RICO Actions, Reliance and Franchisee Lawsuits

You say that your franchisor lied to you about earnings, but you cannot sue because you signed a clause that said you were not relying upon what the franchisor told you about earnings?

You say that your franchisor lied to you about rebates, but you cannot sue because you signed a clause that said you were not relying upon what the franchisor told you about rebates?

You say that your franchisor lied to you about [fill in the blank], but you cannot sue because you signed a clause that said you were not relying upon what the franchisor told you about [fill in the blank]?

And without reliance, you cannot prove legal misrepresentation, or that the lie was a proximate cause of your loss.  And so no attorney will take your case?

Well, very recently, the  Supreme Court of the United States just handed a big gift to potential franchisees in the case BRIDGE ET AL. v. PHOENIX BOND & INDEMNITY CO in their rule about fraud and RICO actions.

The Supreme Court made a very important ruling (pdf) regarding the role of reliance in a RICO cause of action.

"RICO provides a private right of action for treble damages to any person injured in his business or property by reason of the conduct of a qualifying enterprise’s affairs through a pattern of acts indictable as mail fraud. Mail fraud, in turn, occurs whenever a person, “having devised or intending to devise any schemeor artifice to defraud,” uses the mail “for the purpose ofexecuting such scheme or artifice or attempting so to do.”§1341.

In the case, Party A made repeated misrepresentations via mail to Non-Party C, which then relied upon these lies, and took an action which harmed Party B.

The US Supreme Court ruled that Party B could maintain a RICO action against Party A, even though it had not relied upon the representations made to Non-Party C, if the harm to it was directly related to the falsity of the representations.

The facts of the case are this. Party A lied to Non-Party C in order to obtain a favourable distribution of C's property, tax liens, which but for the lies Party B would have obtained. It was agreed that C did not rely upon A's representations.

Several Circuit courts had required that C either relied upon A's representations, or that proximate cause would require reliance. Both arguments were rejected by the US Supreme Court.

Why does this matter to franchisees?

Typically, a franchisee signs a franchise agreement stating that they have not relied upon anything other than what is in the franchise agreement, and often this is done unwittingly.

Recall in the recent Wisconsin case against Quiznos, the Judge originally ruled, "A Party cannot reasonably rely upon allegedly fraudulent statements directly contradicted by the terms of a subsequently executed contract."

The Wisconsin Judge eventually overruled himself, but based his ruling upon several 7th Circuit decisions which held reasonable reliance was a triable issue - and thus Quiznos summary judgment failed.

After this Supreme Court ruling, the Quiznos franchisees may not have to even prove reasonable reliance to sustain their RICO cause of action. They may have to only show that Quiznos' alleged lies about them "negotiating supplier rebates for the benefit of the franchisees harmed the franchisee" harmed the franchisees.

The mail component of course is mailing sales materials and the disclosure document.

Further, according to the Supreme Court,  the concept "by reason of conduct" doesn't mean the non-reliance defeats proximate cause:

"The direct-relation requirement avoids the difficulties associated with attempting “to ascertain the amount of a plaintiff’s damages attributable to the violation, as distinct fromother, independent, factors,” Holmes, 503 U. S., at 269; prevents courts from having “to adopt complicated rules of apportioning damages among plaintiffs removed at different levels of injury from the violative acts, to obviate the risk of multiple recoveries,” ibid.; and recognizes the factthat “directly injured victims can generally be counted on to vindicate the law as private attorneys general, without any of the problems attendant upon suits by plaintiffs injured more remotely."

Now, reliance is not completely out the window:

"None of this is to say that a RICO plaintiff who alleges injury “by reason of” a pattern of mail fraudcan prevail without showing that someone relied on the defendant’s misrepresentations."

But first person reliance is not required:

"For the foregoing reasons, we hold that a plaintiff asserting
a RICO claim predicated on mail fraud need not show, either as an element of its claim or as a prerequisite to establishing proximate causation, that it relied on thedefendant’s alleged misrepresentations."

In a proper case, franchisees who signed a wavier of reliance, but who can prove that they were directly injured as the result of the franchisor misrepresenting the facts to a third party, the misrepresentation involved the use of the mail system, may well have a sustainable RICO action.

And if your attorney thinks that it is a good RICO case, then he or she will be seeking treble damages and attorney compensation.

(Cross Posted at Bizop.ca )