Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—Bankr. D.N.H.: Limitations clause in Quizno’s franchise agreement could be unconscionable, (Dec 3, 2013)

By Tobias J. Gillett, J.D., LL.M.

The federal district court in Manchester, New Hampshire declined to dismiss the claims of the bankruptcy estate of two former Quizno’s restaurant franchisees on statute of limitations grounds because the trustee sufficiently alleged that the limitations clause was unconscionable (In re: Paul Bouley & Cynthia Bouley, November 27, 2013, Harwood, B.). However, the case was transferred to the United States District Court for the District of Colorado pursuant to the franchise agreement’s forum selection clause.

Paul and Cynthia Bouley became Quizno’s franchisees after attending a seminar at which the defendant Quizno’s entities and individuals allegedly made misrepresentations regarding the profitability of Quizno’s franchises, the support Quizno’s gave to franchisees, and the ease with which the Bouleys could open a franchise. Quizno’s allegedly should have realized the Bouleys were not suitable to become franchisees. Quizno’s also allegedly did not provide a Uniform Franchise Offering Circular to the Bouleys, discouraged them from reviewing the agreement in detail, and told them that having a lawyer review it would be a waste of money and needlessly delay the process.

According to their complaint, the Bouleys had great difficulty opening their franchise. The Bouleys alleged that the location was unsuitable, and that Quizno’s should have known it was unsuitable. The Bouleys were required to pay $6,000 for items for a store grand opening, but many of the items were unusable, the franchisees claimed. Quizno’s allegedly did not provide any assistance with difficulties the franchisees had with their landlord, town, and contractor. The franchisor allegedly had promised to provide supplies to the Bouleys at a wholesale discount, but instead purchased them at inflated prices from vendors from whom Quizno’s received “kickbacks.” Quizno’s also required the Bouleys to participate in coupon programs that forced them to sell their food at a large discount that made it impossible for them to perform under their agreement, the complaint charged. Quizno’s allegedly informed the Bouleys that their location was performing well, despite knowing it was unprofitable, and failed to provide advertising for the store, despite charging the Bouleys a fee for it.

The Bouleys eventually closed the store and filed for bankruptcy. The Bouleys’ Chapter 7 trustee filed suit, asserting claims for violation of the New Hampshire Consumer Protection Act, breach of contract, breach of the implied covenant of good faith and fair dealing, unjust enrichment, intentional misrepresentation and fraud in the inducement, promissory fraud, breach of fiduciary duty, negligence; negligent misrepresentation, and civil conspiracy. The defendants filed a motion to dismiss.

Choice-of-law. Colorado law applied in interpreting the agreement, according to the court. The agreement contained a choice-of-law clause calling for interpretation under Colorado law, and had a significant relationship to Colorado because all of the corporate defendants had their principal places of business in Colorado, and both individual defendants resided there. Moreover, the plaintiff failed to show that the choice-of-law clause specifically was “so coercive and one-sided as to have prevented the plaintiff from agreeing to its terms voluntarily.”

Statute of limitations. The court declined to dismiss the trustee’s claims as untimely despite the one-year limitations provision in the agreement, because the trustee had “alleged sufficient facts to support a claim that the limitations provision in the agreement is unconscionable.” The trustee alleged that agreement was “a non-negotiable, form document”; that the Bouleys “were unsophisticated and had never reviewed a franchise agreement before”; and that they “were subjected to a well-planned and contrived sales presentation, which pressured them into signing the agreement.” Moreover, “the limitations provision appear[ed] to be sufficiently one-sided, especially given the totality of the allegations in the complaint.” The clause limited all claims except certain claims regarding payments from the franchisee, which could only benefit Quizno’s. The court noted that at least two other federal courts had declined to dismiss lawsuits against Quizno’s on statute of limitations grounds for similar reasons.

Forum selection clause. However, the court found the trustee had not alleged sufficient facts to render the forum selection clause in the agreement unenforceable. The court declined to find that the clause was unenforceable as “the product of a generally unconscionable contract that was procured by fraud,” because general allegations of fraud, without specific allegations as to the forum selection clause in particular, were insufficient to render the clause ineffective. Moreover, the clause was not unconscionable because, unlike the limitations clause, the forum selection clause applied “equally to both parties,” and courts considered “a national business’s interest in having litigation take place in a predictable location to be reasonable as a matter of law.” In addition, the trustee failed to show how the Bouleys’ financial condition prevented the bankruptcy estate from pursuing litigation in Colorado, and the forum selection clause’s status as a “boilerplate” provision did not necessarily render it invalid. Finally, the clause did not violate any relevant New Hampshire public policy interests.

The court therefore transferred the case to the United States District Court for the District of Colorado.

The case is No. 10-14948-BAH, Adv. Proc. No. 13-01008-BAH.

Attorneys: John J. Washburn (Law Office of John Washburn) for Timothy P. Smith. Fredric A. Cohen (Cheng Cohen, LLC) for The Quizno’s Master LLC.

Companies: The Quizno’s Master LLC

Cases: FranchisingDistribution NewHampshireNews