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Franchisee Class Actions

The U.S. District Court in Colorado ruled in April in a case involving Quiznos that a provision in a franchise agreement that bars franchisees from banding together in class-action lawsuits is enforceable. The decision is seen as affecting other class-action lawsuits against Quiznos in Wisconsin, Illinois and Pennsylvania and may serve as a precedent discouraging such actions in other systems. Such prohibitions are common in franchise agreements. The extent of the impact of the decision remains to be seen. See Franchise Times June/July issue for further discussion.

The plaintiffs had argued, among other things, that fraudulent practices on the part of Quiznos rendered the entire agreement fraudulent and unenforceable. The Court disagreed. The Court held the class action provision was enforceable based upon a seven part test created by the Colorado Supreme Court in an earlier case, known as the “Davis Factors”:

Is the agreement standardized, made by the parties with unequal bargaining power?
Did the parties have an opportunity to read the agreement before signing it?
Did the document bury the provision in fine print?
Is the provision commercially reasonable?
Is the provision substantively unfair?
What is the relationship between the parties?
What are the remaining circumstances surrounding the formation of the contract?

The plaintiffs remain dissatisfied with the result, which their attorneys describe as being fundamentally unfair to individual franchisees. As was reported in BlueMauMau:

Justin Klein of law firm Marks & Klein LLP, attorney for the franchisees, takes exception to the ruling. “The Quiznos franchise agreement says that franchisees have to sue Quiznos one on one,” he explains. “The purpose of our seeking a class action is because it is too expensive to sue Quiznos. It could cost hundreds of thousands of dollars for the individual to sue Quiznos in order to recover their initial franchise fee, which in some cases is $20k – $25k.”

However, Judge Arguello found that the fact that the Quiznos franchise agreement is essentially a take-it-or-leave-it contract did not automatically render it unconscionable, because the plaintiffs did not have to enter into an agreement with Quiznos; being new franchisees, they were free to decline and purchase another franchise. More importantly, the plaintiffs had ample opportunity to read and consider the clause and the Court found the clause itself not to be substantively unfair or “unreasonably overreaching.”
Bonanno, v The Quiznos Franchise Company,. LLC, 2009 WL 1068744 (D.Colo.)

We will keep you advised as to how this decision impacts on other judicial holdings across the nation.

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