Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—11th Cir.: Franchise agreement time limitation on claims may not have been triggered by offering circular revision, (May 12, 2014)

By Edward L. Puzzo, J.D.

Whether a franchisor's revised offering circular provided existing franchisees with sufficient notice of facts giving rise to claims, requiring the claims to be brought within the franchise agreement's specified time limitation, was a question for a jury, the Eleventh Circuit U.S. Court of Appeals in Atlanta has ruled (Massey, Inc. v. Moe’s Southwest Grill, LLC, May 9, 2014, Per Curiam).

The three plaintiffs in this interlocutory appeal—David Titshaw, Rounding Third, LLC, and Taylor Investment Partners II, LLC—were franchisees of Moe's Southwest Grill. The Uniform Franchise Offering Circulars (UFOCs) that these franchisees received prior to entering into their franchise agreements in 2002 and 2003 obligated the prospective franchisees to purchase certain products from Moe's-approved suppliers. At that time, the UFOCs stated that the required suppliers were not affiliated with the franchisor and that "neither we nor any of our affiliates" would derive any income from the required purchases.

The UFOCs were revised in 2005 to disclose that Moe's CEO Martin Sprock had an ownership interest in one of Moe's suppliers, as well as other suppliers. The statement within the UFOC was revised to explain that the franchisor did not “derive revenue, directly or indirectly, from any of these suppliers in connection with the services or products they provide to our franchisees." The reference to "affiliates" of the franchisor was deleted.

Subsequently, 39 franchisees, including the three franchisees in this interlocutory appeal, brought fraud, misrepresentation, and state civil RICO claims against the franchisor to recover allegedly illegal undisclosed "kickbacks" provided by Moe's suppliers to Moe's CEO Martin Sprock.

Facts giving rise to a claim. The franchisor claimed that the 2005 UFOCs had disclosed CEO Sprock's financial interest in the supplier and that their claims were time-barred because, under the franchise agreement, any claims arising out of the agreement had to be commenced within one year from the discovery of facts giving rise to the claim. In response, the three franchisees stated that, as existing franchisees in 2005, there would be little reason for them to examine the provisions of the 2005 UFOC presented to prospective franchisees. Accordingly, they did not discover the facts giving rise to their claims until well after 2005 and their claims were not time-barred. The district court granted Moe's motion for summary judgment on the claims brought by these three plaintiffs. The three plaintiff's appealed.

The appellate court noted that the parties agreed that the franchisees received the 56-page 2005 UFOC in April 2005. However, whether the franchisees actually read the relevant portions of the document at that time was in dispute. Further, the franchisees disputed whether it would be reasonable for then-current franchisees, not interested in purchasing a new Moe's franchise, to read such a lengthy and detailed document not necessarily relevant to them. Finally, the franchisees argued that, even if they had read the 2005 UFOC, it would not have provided them enough facts or notice necessary to allege the necessary elements of fraud, misrepresentation, and state civil RICO to be considered "discovery of the facts giving rise to a claim" sufficient to trigger the one-year contractual limitation period.

The appellate court concluded that it was a question of material fact as to when the franchisees first discovered the facts of the alleged kickback scheme, and thus a question appropriately left for a jury. Consequently, the court reversed the district court's grant of summary judgment in favor of the franchisor.

The case is Civil Action No. 13-12611.

Attorneys: Cary Ichter (Ichter Thomas, LLC) for David Titshaw. Robert Edward Casey, Jr. (Casey Gilson, PC) for Rounding Third, LLC and Taylor Investment Partners II, LLC. Martha Logan Decker (Hill Kertscher & Wharton, LLP) for Moe's Southwest Grill, LLC.

Companies: Massey, Inc.; Rounding Third, LLC; Taylor Investment Partners II, LLC; Moe's Southwest Grill, LLC.

Cases: FranchisingDistribution RICO AlabamaNews FloridaNews GeorgiaNews