm is caused intentionally or recklessly". See Westerfield v. Quiznos Franchise Co., L.L.C., 2008 WL 2512467, **7-9 (E.D. Wis. Apr. 16, 2008). Judge Griesbach therefore vacated his earlier Opinion and granted the Westerfield plaintiffs leave to file an Amended Complaint.*fn8

The other prospective class actions on behalf of franchisees who purchased and operated Quiznos franchises include:

A. Siemer v. The Quiznos Franchise Co., 07-CV-0271, before Judge Pallmeyer in the Northern District of Illinois, is comprised of essentially the same claims, similarly-situated parties (i.e., a state-wide class of Quiznos franchisees), and same counsel as the previously-filed Westerfield action.*fn9 In a succinct Opinion in late March 2008, Judge Pallmeyer cited extensively to, reiterated/concurred in, and largely followed Judge Griesbach's handling of the Quiznos class-action litigation; that is, she applied the same analysis in dismissing without prejudice the antitrust, RICO and fraud claims, and declining pendant jurisdiction over the remaining state law claims.*fn10 As noted above, Judge Griesbach reversed his decision on the plaintiffs' RICO and fraud claims two weeks later.

Moreover, Judge Pallmeyer's March 2008 Opinion gave the Illinois franchisees leave to file an Amended Complaint within thirty (30) days. See id. at * 11. Here then, as in Westerfield, an Amended Complaint maintaining the RICO and fraud claims was filed last Spring, followed by Defendants' October 2008 Motion to Dismiss. Also as in Westerfield, a Motion to Stay was filed pending the Tenth Circuit's decision in Bonanno, which Motion was granted by the Siemer Court on May 26, 2009.*fn11

B. Brunet v. The Quiznos Franchise Co. LLC, Case No. 07-CV-01717, before Judge Brimmer (to whom it was reassigned from Chief Judge Nottingham) in the District of Colorado, is a putative nationwide class action*fn12 comprised of essentially the same claims,*fn13 similarly-situated parties, and same counsel in Westerfield. Defendants' October, 2008 Motion to Dismiss and Plaintiffs' February, 2009 Motion to Certify the Class were filed, and the record indicates that the parties were in private mediation "for a nationwide resolution." See Docket Nos. 124-25; 2009 WL 4511873 (D. Col. Oct. 01, 2008) (extension of dispositive motion and discovery deadlines). On May 22, 2009, the Court stayed its proceedings on the Plaintiffs' Motion, pending the Tenth Circuit's decision in Bonanno, and denied all pending Motions without prejudice to refile. See Docket No. 252.

III. FACTUAL AND PROCEDURAL HISTORY

In addition to the factual background discussed supra, the Court notes the following significant factual and procedural history. As is appropriate in considering Defendants' Motions to Dismiss, the Court views all facts in the light most favorable to the Plaintiffs:

This action has been filed against the following Defendants:

(1) Nine Quiznos-related entities (the "Quiznos Entities") - The Quiznos Franchise Company, LLC; Quiznos Franchising LLC; Quiznos Franchising II LLC (hereafter the "Franchise Entities"); The Quiznos Master LLC; QFA Royalties LLC; QZ Finance LLC; QIP Holder LLC; TQSC LLC; and Cervantes Capital LLC;*fn14

(2) Two father and son corporate majority shareholders and officers/directors: Richard F. Schaden and Richard E. Schaden; and

(3) Two Quiznos Pennsylvania employees: Kevin Casey and John Lubarski. Plaintiffs are allegedly generally unsophisticated, often with little or no business experience or understanding of the implications of the Quiznos non-negotiable franchise documents. Although the UFOCs contained information about numbers of persons becoming and ceasing to be Quiznos franchisees, Plaintiffs allege that they were not provided information sufficient to enable them to understand the high failure rates.

Plaintiffs also allege that they were fraudulently induced to contract on the basis of misrepresentations and omissions regarding the franchisee-franchisor's contractual relationship as to services and supplies. The UFOC represents that:

[Quiznos] and [its] affiliates have the right to receive payments from suppliers on account of their dealings with [franchisee] and other Franchisees and to use the amounts we receive without restriction (unless we or our affiliates agree otherwise with the supplier) for any purpose we or our affiliates deem appropriate. We and our affiliates negotiate purchase arrangements with the suppliers for the benefit of Franchisees, which often include volume discounts.

Some suppliers pay us and/or our affiliates fees for products purchased through these negotiated agreements, and willingness to pay us and/or our affiliates may be a condition of our approval of a supplier.

See Defendants' Memorandum of Law In Support of Motion to Dismiss ("Defendants' Memorandum in Support") at 4 (quoting Ex. B, Representative UFOC at Item 8, p. 28) (emphasis added).*fn15 Moreover, Plaintiffs assert that Quiznos sales representatives told them that Quiznos would use the franchisees' aggregate buying power to obtain volume discounts, which would be passed on to the franchisees. See Second Amended Complaint at ¶ 71.

The Quiznos UFOC includes disclaimers stating that salespersons were not authorized "to furnish any oral or written information concerning the actual or potential sales, income or profits of a Quiznos restaurant", and that "actual financial results [were] likely to differ from [average gross sales figures] presented". See Defendants' Memorandum in Support at 4 (quoting Representative UFOC at Item 19, pp. 54-55).

Similarly, the Quiznos Franchise Agreement, "a copy of which was included in the UFOC each plaintiff received, [was] consistent with the UFOC's disclosures." Id. at 5. The Franchise Agreement provided that it "contain[ed] the entire agreement between the parties . . . and there [were] no other oral or written representations (except for those made in the Franchise Offering Circular that Franchisee received from Franchisor), understandings, or agreements between Franchisee and Franchisor concerning the subject matter of [the] agreement." Defendants' Memorandum in Support at 5 (quoting § 23.2 Entire Agreement). It also included a caution regarding the "substantial risks" of a franchise venture, as dependent "upon [the] franchisee's ability" and "active participation"; reiterated that no assurance or warranty of potential success or likely earnings had been given; and reiterated that Franchisor would not be bound by anything apart from statements, representations or other communications "set forth in [the Franchise Agreement] and in any offering circular supplied to the franchisee". See Defendants' Memorandum in Support at 6 (quoting Ex. A, Franchise Agreement at § 23.12) (emphasis added). Compare id. at 2 (asserting that "in their written and fully integrated franchise agreements . . each Plaintiff . . . disclaimed receiving or relying on any representation, promise or assurance not contained in the franchise agreement itself") (emphasis added).

Finally, "[t]o make certain that no franchisee entered into a franchise agreement in reliance on anything other than the UFOC's disclosures and the express terms of the franchise agreement",*fn16 each franchisee was required to sign a "Disclosure Acknowledgment Statement" (hereafter the "Disclosure Statement") providing that (1) s/he was cognizant of the business risks; (2) s/he had reviewed, and had an opportunity to consult with legal counsel regarding, the franchise investment, UFOC and other documents; that (3) his/her decision was not " predicated upon any oral representations, assurances, warranties, guarantees or promises made by the Franchisor or any of its officers, employees or agents (including any franchise broker) as to the likelihood of success of the franchise", and that (4) "except as contained in the Franchisors' UFOC", the franchisee "ha[d] not received any information from the Franchisor or any of its officers, employees or agents (including any franchise broker) concerning actual, average, projected or forecasted franchise sales, profits or earnings." See Disclosure Acknowledgment Statement, attached to Ex. A. to Defendants' Memorandum in Support. The Disclosure Statement continues as follows:

If the Franchisee believes that it has received any information concerning actual, average, projected or forecasted franchise sales, profits or earnings other than those contained in the UFOC, please describe these in the space provided below or write "None."

Id.

Defendants pointedly assert, in their December, 2008 Motion before this Court, that "Each Plaintiff was asked directly to disclose any representation he had received other than those contained in the UFOC. In the space provided, each and every one of the plaintiffs wrote 'None.'" Defendants' Memorandum in Support at 7. Defendants are, however, neglectful of their duty to this Court when they fail to disclose the evidence in other related cases that this response was required - at the signing stage - to complete the transaction, i.e., it was the "only acceptable" answer. See, e.g., Siemer, 2008 WL 904874 at * 9 (explaining that "Plaintiffs apparently learned, after filing in Wisconsin, that Quiznos issued instructions requiring potential franchisees to write 'None' on the space provided in the Disclosure Statement") (emphasis added); Westerfield, Case No. 06-C-1210 (E.D. Wis.), Docket No. 118, Plaintiffs' Brief in Support of Motion to Alter or Amend Judgment at 8-9 (discussing documents produced by Quiznos, including "Instructions For Completing Franchise Agreement" that direct employees/agents that "Franchisee must write 'none' in on blank lines" of Disclosure Statement).*fn17

Plaintiffs similarly and more generally allege that they were otherwise pressured/coerced into accepting take-it-or-leave it terms.

The Second Amended Complaint in this action sets forth the following claims: Counts I and II - RICO; Count III - Sections 4 and 16 of the Clayton Act, 15 U.S.C. §§ 15 and 26, by reason of violation of the Sherman Act, 15 U.S.C. § 1 (the "antitrust claim"); Count IV through IX -18 Pa.C.S.A. §§ 3921, 3922, 3926 and 18 Pa.C.S.A. §§ 4104, 4107, 4108 (the "Pennsylvania Criminal Code claims"); Count X - Fraud in the inducement; Count XI - Breach of contract; and Count XII - Breach of the implied covenant of good faith and fair dealing. Plaintiffs seek declaratory and injunctive relief, as well as damages. For the reasons set forth below, Counts III through IX will be dismissed as to all Defendants.

IV. STANDARD OF REVIEW; CHOICE OF LAW

A. Standard of Review

In considering a motion to dismiss pursuant to Rule 12(b), the Court must accept all allegations as true, draw all reasonable inferences therefrom, and construe the facts thus set forth in the light most favorable to the non-moving party. See, e.g., Gomez v. Toledo, 446 U.S. 635, 636 n. 3 (1980); Rocks v. City of Philadelphia, 868 F.2d 644, 645 (3d Cir. 1989). As the Federal Rules of Civil Procedure require "notice" pleading, the claims must "make out a claim upon which relief can be granted." Alston v. Parker, 363 F.3d 229, 233 n. 6 (3d Cir. 2004) (quoting Swierkiewicz v. Sorema, N.A., 534 U.S. 506, 512 (2002) (noting that the "standard relies on liberal discovery rules . . . to define facts and issues and to dispose of unmeritorious claims"). In light of recent precedent, the Complaint - while it need not contain "detailed factual allegations" must also contain more than a "formulaic recitation of the elements of a cause of action" and must state a claim that is plausible on its face. Ashcroft v. Iqbal, 2009 WL 1361536, **12-13 (U.S. May 18, 2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007) and providing further guidance on the standard set forth therein); see also Phillips v. County of Allegheny, 515 F.3d 224, 231 (3d Cir. 2008) (holding that the "factual allegations must [also] be enough to raise a right to relief above the speculative level").

As Defendants observe, an exception to the general rule of notice exists for claims of fraud and claims sounding in fraud. Rule 9(b) of the Federal Rules of Civil Procedures requires that these claims be pled "with particularity", and is intended to give defendants notice of the claims against them and reduce the number of frivolous suits. See Defendants' Memorandum in Support at 8 (citing Key Equity Investors, Inc. v. Sel-Leb Mktg., 2007 U.S. App. LEXIS 21392 (3d Cir. Sept. 6, 2007)). A plaintiff is not, however, required to plead "the date, place or time of the fraud, so long as plaintiff uses an alternative means of injecting precision and some measure of substantiation into [his/her] allegations." Seville Indus. Machinery v. Southmost Machinery, 742 F.2d 786, 791 (3d Cir. 1984) (holding that Court must apply heightened pleading standards of Rule 9(b) in accordance with rules underlying purposes - to put defendant on notice of misconduct alleged and to guard against "spurious charges of immoral or fraudulent behavior").

Finally, documents attached to a motion to dismiss are considered part of the pleadings if they are referred to in the plaintiffs' complaint and are central to the claims. See Defendants' Memorandum in Support at 3 n. 3 (noting that "[t]he UFOC and franchise agreements are properly considered" for these reasons) (citing Pryor v. NCAA, 288 F.3d 548, 560 (3d Cir. 2002).*fn18 The Court may examine those documents without converting a motion to dismiss into a motion for summary judgment.

B. Choice of Law

As a preliminary matter, this Court notes that although the franchise agreements at issue provide that disputes are to be litigated in Colorado and governed by Colorado law, Defendants have not sought enforcement of those provisions. Indeed, to the contrary, Defendants made no request for enforcement of those provisions in their Motions to Dismiss or Memorandum of Law in Support thereof, and cited to the law of Pennsylvania and this Circuit in their supportive pleadings, with no suggestion of conflict.*fn19 Accordingly, the Court will apply the law of the Plaintiff's residence and forum state to those issues raised in the Motion to Dismiss and governed by state law. See Westerfield v. Quiznos Franchise Company, LLC, 527 F. Supp.2d 840, 849 n. 2 (applying Wisconsin law in similar circumstance).*fn20 But see Defendants' Suggestion of Decision and Sur-Reply re Suggestion of Decision (stating that Colorado law governs the enforceability of a class action waiver in the franchise agreement).

To the extent that Defendants may, in future, assert that Colorado law controls a particular analysis (as when, e.g., Defendants have recently obtained a favorable interpretation of Colorado law on that point), this Court suggests (without deciding) that in the case sub judice Defendants may have waived the Franchise Agreement's forum selection and choice of law provisions when they failed to move for transfer or to raise enforcement of/indicate reliance upon such provisions in their responsive pleading. See, e.g., National Grange Mutual Ins. Co. v. Goldstein, Heslop, Steel, Capper, Oswalt & Stoehr, 2005 WL 1805667, *6 (3d Cir. Aug. 2, 2005) (holding that party could not rely on choice of law where it had been waived by failure to raise ...


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