The United States District Court for the Western District of Pennsylvania has denied a motion by Quizno’s to dismiss certain claims of franchisees of the system that the sandwich shop franchisor fraudulently induced execution of the plaintiffs’ franchise agreements, notwithstanding that the franchisees also executed and delivered to the franchisor written disclaimers of reliance on any statements other than those in the Uniform Franchise Offering Circular given to them.
The plaintiffs in Martrano v. The Quizno’s Franchise Co., L.L.C. compose a putative class of Pennsylvania sandwich shop franchisees who allege, among other things, that their franchisor made specific misrepresentations in its UFOC. The plaintiffs asserted that reliance on those misrepresentations was not waived by the plain language of the franchise agreements and other documents executed by the parties. The franchisees alleged fraud in the inducement of execution of their franchise agreements in the context of claims that Quizno’s violated the federal RICO statute (by charging above-market markups on required services/supplies and over-saturating the market with franchises and by exploiting its economic power over the franchisees to extract exorbitant, unjustifiable payments).
Quizno’s directed the court’s attention to the “Disclosure Acknowledgement Statement” signed by each plaintiff franchisee, which document provided that (1) the franchisee was cognizant of the business risks; (2) the franchisee had reviewed, and had had an opportunity to consult with legal counsel regarding, the franchise investment and the UFOC and other documents; (3) the franchisee’s 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 as to the likelihood of success of the franchise; and (4) except as contained in the UFOC, the franchisee had not received any information from the franchisor concerning actual, average, projected, or forecasted sales, profits, or earnings.
The Disclosure Acknowledgement Statement went on to ask the subscribing franchisee to describe, in space provided, any information concerning actual, average, projected, or forecasted franchise sales, profits, or earnings other than those contained in the UFOC–or to write, “None.”
Notably, the most important basis for the franchisees’ claim of fraud–a statement in the UFOC that the franchisor negotiated with suppliers to obtain discounts for the franchisees’ benefit–was explicitly excepted from the disclaimer.
The court observed that other courts considering the issue have refused to enforce franchise agreement disclaimer provisions on the ground either that public policy forbids contractual preclusion of liability for intentional misconduct, such as fraud, or that a party cannot waive the right to sue for fraud in the inducement by a provision in the contract the validity of which itself is challenged. The court cited to both Westerfield v. Quiznos Franchise Company, LLC (in Wisconsin) and Elhilu v. Quiznos Franchise Co., LLC (in California).
“Because the disclaimer does not purport to nullify an important representation on which Plaintiffs’ fraud claim is based in substantial part,” the court wrote, “Plaintiffs are entitled to go forward with that claim; and it is not necessary at the present stage for the Court to decide whether, in view of the foregoing considerations, the disclaimer provision may be unenforceable with respect to other representations.”
What really got the Martrano court toasty under the robe, however, is the Quizno’s defendants’ invocation of the disclaimer, and in particular the emphasis on the apparent opportunity to identify other statements relied upon. The court found these, in a word, “deceptive.”
“If, as has been alleged,” the court wrote, “Quiznos pursued a policy of requiring all franchisees to write ‘none’ in the blank ostensibly provided for identification of statements relied upon, then the inclusion of a blank to be filled in by the franchisee in lieu of a pre-printed provision amounts to a sham, whose apparent purpose is to mislead a subsequent reviewer, such as this Court, into believing that Quiznos’ unilaterally-prescribed disclaimer language was actually authored without constraint by the franchisees.”
Mmmm… Shady.