Tag: disclaimer

Appeals Court Upholds “Silent Fraud” Jury Verdict under Franchise Investment Law

June 10th, 2014
David Cahn

David Cahn

Take-away: If your franchise offering document is silent on key issues, you can be liable if your people “oversell” to a potential franchisee. Better to deal with the issue in carefully vetted writing than to be surprised by something your people say off the cuff.

The case: A recent Michigan Court of Appeals decision, reinstating a jury verdict against a cellular communications store franchisor, shows the potency of franchise investment and disclosure laws in protecting franchisees against misleading sales tactics, if the information provided does not contradict the franchise disclosure document presentation.

The facts: In Abbo v. Wireless Toyz Franchise, L.L.C., Abbo was a failed franchisee and area developer of cellular communications stores. Looking back, he alleged that an officer of Wireless Toyz provided misleading information in the “discovery day” presentation.

As background, you need to understand something about the business model of cellular franchises. Their profitability can be affected by “hits” (discounts given in the sale of phones); “chargebacks” that decrease store commission revenue; the franchisor’s bargaining power with cell phone carriers; the hidden costs of purchasing inventory from the franchisor; and ultimately the number of cell phone sales necessary to make a profit.

None of these issues was dealt with in any meaningful way in Wireless Toyz’s franchise disclosure document (“FDD”). Since the FDD was silent, that left wide areas about which prospective franchisees could ask for additional information, and left the franchisor’s executives, eager to sell franchises, vulnerable to providing answers outside the FDD. In this particular case, the franchisee directly asked a senior franchisor executive about revenue deductions from “chargebacks” and “hits,” and the franchisor executive apparently said that chargebacks constituted “only five to seven percent” of total commissions and that Wireless Toyz stores outside of Michigan (the home state) had been “subject to only ‘very minor’ hits.”   In fact, neither statement was accurate.

The FDD’s Item 19 Financial Performance Representation said that there were 181 average new activation contracts each month, and an average of $222.31 in commissions per activation. However, the presentation did not mention “hits” or the minimal amount of revenue (net of the cost of cellular devices) earned by the stores, and it also did not detail the extent of chargebacks and how they impacted the actual net commissions earned per activation.

After a jury trial, the jury found that the franchisor had failed to provide material facts necessary to make the FDD’s statements not misleading under the circumstances of their presentation, and also that it was liable for creating false impressions when responding to the prospective franchisee’s direct questions regarding “hits” and “chargebacks.” The Michigan Franchise Investment Law (like its statutory cousin, the Maryland Franchise Registration and Disclosure Law) creates an affirmative legal duty to disclose all material facts necessary to avoid creating a false impression.

In this case, Wireless Toyz made a corporate decision not to provide information on the extent of chargebacks in Item 19 of the FDD, even though that information was clearly relevant to the picture of commission revenue generated per activation. The “gasoline on the fire” in this case was the “five to seven percent” estimate provided by the franchise salesperson in response to a direct question.

Initially, despite the jury’s findings, Wireless Toyz came out ahead: the trial court overturned the jury verdict because of the following, very common, franchise agreement provision:

Except as provided in the [Disclosure Document] delivered to the Franchise Owner, the Franchise Owner acknowledges that Wireless Toyz has not, either orally or in writing, represented, estimated or projected any specified level of sales, costs or profits for this Franchise, nor represented the sales, costs or profit level of any other Wireless Toyz Store.

The jury concluded that, despite this language in the contract, Abbo was reasonable in relying on the verbal statements on matters not addressed in the FDD. Moreover, because the verdict was for misleading omissions, the jury presumably found that the failure to provide additional clarifying information both in and out of the FDD presentation was what misled the franchisee.

The appellate court agreed with the jury, not the trial judge.

There was a dissenting opinion at the appellate level, and it is likely that Wireless Toyz will seek to have the Michigan Supreme Court review the decision. However, that court is not obligated to do so and may not want to substitute its opinion for that of the jury. As in many franchise cases, Wireless Toyz’s chances were not terribly good once it allowed a jury to deliberate regarding its actions.

In an era when about two-thirds of franchisors now provide written financial performance information in their FDD, this decision is an important reminder to franchisors of the risk of providing only partial information in the FDD – particularly if the franchisor has access to accurate (if not necessary encouraging) information on unit-level expenses or deductions from revenue.

For example, in a quick service food system, if a franchisor has a standard accounting system, then it should have access to franchisees’ costs of ingredients and packaging supplies as well as their labor costs. (And, since the franchisee will use these figures to calculate its tax deductions from gross revenue, the amount of those costs probably will not be understated.)

That sort of information is important to prospective franchisees and is almost certainly data that they will seek from the franchisor. It is better to disclose fully in the FDD instead of hoping your salespeople don’t get asked about it or that, if asked, they answer accurately.

Courts Enforce Waivers of Class Actions in Arbitration By Franchisees, Employees and Small Businesses

July 18th, 2013

In 1925, the Federal Arbitration Act (“FAA”) was enacted to strengthen the ability of parties to enforce “purely voluntary” pre-dispute promises to have disputes determined through arbitration. See, e.g., David S. Clancy & Matthew M.K. Stein, An Uninvited Guest: Class Arbitration and the Federal Arbitration Act’s Legislative History, 63 Bus. Law. 55, 60-61 (Nov. 2007). In the decades since, countless federal and state statutes have been passed to protect consumers, employees, franchisees, small businesses and investors, and class and collective lawsuits have developed as an avenue to vindicate those statutory rights. In response, companies have used arbitration clauses to decrease the risks of having to defend against such large potential liabilities. Recent decisions by both the U.S. Court of Appeals for the Fourth Circuit and the U.S. Supreme Court have emphasized that, if the arbitration clause clearly bars class or collective actions, then the FAA precludes parties to the agreement from pursuing a class or group action through court or arbitration. This established trend of statutory interpretation also may be increasing the possibility of that the U.S. Congress will pass the “Arbitration Fairness Act” to limit companies’ ability to use arbitration clauses as a bar to collective legal actions.

Shuttle Express Case – Fourth Circuit

In the case of Muriithi v. Shuttle Express, Inc., issued April 1, 2013, the U.S. Court of Appeals for the Fourth Circuit required individual arbitration of claims due to a franchise agreement’s inclusion of an arbitration clause 1) forbidding any class or group actions, 2) requiring the parties to split the cost of arbitration, and 3) containing a one-year limitations provision.

Plaintiff Samuel Muriithi was a driver for defendant Shuttle Express, who provided transportation for passengers to and from the Baltimore-Washington International Airport. Muriithi filed a class action in federal court against Shuttle Express asserting claims under the federal Fair Labor Standards Act (FLSA) and under Maryland law on behalf of himself and all other Shuttle Express drivers. Muriihi alleged that Shuttle Express misled the drivers about the compensation they would earn, inducing them to sign franchise agreements when they would be employees as a matter of law. Shuttle Express moved to dismiss the complaint, or in the alternative, to compel arbitration under the arbitration provision. The district court refused to compel arbitration on the grounds that the agreement contained three unconscionable provisions, which rendered the arbitration clause unenforceable. On appeal, the Fourth Circuit reversed the district court’s decision, holding that all three provisions at issue were not unconscionable and, therefore, the arbitration clause was enforceable.

In addressing the enforceability of the class action waiver, the Fourth Circuit rejected the district court’s decision, which identified the class action waiver as a factor in preventing Muriihi from “fully vindicating his statutory rights.” The Fourth Circuit explained that, subsequent to the district court’s decision, the U.S. Supreme Court addressed the issue of class action waivers in AT&T Mobility LLV v. Concepcion, 131 S. Ct. 1740 (2011). According to the court, the FAA, as interpreted in the Concepcion decision and prior Supreme Court rulings, “prohibited courts from altering otherwise valid arbitration agreements by applying the doctrine of unconscionability to eliminate a term barring classwide procedures.” Because the district court reached an opposite conclusion prior to Concepcion, the Fourth Circuit reversed the district court’s decision, finding the class action waiver enforceable.

The Fourth Circuit then addressed the enforceability of the fee-splitting provision. The court found that Muriithi failed to meet his “substantial” burden of showing the likelihood of incurring prohibitive costs as required to invalidate an arbitration agreement. The court explained that a fee-splitting provision has the ability to render an arbitration agreement unenforceable if the arbitration costs are “so prohibitive as to effectively deny the employee access to the arbitral forum.” According to the court, a number of factors are considered when determining prohibitive costs including, “the costs and fees of arbitration, the claimant’s ability to pay, the value of the claim, and the difference between arbitration and litigation.” The court concluded that Muriithi did not meet his substantial burden for proving prohibitive costs because he failed to show the costs of arbitration, “the most basic element” of the challenge. The court further explained that Muriihi could not meet his burden “simply by showing the fees that some arbitrators are charging somewhere.” Muriithi also failed to show the value of his claims, which were necessary to determine the fees under the American Arbitration Association’s rules. Because Murihhi failed to prove these “critical factors”, the Fourth Circuit concluded that he had failed to meet the substantial burden required for a finding of prohibitive costs.

Finally, the Fourth Circuit held that the one-year limitations provision could not be considered in a motion to compel arbitration because it was “not referenced in the Arbitration Clause.” The court referred to Section 2 of the FAA, which states that a party challenging the enforceability of an arbitration clause must rely on grounds that “relate specifically to the arbitration clause and not just to the contract as a whole.” The court stated that the one-year limitations provision related to the general agreement itself rather than the arbitration clause because the language and terms of the provision “did not overlap” with the language of contract’s arbitration clause. Therefore, its enforceability was an issue to be decided by the arbitrator and could not be considered in the motion to compel arbitration.

American Express Antitrust Case – U.S. Supreme Court

In American Express Co. v. Italian Colors Restaurant, No. 12-133 (June 20, 2013), the U.S. Supreme Court, by a 5-4 majority, held that the prohibitively high cost of pursuing an individual claim is not a sufficient reason to invalidate a class action waiver in an arbitration agreement. This decision reinforces Concepcion in demonstrating the Court’s willingness to allow arbitration clauses to be used as class action avoidance mechanisms. This ruling also validates the Fourth Circuit’s interpretation of Concepcion in its Shuttle Express decision.

American Express (“Amex”) requires all of its merchants to enter into a standard form contract. These agreements contain arbitration provisions that require all disputes between the parties to be resolved by arbitration and prohibit all class action claims. In this case, a group of merchants filed individual claims against Amex, claiming that Amex used its “monopoly power” to force them into contractual agreements that violate anti-trust laws. Amex moved to dismiss and to compel arbitration. The district court agreed with Amex, and the merchants appealed. On appeal, the United States Court of Appeals for the Second Circuit reversed, finding the class action waiver unenforceable because the costs that an individual merchant would incur to pursue its claim would substantially exceed the amount of that individual merchant’s damages. The Supreme Court reversed the Second Circuit’s decision.

Justice Scalia, writing for the narrow majority, emphasized that the “overarching principle” of arbitration is a matter of contract, and that courts must “rigorously enforce” arbitration agreements by their expressed terms unless the FAA’s mandate has been “overridden by a contrary congressional command.” The majority failed to find any contrary congressional command that would require a rejection of the class action waiver. According to the Court, antitrust laws do not guarantee that a claim will be resolved affordably, nor do they “evince[e] an intention to preclude a waiver” of class-action procedure.

The Court rejected the merchants’ argument that enforcing the waiver of class arbitration bars effective vindication because merchants have no economic incentive to pursue their antitrust claims individually in arbitration. The Court declined to apply the “effective vindication” exception to the case at hand on the grounds that the exception’s purpose is to prevent “prospective waiver of a party’s right to pursue statutory remedies.” The Court explained that not being worth the costs to prove a statutory remedy is not an elimination of the right to pursue that remedy. In other words, according to the Court, class action waivers merely limit arbitration to the two contracting parties and do not eliminate parties’ rights to pursue statutory remedies.

The majority referred to its decisions in Gilmer v. Interstate/Johnson Lane Corp., 500 U.S. 20 (1991) and AT&T Mobility LLC v. Concepcion, 130 S. Ct. 1740 (2011) (also decided by a 5-4 vote), to validate that class action waivers in arbitration agreements are, indeed, enforceable and therefore do not preclude the effective vindication of statutory rights. In Gilmer, the Court had “no qualms in enforcing a class waiver in an arbitration agreement even though the federal statute at issue…expressly permitted collective actions.” In Concepcion, the Court stated that class arbitration was not necessary to prosecute claims “that might otherwise slip through the legal system.”

In Justice Kagan’s dissent, she emphasized that the purpose of the FAA is to resolve disputes and facilitate compensation of injuries. According to Justice Kagan, the majority’s decision “admirably flaunt[s]” the fact that monopolists get to use their power to force merchants into contracts that deprive them of all legal recourse. “Too darn bad,” says Justice Kagan, as she describes the majority’s decision in a nutshell. Justice Kagan explains that the majority’s decision offers support to parties who intend to confer immunity from potentially meritorious federal claims through arbitration clauses in standardized form “contracts of adhesion”, which is contrary to the purpose of the FAA as enacted in 1925.

What does this mean?

In light of the body of U.S. Supreme Court precedent in this issue, nearly all parties offering contracts to large groups of similarly situated persons such as employees, franchisees, and consumers of services, should strongly consider including an arbitration provision in the contract that explicitly bars class or collective actions. Under current law, those waivers will almost certainly be enforced and therefore sharply limit the likelihood that the company will have to defend against large-scale litigation brought by disaffected members of such groups. Such arbitration clauses do need to be carefully drafted and implemented to avoid other defenses to their enforcement, and they should be prepared and implemented with the assistance of experienced counsel.

Of course, ubiquitous arbitration clauses and these judicial decisions sharply limit the ability of private practice attorneys to deter violations of protective statutes through civil dispute resolution, leaving an even greater burden of enforcement on overburdened government regulators. This is unlikely to change unless the FAA is amended through legislation. In recent years, the “Arbitration Fairness Act” has been pending in the U.S. Congress. This act would invalidate the enforceability of pre-dispute arbitration clauses with regard to employment, consumer, and civil rights disputes, and antitrust class action proceedings. The bill has been languishing in recent years, and it remains to be seen whether the Supreme Court’s latest decision spurs more aggressive Congressional action on this issue.

AUTHOR’S NOTE: THIS ARTICLE WAS CO-WRITTEN BY DAVID L. CAHN, CHAIR OF THE FRANCHISE BUSINESS LAW GROUP AT WHITEFORD TAYLOR & PRESTON, AND KATELYN P. VU, WHO IS A SUMMER ASSOCIATE AT THE FIRM AND A 2015 J.D. CANDIDATE AT UNIVERSITY OF BALTIMORE LAW SCHOOL.

PLEASE ALSO NOTE THAT THIS ARTICLE REPRESENTS THE VIEWS OF THE AUTHORS AND NOT THE VIEWS OF WHITEFORD TAYLOR & PRESTON L.L.P.

Sylvan Learning, Inc. Fighting Franchise Act Claim

April 24th, 2012

David Cahn

During 2012 Sylvan Learning, Inc. and its corporate affiliates are fighting a claim of violating of the Maryland Franchise Registration & Disclosure Law and fraudulent conduct in its sale of tutoring center franchise rights, after having its motions to dismiss the fraud claims denied by the U.S. District Court in Baltimore.

In Next Generation Group, LLC v. Sylvan Learning Centers, LLC, Case CCB-11-0986 (decided Jan. 5, 2012), the plaintiff franchisee alleged that he agreed to develop and operate a new Sylvan Learning Center in Irving, Texas, in reliance upon representations from Sylvan that it would sell the plaintiff two existing Centers in nearby Arlington and Allen, Texas. According to the Amended Complaint, those representations were made orally by Sylvan’s agent to plaintiff’s principal both before and after the plaintiff signed the franchise agreement for Irving, but several weeks before the Irving location opened, Sylvan’s agent advised plaintiff’s principal “in writing that Sylvan had approved his acquisition of the Arlington and Allen Learning centers, respectively.” The parties executed letters of intent for the sale of both sites about two weeks before the Irving Center opened. However, about three weeks after the Irving Center opened, Sylvan’s same agent “informed [plaintiff] that Sylvan would not sell him the license and assets for any more franchises.” According to the Amended Complaint, Sylvan provided no explanation of its reversal of course. The franchisee claimed that Sylvan fraudulently induced it to develop and open the Irving location.

Sylvan argued for dismissal of the claims on the basis that the Irving franchise agreement contained an “integration clause” that prevented the plaintiff from relying on promises made outside that written agreement. The court rejected this, by quoting a prior court decision stating, “[T]he law in Maryland … is that a plaintiff can successfully bring a tort action for fraud that is based on false pre-contract promises by the defendant even if (1) the written contract contains an integration clause and even if (2) the pre-contractual promises that constitute the fraud are not mentioned in the written contract. Most of our sister states apply a similar rule. Greenfield v. Heckenbach, 144 Md. App. 108, 130, 797 A.2d 63, 76 (2002).” Sylvan’s problem is that the contractual “integration clause” did not disclaim any specific oral representations, and certainly not any concerning Sylvan’s willingness to sell the plaintiff additional existing franchised businesses. Without specific disclaimers as to representations made on that specific topic, the integration clause did not prevent pursuit of the claim.

While Sylvan could use the presence of the integration clause at trial to challenge whether the plaintiff reasonably relied on promises made outside of the Irving franchise agreement, based on the facts alleged the court stated, “there is reason to believe [plaintiff] could reasonably have relied on Sylvan’s representations” concerning the sale of the existing locations. Therefore, the court held that permitting the plaintiff to file a second amended complaint would not be “futile” and granted the plaintiff’s motion to do so.

After the plaintiff filed its Second Amended Complaint, Sylvan immediately moved to dismiss it on essentially the same grounds as asserted previously, and the court once again refused to dismiss the claims for fraud and violation of the Maryland Franchise Registration & Disclosure Law. Accordingly, the parties are now conducting discovery that may take most of 2012 to complete.

It is important to recognize that the proceedings in this case to date solely concern the sufficiency of the plaintiff’s factual allegations as a matter of law, and in later proceedings Sylvan’s representatives will provide information on what occurred with regard to this franchise sale. Nevertheless, the decision reiterates an important point for all Maryland business people – even if promises and statements are excluded from a particular written agreement, they may have legal consequences if the subsequent business relationship fails to meet the other party’s expectations.

Is That Really My Problem? Case Highlights Need to Verify Franchise Disclosure Data

November 7th, 2011

A recent decision in A Love of Food I, LLC v. Maoz Vegetarian USA, Inc. , Case No. AW-10-2352, Bus. Franchise Guide (CCH) ¶ 14,633 (decided July 7, 2011), the United States District Court for the District of Maryland, in denying a motion to dismiss, highlighted the need for franchisors to vigilantly update their government-required disclosure document to maintain its accuracy, while also providing a valuable reminder as to the geographic scope of state franchise sales laws’ application.

Misrepresentations in Franchise Disclosures

The franchise agreement at issue in the case was for a Maoz Vegetarian® quick-serve restaurant that the plaintiff opened and operated in the Dupont Circle neighborhood in Washington, D.C. The franchisee alleged that the startup cost estimates in the franchisor’s government-mandated disclosure document (then known as the Uniform Franchise Offering Circular, or “UFOC”) dramatically underestimated the actual startup costs for its franchise, and that the franchisor knew that the representations were inaccurate at the time it made them. They alleged that the franchisor’s actions constituted violations of the anti-fraud provisions of the Maryland Franchise Registration and Disclosure Law, as well as fraud as a matter of the general common law of Maryland.

In a decision during 1999 in the case of Motor City Bagels, LLC v. American Bagel Co., Civ. No. S-97-3474, Bus. Franchise Guide (CCH) ¶ 11,654, another judge in the U.S. District Court for Maryland had held that a franchisor could have committed fraud by misrepresenting the initial investment costs in its UFOC by approximately 20 – 25%. By contrast, in this case the franchisee alleged that it had to spend more than twice the franchisor’s “maximum” estimate of $269,000 to open their restaurant, and that during 2008 the franchisor increased the “maximum” initial investment cost estimate in its UFOC by $225,000.

The UFOC specifically encouraged the franchisee to rely on the startup cost estimates in two ways. First, the UFOC specifically itemized various cost categories and provided sub-estimates for each category. Second, the UFOC pointed out that the estimates were based on the franchisor’s “15 years of combined industry experience and experience in establishing and assisting our franchisees in establishing and operating 23 [vegetarian restaurants] which are similar in nature to the Franchised Unit you will operate.”

The franchisor argued that cost projections were statements of opinion and could not constitute fraud because they were not susceptible to exact knowledge at the time they are made. However, the court held that erroneous projections could supply a basis for fraud under Maryland law in some cases. Whether projections were sufficiently concrete and material to qualify as statements of fact required a context-sensitive inquiry that could not be reduced to a single formula. An assessment of relevant factors—including the extent of the alleged discrepancy, whether the projection was based on mere speculation or on facts, and whether the projection was contrary to any facts in the franchisor’s possession—supported the conclusion that the franchisee had sufficiently stated a claim for fraud to proceed with factual discovery for its common law fraud and Maryland Franchise Law claims.

Jurisdiction in Maryland and Application of New York Franchise Sales Law

The franchise agreement in this case only permitted the franchisee to open a restaurant in the District of Columbia, and in fact that is where the restaurant has been operated. The defendant franchisor maintains its principal place of business in New York, and the parties’ first meeting concerning a potential franchise sale took place at the franchisor’s New York office. The plaintiff franchisee was formed by Maryland residents and, at the time of the franchise purchase, “maintained its principal place of business” in Chevy Chase, Maryland. The parties had numerous telephone conversations during which the franchisor’s representatives were located in New York and the franchisee’s representatives were in Maryland. The franchisor sent its UFOC and the proposed franchise agreement contract to the franchisee’s address in Maryland.

Based on those facts, the court found that those activities were sufficient to allow it to exercise jurisdiction, meaning that it could require the franchisor to defend itself in Maryland.

The franchisee filed a claim for violation of the New York Franchise Sales Act on that basis that the law applied because the franchise sale was made from New York. The court, following the express terms of that law and a decision of the U.S. District Court for the Southern District of New York, found that the New York Franchise Sales Act protects franchisees in other states where offer and/or acceptance took place in New York. The rationale for extending the statute to situations such as this was to protect and enhance the commercial reputation of New York by regulating not only franchise offers originating in New York by New York-based franchisors.

The anti-fraud provisions of the Maryland Franchise Registration and Disclosure Law, as well as those of other states such as California, also apply to franchise sales made from the state. However, to the author’s knowledge, New York is the only state that requires franchisors based within its borders to obtain state registration approval before selling franchises to out of state residents.

The takeaways:

(1) Franchisors need to be vigilant to monitor the actual initial investment costs being incurred to open new locations (whether company-owned or franchised) and promptly update initial cost estimates. Prospective franchisees should not assume that the franchisor is doing this, and should ask existing franchisees about their initial investments before buying franchise rights.

(2) If a franchise seller is discussing a franchise sale with a person located in state with a franchise sales law, then the franchisor needs to determine if it needs to obtain pre-sale registration approval from that state before selling the franchise.

(3) New York needs to amend its law to exempt out of state franchise sales from its registration requirements.

Litigating Waivers and Disclaimers in Franchise Disputes

October 5th, 2009

A recent case out of the Federal District Court for the Western District of Pennsylvania demonstrates what appears to be a movement by the courts away from their traditional franchisor-friendly view of franchisee waivers and disclaimers.

In the past, a franchisee’s willingness to sign a franchise agreement has generally bound them to the waivers and disclaimers included therein, regardless of any related fraud or misrepresentation on the part of their franchisor. Courts have typically been unsympathetic to franchisees’ claims of fraudulent inducement where the franchise agreements themselves and other documents, such as “franchisee disclosure questionnaires,” expressly stated that the franchisees were not relying on any statements made by the franchisor’s representatives other than those in the Franchise Disclosure Document (or “UFOC”), and that the franchisees understood that the parties’ entire agreement was contained in the franchise agreement. Most courts have held that franchisors are entitled to rely on their franchisees’ express affirmations, and that franchisees are bound by the statements and agreements they sign.

However, the federal district court in Martrano v. The Quizno’s Franchise Co. denied Quizno’s’ motion to dismiss a class of franchisees’ claims for fraudulent inducement based on waivers and disclaimers included in the Quizno’s franchise documents. The franchisees’ primary claim was that a statement in the UFOC that Quizno’s negotiated volume discounts for the benefit of its franchise system was misleading, and the court held that the franchise agreement and disclosure questionnaire did not disclaim any of Quizno’s’ assertions contained in the UFOC itself.

Importantly, the court also allowed the franchisees to pursue additional fraudulent misrepresentation claims for statements made outside of the UFOC based on the franchisees’ assertion that Quizno’s required all prospects to provide “correct” responses to the disclosure questionnaire in order to be awarded a franchise. The court also cited previous cases holding that disclaimers of intentional misconduct are void as against public policy, and that parties cannot waive the right to sue for fraudulent inducement in the very contract they wish to challenge. Finally, the court noted that Quizno’s may be liable for violating its general duties of good faith and fair dealing by taking actions detrimental to its franchisees for its own benefit.

While the court’s acceptance of the franchisees’ claim based on the misrepresentation included in the UFOC was clearly in line with established precedent and current franchising regulations, its willingness to allow the franchisees to pursue other claims that Quizno’s argued were barred by express waivers and disclaimers represents a separation from established precedent. This case suggests that courts may in the future accord less weight to defenses asserted by franchisors based solely on a franchisees’ execution of form contracts and other documents.

Also of note, the court also denied Quizno’s claim for enforcement of the franchise agreements’ class action waiver provision. The court held that class action certification is a matter of federal procedural law, and therefore remains within the federal courts’ discretion regardless of any agreement between the private litigants.

By: Jeffrey S. Fabian