Court Watch

But the federal court rejected these arguments and remanded back to the state court, noting that the complaint did not allege violation of the FTC Franchise Rule (and no violations could be alleged since there is no private right of action). In addition, none of the state law claims implicated the FTC Franchise Rule. To the extent that the defendants predicated their defense on compliance with the FTC Franchise Rule, they did not change the nature of the complaint and turn it into one based on violation of federal law. The defense might be predicated on federal law, but the complaint, which governs removability, was not.

With regard to the claims that federal law was implicated by virtue of the state RICO claims that were predicated on federal mail and bank fraud, the court determined that they were not enough to change the complaint to one relying on federal law. The federal claims must be disputed and substantial, and the types of claims that would be entertained by a federal court without disturbing the balance between federal and state claims. The court deemed it relevant that there were no private rights of action for the federal mail and bank fraud claims, indicating no desire on the part of Congress to have those claims litigated in federal court. In addition, the state RICO claims could be decided without consideration of the federal statutes, which were more or less icing on the cake. Lastly, the court noted that the federal violations were, in reality, a part of the state-law claims.

In the end, the court adhered to the oft-cited proposition that the plaintiff is the master of the claim, and so long as the claim truly can be decided under state law, the case will not be removed. This was not a case where a plaintiff alleged state-based claims, but in reality the claims depended on application of federal law.

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Integration Clause Will Not Shield Against Fraud Claim Under Minnesota Franchise Act

Long John Silver's Inc. and A&W Restaurants, Inc. v. Patrick Nickleson, et al., Bus. Fran. Guide (CCH) ' 14,986 (USDC, WD Kentucky, Feb. 12, 2013), was a franchisor/franchisee dispute that involved various claims of fraud by the franchisee against A&W in connection with a franchise agreement for a drive-in A&W restaurant in Minnesota. While the agreement contained a Kentucky choice of law provision, the agreement specified that nothing therein would abrogate or reduce any of the franchisee's rights under the Minnesota Franchise Act (“MFA”), Minnesota Statutes, Chapter 80C. As such, the U.S. District Court in Kentucky hearing the parties' summary judgment motions held it would hear the franchisee's MFA claims, but the franchisee's common law fraud claim would be subject to Kentucky law.

The MFA makes it unlawful for a franchisor to make false or misleading statements to a franchisee. Among the MFA claims alleged by the defendant in its cross-complaint was that various representations made by A&W were fraudulent, including representations concerning the performance of other drive-in A&W locations ' the drive-in was a new concept for A&W ' and the likely performance of the location at issue in this case. In defense, A&W relied on the disclaimers in the franchise agreement and its accompanying FDD, as well as the franchise agreement's integration clause.

The district court reviewed Minnesota cases dealing with the effect of disclaimers in franchising documents and found the cases to be inconsistent, often turning on the specificity of the representations and the accompanying disclaimer. The court relied upon the reasoning of Randall v. Lady of America Franchising Corp., 532 F.Supp.2d 1071 (USDC D. Minn., 2007) in holding that disclaiming misrepresentations does not defeat the MFA's prohibition on them, even though the disclaimer can go to whether the franchisee reasonably relied on the representations, a necessary element for recovery. In denying A&W's motion for summary judgment, the court found that whether the representations made by A&W were untrue, and whether the franchisee's reliance on them was reasonable, were questions of fact to be determined at trial.

A more interesting question was whether common law fraud was committed by A&W by providing projections based on data it knew to be false and whether a general disclaimer regarding financial performance representations can defeat such a claim.

The franchisee claimed it was given representations about the likely future sales and profits of the concerned location based on the purported earnings of the only two other drive-in A&W restaurants then existing. The franchisee alleged that the data given to it of the other units' earnings were known by A&W to be inaccurate and, therefore, the projections the franchisee received were fraudulent. A&W said summary judgment on that issue should be granted since it disclaimed its earnings representations and that, in any event, representations about future events could not serve as the basis for a fraud claim. The court pointed out that representations about future events are normally not actionable since they are opinions that are not subject to definite knowledge and, therefore, generally cannot be reasonably relied upon. However, representations about current or past events, if false, can be the basis of a such a claim. An exception is when representations regarding future events are based on known falsities or are so contrary to the true state of affairs that they are a sham; in those circumstances, they can serve as the basis for a claim of fraud. Again, A&W raised its disclaimers and, again, the court found that allowing a franchisor to escape its knowing misrepresentations by broadly worded disclaimers would incentivize the making of misrepresentations by a franchisor and its representatives.

This case illustrates that courts are reluctant to summarily dismiss claims where fraud may be involved but, rather, will allow those claims to go to trial. In illustration, the recent California case of Riverisland Cold Storage Inc. v. Fresno-Madera Production Credit Assoc., 55 Cal.4th 1169 (Jan. 14, 2013) saw a unanimous California Supreme Court overturn a long-standing precedent and allow the plaintiff to put on proof showing that the terms that were represented to be in its contract were contrary to the terms that were actually in the contract ' despite the integration clause and the former limitation on the fraud exception to the parol evidence rule.

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Charles G. Miller is a shareholder and a director, and Darryl A. Hart is an attorney with Bartko, Zankel, Tarrant & Miller in San Francisco. They can be reached at 415-956-1900 or at mailto:[email protected] and [email protected], respectively.

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Franchisor's Attempt to Remove State Court Case for Fraud, State RICO Law Violations Fizzles

Franchisors, more often than not, prefer to litigate in federal court when they are sued by franchisees. Since franchisors do not have the ability to control where the case is to be filed when they are on the receiving end, they sometimes have to resort to creative means to effect removal of state court cases to federal courts. The basis for removal is either diversity of citizenship (as long as the diverse defendant is not a citizen of the state where suit has been filed) or that the litigation is a federal question. Plaintiffs will usually anticipate the possibility of removal by either naming defendants who are non-diverse or crafting their claims as based on state, not federal, law. Federal courts require that removal notices lay out the basis for removal, since in some instances a federal court, sua sponte, without any motion to remand, will remand a case based on its reading of the removal notice; this reflects the importance of anticipating such possible action in drafting the removal notice. This happened recently in a case brought by Quiznos franchisees against a number of Quiznos-related parties in Colorado state court. PT Sak, LLC v. QFA Royalties, LLC, Bus. Fran. Guide (CCH ' 14,996 (D.CO Feb. 11, 2013).

The franchisees based their claims under Colorado law, including the Colorado equivalent of RICO and its Consumer Protection Act. In addition, they alleged fraud in the sale of the franchises. The defendants creatively removed the case to federal court on the basis that, in order to determine if there was fraud in connection with the franchise offering, it would be necessary to determine if the offering complied with the disclosure requirements of the FTC Act, necessarily implicating federal law. Defendants further argued that the state RICO claims alleged federal law violations such as wire fraud, federal bank fraud and the like.

But the federal court rejected these arguments and remanded back to the state court, noting that the complaint did not allege violation of the FTC Franchise Rule (and no violations could be alleged since there is no private right of action). In addition, none of the state law claims implicated the FTC Franchise Rule. To the extent that the defendants predicated their defense on compliance with the FTC Franchise Rule, they did not change the nature of the complaint and turn it into one based on violation of federal law. The defense might be predicated on federal law, but the complaint, which governs removability, was not.

With regard to the claims that federal law was implicated by virtue of the state RICO claims that were predicated on federal mail and bank fraud, the court determined that they were not enough to change the complaint to one relying on federal law. The federal claims must be disputed and substantial, and the types of claims that would be entertained by a federal court without disturbing the balance between federal and state claims. The court deemed it relevant that there were no private rights of action for the federal mail and bank fraud claims, indicating no desire on the part of Congress to have those claims litigated in federal court. In addition, the state RICO claims could be decided without consideration of the federal statutes, which were more or less icing on the cake. Lastly, the court noted that the federal violations were, in reality, a part of the state-law claims.

In the end, the court adhered to the oft-cited proposition that the plaintiff is the master of the claim, and so long as the claim truly can be decided under state law, the case will not be removed. This was not a case where a plaintiff alleged state-based claims, but in reality the claims depended on application of federal law.

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Integration Clause Will Not Shield Against Fraud Claim Under Minnesota Franchise Act

Long John Silver's Inc. and A&W Restaurants, Inc. v. Patrick Nickleson, et al., Bus. Fran. Guide (CCH) ' 14,986 (USDC, WD Kentucky, Feb. 12, 2013), was a franchisor/franchisee dispute that involved various claims of fraud by the franchisee against A&W in connection with a franchise agreement for a drive-in A&W restaurant in Minnesota. While the agreement contained a Kentucky choice of law provision, the agreement specified that nothing therein would abrogate or reduce any of the franchisee's rights under the Minnesota Franchise Act (“MFA”), Minnesota Statutes, Chapter 80C. As such, the U.S. District Court in Kentucky hearing the parties' summary judgment motions held it would hear the franchisee's MFA claims, but the franchisee's common law fraud claim would be subject to Kentucky law.

The MFA makes it unlawful for a franchisor to make false or misleading statements to a franchisee. Among the MFA claims alleged by the defendant in its cross-complaint was that various representations made by A&W were fraudulent, including representations concerning the performance of other drive-in A&W locations ' the drive-in was a new concept for A&W ' and the likely performance of the location at issue in this case. In defense, A&W relied on the disclaimers in the franchise agreement and its accompanying FDD, as well as the franchise agreement's integration clause.

The district court reviewed Minnesota cases dealing with the effect of disclaimers in franchising documents and found the cases to be inconsistent, often turning on the specificity of the representations and the accompanying disclaimer. The court relied upon the reasoning of Randall v. Lady of America Franchising Corp. , 532 F.Supp.2d 1071 (USDC D. Minn., 2007) in holding that disclaiming misrepresentations does not defeat the MFA's prohibition on them, even though the disclaimer can go to whether the franchisee reasonably relied on the representations, a necessary element for recovery. In denying A&W's motion for summary judgment, the court found that whether the representations made by A&W were untrue, and whether the franchisee's reliance on them was reasonable, were questions of fact to be determined at trial.

A more interesting question was whether common law fraud was committed by A&W by providing projections based on data it knew to be false and whether a general disclaimer regarding financial performance representations can defeat such a claim.

The franchisee claimed it was given representations about the likely future sales and profits of the concerned location based on the purported earnings of the only two other drive-in A&W restaurants then existing. The franchisee alleged that the data given to it of the other units' earnings were known by A&W to be inaccurate and, therefore, the projections the franchisee received were fraudulent. A&W said summary judgment on that issue should be granted since it disclaimed its earnings representations and that, in any event, representations about future events could not serve as the basis for a fraud claim. The court pointed out that representations about future events are normally not actionable since they are opinions that are not subject to definite knowledge and, therefore, generally cannot be reasonably relied upon. However, representations about current or past events, if false, can be the basis of a such a claim. An exception is when representations regarding future events are based on known falsities or are so contrary to the true state of affairs that they are a sham; in those circumstances, they can serve as the basis for a claim of fraud. Again, A&W raised its disclaimers and, again, the court found that allowing a franchisor to escape its knowing misrepresentations by broadly worded disclaimers would incentivize the making of misrepresentations by a franchisor and its representatives.

This case illustrates that courts are reluctant to summarily dismiss claims where fraud may be involved but, rather, will allow those claims to go to trial. In illustration, the recent California case of Riverisland Cold Storage Inc. v. Fresno-Madera Production Credit Assoc. , 55 Cal.4th 1169 (Jan. 14, 2013) saw a unanimous California Supreme Court overturn a long-standing precedent and allow the plaintiff to put on proof showing that the terms that were represented to be in its contract were contrary to the terms that were actually in the contract ' despite the integration clause and the former limitation on the fraud exception to the parol evidence rule.

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Charles G. Miller is a shareholder and a director, and Darryl A. Hart is an attorney with Bartko, Zankel, Tarrant & Miller in San Francisco. They can be reached at 415-956-1900 or at mailto:[email protected] and [email protected], respectively.

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