Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Md.: Franchisee’s Maryland Franchise Act claims against its franchisor can proceed to trial, (Jul 19, 2013)

By John W. Arden, J.D., LL.M.

A coffee shop franchisee’s claims that its franchisor made misrepresentations prior to the sale of its franchise, in violation of the Maryland Franchise Act, could proceed to trial, according to the federal district court in Baltimore (WW, LLC v. The Coffee Beanery, Ltd., July 17, 2013, Nickerson, W.). The franchisee’s Maryland Franchise Act claims survived the franchisor’s motion for summary judgment. However, the franchisee’s common law misrepresentation and federal RICO claims did not.

Plaintiffs Deborah Williams and Richard Welshans formed WW, LLC in 2003, after Welshans entered a franchise agreement with The Coffee Beanery, Ltd. That year, they opened a Coffee Beanery café in Annapolis, which they operated through November 2007, “incurring substantial losses along the way,” the court observed. In December 2005, they filed this action against Coffee Beanery and numerous officers of the franchisor.

In August 2012, the district court dismissed the claims for detrimental reliance and conspiracy against all defendants, as well as claims for intentional misrepresentation and negligent misrepresentation against two individual defendants. The remaining claims were for violation of the Maryland Franchise Act, intentional misrepresentation, negligent misrepresentation, and violation of the federal Racketeer Influenced and Corrupt Organizations Act (RICO). The franchisor filed a motion for summary judgment on all remaining claims, while the franchisee moved for summary judgment in its favor.

The plaintiffs argued that a prior decision of the Sixth Circuit in this case and a consent order that The Coffee Beanery and Kevin Shaw entered into with the Maryland Attorney General should bind the defendants under the doctrines of the law of the case or collateral estoppel. The district court disagreed.

The plaintiffs asserted that the Sixth Circuit found that the Coffee Beanery violated the Maryland Franchise Act by failing to disclose that Kevin Shaw had been convicted of a felony and that the entire franchise agreement was invalid. They argued that either of these determinations warranted the entering of judgment in their favor on the question of liability based on law of the case or collateral estoppel.

“In none of those prior decisions, however, has a reading of the Sixth Circuit’s opinion been outcome determinative, as Plaintiffs argue it is here,” the district court held. “That difference alone is sufficient to permit the Court to reevaluate its prior statements and give the Sixth Circuit’s opinion the critical analysis it deserves.”

Law of the case. Contrary to the plaintiffs’ argument, the Sixth Circuit did not determine that the franchise agreement was invalidated because The Coffee Beanery misrepresented Kevin Shaw’s criminal background, the court found. Rather, the appeals court undertook the “narrow task” of reviewing an arbitrator’s decision, finding that the arbitrator manifestly disregarded the law when reaching the conclusion that The Coffee Beanery was not required to disclose that Shaw had been convicted of grand larceny.

The law of the case doctrine did not apply in light of the exceptions for new evidence and clear error, the court held. There was no evidence in the record to show that the appeals court premised its decision on the arbitrator’s finding that Shaw had a felony conviction and evidence indicating that no such conviction existed.

The validity of the franchise agreement was never before the Sixth Circuit or this court. The argument failed because there was no “rule of law” relating to the franchise agreement.

Collateral estoppel. The Plaintiffs claimed that the defendants were collaterally estopped from rearguing the issues of their alleged fraud and violations of the Maryland Franchise Act because those issues were necessarily decided by the Sixth Circuit. However, the Sixth Circuit’s role was limited to determining whether to set aside the arbitrator’s award or whether the district court’s decision to confirm the arbitrator’s award was correct. The merits of the Plaintiff’s claims were not before the court and not necessarily decided by the court.

Maryland consent order. Likewise, the consent order that Kevin Shaw and The Coffee Beanery entered into with the Maryland Attorney General did not entitle the plaintiffs to a judgment. Even the plaintiffs acknowledged that the terms of the consent order were not binding in subsequent proceedings, such as this one.

Maryland Franchise Act. The plaintiffs alleged that the defendants violated the Maryland Franchise Act by making untrue statements and omissions of fact. Under this provision, a franchisee may sue to recover damages sustained as a result of the franchise purchase. The plaintiffs argued that the defendants violated other provisions of the Maryland Franchise Act, regarding the timely delivery of an offering prospectus.

Defendants argued that only Welshans had standing to pursue a claim under the Franchise Act, since he was the only party who was granted a franchise. Plaintiffs argued that the statute should be interpreted to include a corporate entity, such as WW, LLC, that was formed after the franchise was purchased and to which the purchaser assigned the franchise agreement. This argument was unavailing and unsupported by case law, according to the district court. Thus, only Welshans was allowed to pursue a claim under the statute.

The plaintiffs claimed that the defendants failed to provide a Uniform Franchise Offering Circular (UFOC) 10 days prior to the signing of the franchise agreement, as required by the Maryland Franchise Act. However, only the state was entitled to enforce this requirement, the court found. Moreover, it was undisputed that plaintiffs did not suffer any harm from receiving the registered version of the UFOC within six days of the signing of the franchise agreement.

Plaintiffs further claimed that the defendants made several misrepresentations or omissions of material fact in the UFOC, in violation of the Franchise Act. Specifically, they claimed that defendants (1) misrepresented their business experience, (2) failed to separately identify the names and addresses of franchises of café outlets, (3) misrepresented Julius Shaw’s position, (4) failed to disclose that Kevin Shaw had been convicted of a felony, (5) misrepresented that monies paid into the franchisor’s national advertising fund were not commingled with other funds, (6) failed to disclose certain required contracts and programs, and (7) failed to include unaudited financial statements from November 2002 with the UFOC. Defendants argued that they did not make any misrepresentations and, alternatively, that none of the alleged misrepresentations was material.

The parties agreed that the UFOC guidelines established the franchisor’s obligations with regard to required disclosures. “Reviewing the UFOC by those standards, the Court concludes that it cannot grant summary judgment in Defendants’ favor. At points, Defendants even appear to acknowledge as much.”

The only alleged misrepresentation that was not actionable was Kevin Shaw’s supposed felony conviction, the court found. Plaintiffs produced no evidence that Shaw was, in fact, convicted of a felony. Defendants failed to offer any argument regarding the materiality of the alleged misrepresentations that could support granting summary judgment in their favor, according to the court.

Therefore, the court granted defendants’ motion for summary judgment only with respect to the claim that defendants’ violated the Maryland Franchise Act by misrepresenting Kevin Shaw’s criminal history.

Misrepresentation and RICO. Defendants argued that the misrepresentation and RICO claims were barred by the franchise agreement, which required that any claim—besides one brought under the Maryland Franchise Act—be brought within one year of occurrences giving rise to such claim. The misrepresentation and RICO claims arose out of statements made before the franchise agreement was signed on June 17, 2003, but the suit was not filed until December 2005.

Under Maryland law, parties may agree to modify limitations periods where there is no controlling statute to the contrary, the modification is reasonable, and there is no defense such as fraud, duress, or misrepresentation. “Finding no reason not to enforce the limitations provision of the Franchise Agreement, the Court will grant Defendants’ motion as it regards Plaintiffs’ claims for misrepresentation and RICO.”

The case is No. WMN-05-3360.

Attorneys: Harry M. Rifkin (Law Offices of Harry M. Rifkin LLC) for WW, LLC. Stephan Y. Brennan (Iliff Meredith Wildberger and Brennan PC) for The Coffee Beanery, Ltd.

Companies: WW, LLC; The Coffee Beanery, Ltd.

Cases: FranchisingDistribution RICO MarylandNews