Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D. Ill.: Restaurant franchisees’ breach of contract and negligent misrepresentation claims survive motion to dismiss, (Nov 6, 2013)

By Linda O’Brien, J.D., LL.M.

In an action against a restaurant franchise, commercial real estate developer, and three employees for violations of the Illinois Franchise Disclosure Act, and Illinois Consumer Fraud Act among other claims, the federal district court in Chicago has denied the defendants’ motions to dismiss the claims for breach of contract based on the franchise agreement and negligent misrepresentation, and for lack of individual standing to assert their fraud claims. The defendants’ motions to dismiss the plaintiffs’ claim for conspiracy to commit fraud and for lack of individual standing to assert their breach of contract claims were granted (Wojcik v. InterArch, Inc., November 4, 2013, St. Eve, A.).

Additionally, the franchisees’ motion to strike the franchise agreement as an exhibit from the defendants’ motions to dismiss was denied. However, their motion to strike a transfer agreement and addendum to the multi-unit development agreement as exhibits from defendants’ motion was granted, the court ruled.

Background. In 2011, David Wojcik contacted Saladworks, LLC (Saladworks) regarding the possibility of opening a Saladworks franchise in the Chicago area. He was provided with its Franchise Disclosure Document (FDD) and attended an informational meeting at the company office in Pennsylvania. During the meeting, Wojcik met with Saladworks employees, including three of the individual defendants, Paul Steck, Patrick Pantano, and John Mattes, who interviewed him to determine his qualifications to be a franchisee and reviewed the FDD with him. Wojcik also visited a nearby Saladworks restaurant and was told that Saladworks’ designated commercial real estate firm, Site Development (SD) and architecture firm, InterArch, Inc., would assist him in finding a location and design his restaurant. In reliance on the representations made by Saladworks in the FDD and at the informational meeting, Wojcik claimed that he and Denise Wojcik entered into a franchise agreement and invested in the franchise.

Wojcik closed his restaurant after six months of operation in 2012. The franchisees filed their complaint, alleging fraud, breach of contract, conspiracy to commit fraud, and negligent misrepresentation against Saladworks , its employees and SD. The plaintiffs asserted one count of misrepresentation against InterArch, but subsequently settled with it and voluntarily dismissed it from the suit. The remaining defendants moved to dismiss the plaintiffs’ complaint for failure to state a claim and argued that the plaintiffs previously released all claims they may have had against Saladworks, thus barring their suit. The plaintiffs moved to strike the exhibits and arguments based on those exhibits in the defendants’ motion to dismiss.

Motion to strike. The defendants attached documents to their motions to dismiss to support their claim that the franchisees released any claims against Saladworks: the franchise and multi-unit development agreements, a transfer agreement which transferred the franchise to the new franchisee, and an addendum to the multi-unit development agreement which granted Salads of Schaumburg a six-month extension to open a second restaurant. The franchisees moved to strike the exhibits from the defendants’ motion to dismiss, claiming that the documents were not attached to the Complaint and that the purported releases were procured through fraud.

In denying the plaintiffs’ motion to strike in part, the court agreed with the defendants that the franchise agreement may be considered because the franchisees incorporated the document into their complaint by reference and used it as a basis for their breach of contract claim. However, in granting the motion to strike in part, the court found that the multi-unit development agreement, transfer agreement, and addendum fell outside the incorporation-by-reference doctrine. Although the franchisees made two brief references to the multi-unit development agreement in their complaint, it was not central to the plaintiffs’ claims. In addition, the transfer agreement and addendum did not amend the franchise agreement and were not relied upon by the defendants for the same purpose that made the franchise agreement central to the plaintiffs’ claims.

General release. The Saladworks defendants moved to dismiss the plaintiffs’ complaint on three grounds: (1) the general releases contained in the transfer agreement and addendum barred the plaintiffs’ claims as a matter of law, (2) the breach of contract claims failed because a covenant of good faith and fair dealing cannot vary the specific terms of a contract, and (3) the plaintiffs had no standing to assert claims in their individual capacities. A release provides an affirmative defense and a plaintiff is not required to plead facts in the complaint to anticipate and defeat affirmative defenses. The defendants argued that the documents attached to their motion to dismiss, which were incorporated into the complaint by reference, demonstrated that the plaintiffs released their claims against Saladworks. The court ruled that, since the documents were stricken and the complaint did not mention the releases, the defendants’ release argument was prematurely brought.

Breach of contract claim. The franchisees alleged that Saladworks breached the implied covenant of good faith and fair dealing in the franchise agreement by requiring them to work with InterArch, failing to spend sufficient funds on brand development, and failing to deliver a successful franchise system for operating a restaurant. Saladworks argued in their motion to dismiss that each of the alleged breaches was addressed by specific provisions in the franchise agreement. In granting the defendants’ motion to dismiss in part and denying it in part, the court found that the plaintiffs sufficiently pleaded a claim for breach of contract, relying on specific provisions of the franchise agreement that endowed Saladworks with discretion over its performance under the contract. However, the court ruled that the plaintiff could generally allege that Saladworks failed to deliver on its promise to provide a successful franchise system and the alleged breach did not relate to a specific duty imposed in the franchise agreement.

Standing. The court dismissed the franchisees’ breach of contract claims asserted in their individual capacities since David and Denise Wojcik were not parties to the franchise agreement. However, they did have standing to assert their claims for fraud alleging that they suffered individual harm apart from the harm to the corporation.

Conspiracy to commit fraud and negligent misrepresentation. SD moved to dismiss the plaintiffs’ counts of conspiracy to commit fraud and negligent misrepresentation on the following grounds: the plaintiffs failed to plead a conspiracy to commit fraud with particularity, SD’s alleged misrepresentation, and their reliance on that misrepresentation. In dismissing the plaintiffs’ conspiracy claims, the court found that the plaintiffs failed to allege with specificity that SD knowingly and intentionally participated in a scheme to defraud the plaintiffs. However, in finding that the plaintiffs adequately stated a claim for negligent misrepresentation, the court ruled that the plaintiffs plead sufficient facts regarding SD’s alleged misrepresentations and their reliance on SD’s expertise and misrepresentations in the site selection for the restaurant.

The case is No. 13-cv-1332.

Attorneys: Carmen David Caruso for David J. Wojcik and Salads of Schaumburg, Inc. William M. McErlean (Barnes & Thornburg LLP) for Site Development, Inc. Arthur L. Pressman (Nixon Peabody LLP) for Saladworks, LLC.

Companies: InterArch, Inc.; Site Development, Inc.; Saladworks, LLC

Cases: FranchisingDistribution IllinoisNews