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

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