Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—WDPa: Fraudulent inducement claims barred by license agreement’s integration clause, (Jun 20, 2013)

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

Allegations that a gelato supplier fraudulently induced a Pennsylvania gelato shop owner to enter an exclusive license and supply agreement failed to state a claim, since an integration clause in the agreement barred consideration of the licensor’s alleged pre-contractual misrepresentations about its products, the federal district court in Pittsburgh has ruled (Palermo Gelato, LLC v. Pino Gelato, Inc., June 19, 2013, Hornak, M.). Thus, the licensee’s fraudulent inducement and unjust enrichment claims were dismissed.

Palermo Gelato, seeking to open gelato stores in the Pittsburgh area, agreed to purchase the products of Pino Gelato, Inc. Prior to the execution of the parties’ agreement, Pino allegedly made representations, suggesting that it was the “exclusive” owner of a “unique recipe” of gelato developed in Sicily.

In 2008, the parties entered into an exclusive agreement for the licensing and supply of Pino’s gelato at Palermo’s shops in Allegheny County and Butler County, Pennsylvania. Under the agreement, Palermo promised to purchase Pino’s products at a certain price and to sell the products under the Pino trademark.

The agreement contained an integration clause, providing that the contract—together with its exhibits and schedules—contained the entire understanding between the parties and superseded any prior understandings between them. The agreement also contained a “no franchise” clause, providing that the relationship was not deemed a “franchise” within the meaning of the Federal Trade Commission franchise disclosure rule or applicable state law.

In 2011, Palermo allegedly discovered that the gelato it purchased from Pino was not the “small-batch crafted gelato” it had expected, but was being manufactured in bulk by G.S. Gelato, which sold its gelato at wholesale on its website. Palermo claimed that it was fraudulently induced to enter the license and supply agreement in the belief that it was purchasing high-end gelato from Pino’s own exclusive recipe and that, as such, it was paying for unfairly marked-up gelato.

Palermo filed an action against Pino, alleging that the relationship between the parties qualified as a franchise and that Pino violated the FTC franchise disclosure rule by failing to provide a presale disclosure document. In a January 24, 2013, decision, the court found that it lacked subject matter jurisdiction because Palermo asserted only federal question jurisdiction and the FTC franchise disclosure rule and FTC Act do not provide a private right of action. However, the court gave Palermo 30 days to amend its complaint and to allege diversity jurisdiction. Palermo’s amended complaint asserted diversity jurisdiction and two new counts against Pino under Pennsylvania law: fraud in the inducement and unjust enrichment.

Pino moved to dismiss the two new claims on the ground that the parol evidence rule barred any evidence supporting Palermo’s fraud in the inducement claims. The district court agreed.

Mediation. Before examining the merits of the case, the court observed that the agreement contained a mediation provision, stating that the parties will attempt to mediate a dispute prior to maintaining a legal action. Neither party raised the potential applicability of this provision, stated whether they conducted mediation, or addressed whether they believe that the provision imposes a precondition on litigation. Pennsylvania federal and state courts have held that parties may waive their rights to have their disputes settled by nonjudicial means by availing themselves of the judicial process. In this case, Palermo availed itself of the judicial process by filing two complaints, seeking money damages. Pino availed itself of the judicial process by filing two dispositive motions for failure to state a claim. Thus, the court concluded that both parties waived their rights to seek mediation.

Fraud in the inducement. Pennsylvania’s parol evidence rule barred the consideration of the alleged gelato misrepresentations that fraudulently induced Palermo to enter the license and supply agreement. Without those misrepresentations, Palermo could not state a claim for fraud in the inducement. Without a claim of fraud in the inducement, there was no basis for the claim of unjust enrichment, given the presence of a valid contract.

The parol evidence rule applied because there was a fully-integrated contract and the misrepresentations involved the same subject matter as the contract. The agreement explicitly referred to the gelato recipe, providing that if Pino were expected to go out of business, it must either train Palermo to manufacture the gelato or work with Palermo to identify a third party manufacturer to provide the covered products. It also would be required to provide Palermo with the recipe.

While this case is slightly unusual in that the terms of the contract seem to confirm, rather than deny, the content of the alleged misrepresentation, “it is enough that the contract relates to the subject matter of the gelato recipe in order for the parol evidence rule to operate and bar other representations on that topic—it need not carry terms that run contrary to those other representations, even implicitly.”

The case is Civil Action No. 2:12-cv-00931.

Attorneys: Brad N. Sommer (Sommer Law Group, PC) for Palermo Gelato, LLC. Carolyn Batz McGee (Eckert, Seamans, Cherin & Mellott, LLC) for Pino Gelato, Inc.

Companies: Palermo Gelato, LLC; Pino Gelato, Inc.

Cases: FranchisingDistribution PennsylvaniaNews