LOUISVILLE, Ky. – A federal court has ruled that the disclaimers in A&W’s franchise disclosure documents given to a franchisee when buying his franchise do not bar his counterclaim that A&W violated the Minnesota Franchising Act when giving him untrue statements and financial projections.

Because there are legitimate issues as to whether A&W made those false statements and whether the franchisee relied on that information in purchasing his franchise, the judge ruled A&W was not entitled to summary judgment. That decision allows the franchisee to have his day in court.

The judge said the franchisee’s counterclaim is actionable because “the misstatements go beyond mere puffery and opinions into the territory of an outright lie.”

There are two interesting aspects to the case. One is that the Kentucky judge, in making his decision, relied heavily on an earlier case in Minnesota, Randall, et al. v Lady of America. Attorney John Holland of Dady & Gardner, representing the franchisees, reminded, “That decision was one of our cases a few years back.”  In that decision the court held that a franchisor could not escape fraud by inserting boilerplate merger and integration clauses in its franchise agreement. Holland added, “This latest decision in Kentucky builds on the work we did previously in the Randall case.”

The other aspect to be noted in the ruling is that out of the three named franchisee entities—Patrick Nickleson, LLC; Patricia Nickleson Enterprises, LLC; and PBJ Enterprises, LLC—the judge only allowed Patricia Nickleson to be party in their counterclaims. Although Patrick was the sole owner and officer of the three entities, Patricia was the only signatory to the franchise agreement for the fourth restaurant. The judge ruled she alone had standing on the main issues of the countersuit. The failed fourth restaurant was the only one at the center of the counterclaims in the litigation.

A&W and Long John Silver’s outside counsel Margaret R. Grant of Stites & Harbison said the judge’s order actually went in favor of both parties. “The franchisees were trying to make claims for different franchisees and different stores when those allegations were not related to anything but the one store.” She said they are currently in the middle of briefing summary judgment on the counterclaims, mainly on the fact that Patrick Nickleson did not fulfill his obligations under the franchise agreement. “That’s why A&W terminated the franchisee in the first place,” she explained.

A&W’s alleged fraud in the making

A&W first filed the lawsuit against Patrick Nickleson and his two entities related to their four failed restaurants in Minnesota. Specifically, the franchisor claimed he infringed on A&W trademarks, breached his contracts and ignored unfair competition provisions concerning the franchise agreements. Nickleson shot back with three counterclaims against A&W, alleging various claims including violations of the Minnesota Franchising Act and common law fraud.

While running his three stores, Patrick Nickleson asserted that A&W courted him for over a year in hopes that he would purchase a fourth unit, a new drive-in model that the company was offering to existing franchisees. Nickleson claimed that A&W’s proposal to him included information with financial projections on profitability and past performance of other franchisees that was laden with false data. The counterclaims state that A&W fraudulently induced him into entering the franchise agreement and open the new, more expensive restaurant model. While sales started out strong after he opened, within months they began to trail off. When Nickleson was forced to tap equity from his other stores to keep up with his ongoing financial obligations, he soon was unable to pay royalties and advertising fees to A&W for all four restaurants.

Nickleson closed all of his Minnesota restaurants in early 2011 and the franchisor filed its lawsuit against him. In May 2012 he filed for bankruptcy. After A&W filed the lawsuit against him and the other entities, the bankruptcy court lifted the stay on the bankruptcy to allow the litigation to move forward.

Minnesota Franchising Act designed to protect franchisees

In his decision, the judge noted that A&W relied heavily on its disclaimers and integration clause in its franchise agreement and its FDD [franchise disclosure document]. Essentially, the franchisor asserted that it disclaimed any representation regarding the costs, sale or profits of the last restaurant Nickleson purchased and made it clear that company representatives were not authorized to make claims.

While the judge acknowledged that the disclaimers were relevant, he also noted that conflicting Minnesota case law on the subject could have led the franchisee to believe that those disclaimers would not be upheld in court. He reminded that the Minnesota Franchising Act, adopted in 1973, was remedial legislation designed to protect potential franchisees within Minnesota from unfair contracts and other prevalent and previously unregulated abuses in a growing national franchise industry.” The judge said while disclaimers should not be altogether void, he finds that A&W cannot use a disclaimer to defeat Nickleson’s misrepresentation claims.

In spite of that, the judge stated, “A&W’s disclaimer is so general it envelopes almost any misrepresentation A&W could have made. To uphold such a vast disclaimer would incentivize franchisors to write broadly-worded disclaimers that would negate specific, unequivocal misrepresentations made by the franchisor and its representatives.”

The judge further stated, “. . . disclaimers do not insulate a party from its fraud, but they do put the opposing party on notice that projections ought not to be uncritically relied upon.”

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• Randall v Lady of America - July 24, 2007