Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—DColo: Franchise Rule Application, Federal Predicate Acts Do Not Confer Federal Jurisdiction Over Colorado RICO, Consumer Protection Claims, (Feb 14, 2013)

By Tobias J. Gillett, J.D., LLM.

The federal district court in Denver has refused to exercise jurisdiction over a case brought by Quiznos franchisees against the restaurant chain in Colorado state court, alleging violations of the Colorado Organized Crime Control Act (COCCA) and the Colorado Consumer Protection Act (CCPA) (MARPA LLC v. QFA Royalties LLC, February 12, 2013, Krieger, M.). The defendants’ assertion that resolution of claims for fraud and misrepresentation would require application of the FTC’s Franchise Rule, and the franchisees’ inclusion of alleged federal law violations among the predicate acts for the COCCA claim, did not confer jurisdiction over the case.

A group of Quiznos restaurant franchisees brought suit against owners and affiliates of the restaurant chain, asserting a variety of claims under Colorado statutes and common law, including violations of the COCCA and CCPA. The defendants sought to remove the case under federal question subject matter jurisdiction.

The court explained that a plaintiff can only remove a civil action to federal court if the plaintiff could have brought the suit in federal court originally. A case arises under federal law, and therefore can be removed to federal court, if its “well-pleaded complaint establishes either that federal law creates the cause of action or that the plaintiffs’ right to relief necessarily depends on resolution of a substantial question of federal law.”

The defendants initially contended that, since the FTC’s Franchise Rule established disclosure requirements for franchise sales, a challenge to the “quality of their pre-sale disclosures, or claims that they failed to disclose material information, will require an analysis of whether it complied with the Franchise Rule.”

The court rejected that argument, noting that the franchisees had not claimed that the defendants had violated the Franchise Rule. Instead, the claims relied entirely on Colorado law, and had no elements “that would implicate any FTC statute or rule.” Moreover, any defense based on the Franchise Rule would also not confer federal question jurisdiction.

The defendants also argued that the franchisees’ COCCA claims “involve a substantial federal question because an element of those claims requires proof that the defendants committed federal crimes.” The franchisees had claimed numerous violations of state and federal law as predicate acts for the COCCA claim.

The court observed that “the mere presence of a federal issue in a state cause of action does not automatically confer federal-question jurisdiction,” and that “the relevant question is does the state-law claim necessarily raise a stated federal issue, actually disputed and substantial, which a federal forum may entertain without disturbing any congressionally approved balance of federal and state judicial responsibilities.”

The court noted that application of federal law might not be necessary, since the franchisees had also alleged violations of state law. Even assuming that the federal issues were necessary to the claim, however, the court concluded that they did not “present a substantial question of federal law,” because “the violations of federal law are simply applied as an element of the state-law claims.” Moreover, permitting removal in this case “would invite a horde of removal cases that raise the same kind of claims, or similar claims that have embedded federal issues.” Therefore, the court determined that it did not possess subject matter jurisdiction over the case, and remanded it to state court.

The case is No. 13-cv-00262-MSK.

Attorneys: Jeffrey Cohen (Ballard Spahr, LLP) for MARPA LLC. Fredric Adam Cohen (Cheng Cohen, LLC) for QFA Royalties LLC.

Companies: MARPA LLC; QFA Royalties LLC

Cases: FranchisingDistribution StateUnfairTradePractices RICO ColoradoNews