Judge Allows Fraud, RICO Claims in Quiznos Class

PITTSBURGH - Last week U.S. Magistrate Judge Lisa Pupo Lenihan granted Quiznos’ motion to dismiss on two claims, antitrust violations and violations of Pennsylvania criminal code provisions, but denied all others including fraud in inducement and civil RICO (Racketeer Influence and Corrupt Organization) charges. She also cleared the way for franchisee plaintiffs to refile for class certification.

The judge stated that the second amended complaint in this case (Joe Martrano v The Quiznos Franchise Co.), filed by Peter J. Daley & Associates, mirrors allegations in other statewide class actions and one national. In her ruling she writes,

The over-arching allegation of these Complaints is that Defendants, not content with the profitability of a nationwide network of honestly/legitimately franchised “toasted sandwich” businesses, operated and expanded the Quiznos franchise empire via fraudulent and exploitive sales/contracting and business practices; and with (a) disregard for the long-term viability of its individual franchise stores, and (b) the primary intent of inflating Quiznos short-term/apparent profitability and, correspondingly, its sale value.

The order and opinion filed in Pennsylvania federal court concurred with another ruling (Westerfield v Quiznos , Wisconsin) rejecting Quiznos defendant’s assertion that they were entitled to the dismissal of the franchisees’ RICO and/or fraud in the inducement claims on the basis of the franchise documents. But the judge stated,

The Court is troubled by some of what it has read and it notes that (taking the allegations in the light most favorable to Plaintiffs [franchisees], one or more of those documents could ultimately be found not only to have been obtained through fraud on—or an unconscionable exploitation of—the Plaintiffs, but even to have been obtained by Defendants for the purpose of facilitating a subsequent fraud on the Court.

The decision gave considerable recognition to other related legal action between Quiznos and its franchisees in the United States and Canada over the past years. Judge Lenihan placed the litigation into two categories:  “. . . those on behalf of some/all of the more than 3,000 individuals who purchased franchise opportunities but were unable to open a store within the contractual time frame and were deemed by Quiznos to have forfeited their investment monies” and “ . . . franchisees who, like Plaintiffs . . . suffered losses in their operation of a Quiznos store allegedly due to Defendants’ conduct.”

The judge lists the nine Quiznos entities named as defendants, as well as “the two father and son corporate majority shareholders and officer/directors: Richard F. Schaden and Richard E. Schaden; and two Quiznos Pennsylvania employees, Kevin Casey and John Lubarski.

As part of the factual and procedural history, she stated that the franchisee plaintiffs are allegedly unsophisticated, often with little or no business experience or understanding of the implications of the “Quiznos non-negotiable franchise documents.”  Although the disclosure documents contained information about former franchisees who had left the system, she said the plaintiffs allegedly were not provided sufficient information to help them recognize the high failure rates in the system.

According to the court order, the franchisees allege they were fraudulently induced to contract on the basis of misrepresentations and omissions regarding the franchisee-franchisor’s contractual relationship as to services and supplies. She declared, “Moreover, Plaintiffs assert that Quiznos sales representative told them that Quiznos would use the franchisees’ aggregate buying power to obtain volume discounts, which would be passed on to the franchisees.” But the judge continues stating “Quiznos disclosure documents include disclaimers stating that salespersons were not authorized to furnish any oral or written information concerning the actual or potential sales, income or profits of a restaurant. The franchise agreement provided that it “contain[ed] the entire agreement between the parties . . . and there [were] no other oral or written representations . . .” that should be relied on unless given by the franchisor.

The franchisees were also required to sign a disclosure acknowledgment statement agreeing that they were aware of the business risks, had consulted with an attorney, their decision was not based on any oral assurances by the franchisor and its officers and agents to the likelihood of success of the franchise, and they did not rely on any projections or forecasts on earnings or profits. But the judge ruled, “Defendants are, however, neglectful of their duty to this Court when they fail to disclose the evidence in other related cases that this response was required . . . to complete the transaction . . .” She further stated that franchisees allegedly were pressured into accepting the take-it-or-leave-it terms of the contracts.

Quiznos spokesperson Ellen Kramer said Quiznos attorneys made a procedural motion to dismiss the claims in the lawsuit and about half the counts were in fact dismissed.  “The magistrate judge in Pittsburgh was obligated to take those claims that were made at face value before any discovery was done. We believe that’s what lead to the strong opinion that she gave.” Kramer said the judge doesn’t believe these things are true, and she hasn’t prejudged the case. “She was obligated to rule under the assumption that the claims were true. And we appreciate that. It really put her in a tough position,” she explained.

Kramer said they obviously disagree with the claims going forward, but they are confident that at the end of the day they will prevail and demonstrate that the allegations are false.

Peter J. Daley, Daley & Associates, representing the Pennsylvania franchisee plaintiffs did not return phone calls prior to publishing.  But Justin M. Klein, Marks & Klein, counsel to numerous franchisees in other lawsuits with Quiznos, individual and class actions, said they reviewed Judge Lenihan’s decision and believe she got it right from start to finish. “Her decision was thoughtful and it is clear she spent considerable time learning about and evaluating all of the litigation involving Quiznos around the United States.”  He said it considers the facts and applies the law in a manner that benefits litigants and the judicial system as a whole.  “We are confident Judge Lenihan's decision will be seriously considered in each of the various class action cases against Quiznos.

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Related Reading:

• Class Action Alleges 3000 Quiznos Sold but Not Opened
• Quiznos Files Answer and Counterclaim to Sold but Not Opened Lawsuits
• Franchisees Strengthen Charges against Quiznos Deceptive Business Practices
• National Class Action Filed Against Quiznos