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Siemer v. Quizno's Franchise Co. LLC.

March 31, 2008

ILENE SIEMER, FLYING SQUIRREL, INC., CHARLES GRACHAN, GRACHAN ENTERPRISES, INC., HENRY KUSZTELAK, UNCLE HENRY, INC., SONIA BRAR, RICK BRAR, BRAR MANAGEMENT LLC, NORMAN COHEN, AND SUPER SUBS OF GURNEE, INC., PLAINTIFFS,
v.
THE QUIZNO'S FRANCHISE COMPANY LLC., QUIZNO'S FRANCHISING LLC, QUIZNO'S FRANCHISING II LLC, THE QUIZNO'S MASTER LLC, QFA ROYALTIES LLC, QZ FINANCE LLC, QIP HOLDER LLC, TQSC LLC, CERVANTES CAPITAL LLC, RICHARD E. SCHADEN, RICHARD F. SCHADEN, SCOTT MORTIER, ADAM GOLDFARB, DAVID GOLDBERG, CARL CURATOLA, DOMINICK VOSO, AND STEVE ELLER, DEFENDANTS.



The opinion of the court was delivered by: Judge Rebecca R. Pallmeyer

MEMORANDUM OPINION AND ORDER

Quizno's is a fast-food restaurant known for its toasted submarine sandwiches. On April 19, 2007, six of Quizno's Illinois franchisees brought this class action against Quizno's Franchise Company, related entities, two corporate officers, and six of the company's Illinois employees.

In the complaint, Plaintiffs--each of whom claim to have suffered losses in connection with franchise agreements they signed with Quizno's--bring this class action against Quizno's, alleging ten claims for relief. The Plaintiffs assert violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), the Sherman Act, the Illinois Antitrust Act, the Illinois Franchise Disclosure Act of 1987, and the Illinois Consumer Fraud and Deceptive Business Practices Act, as well as claims for common law fraud, breach of contract, and breach of the covenant of good faith and fair dealing. (Compl. ¶¶ 73-176.) Defendants have moved to dismiss all claims. For the reasons outlined below, Plaintiffs' federal civil RICO claims and Sherman Act Claims, as well as Plaintiffs' state common law fraud claim and antitrust claims, are dismissed.

BACKGROUND

Plaintiffs' Federal Claims

Plaintiffs assert two civil RICO violations (Counts I and II), each of which is based on a fraud allegedly perpetrated by Quizno's in connection with the parties' franchise agreement. First, Plaintiffs allege that the Defendants are an association-in-fact enterprise that asserts its control over franchisees by requiring them to pay inflated prices for products, services, and materials. (Compl. ¶¶ 3, 73-95.) The terms of the franchise agreement require franchisees to purchase products and materials necessary for the running of the franchise from either Quizno's or Quizno's-approved vendors. (Id. ¶ 3.) Plaintiffs allege that Quizno's sold these goods to franchisees at supra-competitive prices, and that Quizno's benefited either directly when they, or an affiliated company, sold the goods, or indirectly when an approved vendor sold the goods and Quizno's received a vendor rebate. (Id.)

Second, Plaintiffs allege that the association-in-fact enterprise induced Plaintiffs to purchase franchises by knowingly misrepresenting facts about the cost of maintaining the franchise, projected profits, and Quizno's policies and procedures. (Compl. ¶¶ 2, 96-123.) In support of this claim, Plaintiffs allege that Quizno's and its area directors made various misrepresentations to them concerning the profitability of the franchises and franchise operation costs. (See, e.g., id. ¶¶ 2, 100, 102.) Plaintiffs also claim that Quizno's fraudulently withheld information it was required to disclose, including the cost of goods Plaintiffs would need, and that Quizno's "failed to disclose the substantial markups and kickbacks that add to the prices of food, supplies, services and other materials that must be purchased from Quizno's or its approved suppliers." (Compl. ¶¶ 110(g), (k), 112(h), 114(h), 116(b), and 118(d).) Both RICO claims are predicated on the same allegedly fraudulent conduct underlying Plaintiffs' common law fraud claim (Count VII).

Plaintiffs' final federal claim asserts a Sherman Act violation (Count III). In that claim, Plaintiffs allege that Defendants violated the Sherman Act, 15 U.S.C. § 1, by requiring Plaintiffs to purchase necessary goods and services only from approved vendors. (Compl. ¶¶ 124-137.) According to Plaintiffs, Quizno's exercises its substantial economic power within the "Quick Service Toasted Sandwich Restaurant Franchises market" to coerce franchisees to purchase essential goods from its affiliates and approved vendors. (Id.¶ 131.) Plaintiffs claim that these tying arrangements are either illegal per se, or an unreasonable restraint of competition. (Id. ¶¶ 135-36.) The same conduct underlying this federal antitrust claim also gives rise to Plaintiffs' claim that Defendants violated the Illinois Antitrust Act (Count IV).

Governing Contractual Provisions

In their motion to dismiss, Defendants argue that Plaintiffs' reliance on alleged misrepresentations regarding operating costs, marketing practices, and vendor rebates is unreasonable in light of the disclosures made in the Uniform Franchise Offering Circular ("UFOC") and the explicit terms of the franchise agreements. As required by FTC rules and state laws, each franchisee receives a UFOC prior to execution of a franchise agreement. The UFOC included cautionary language pertaining to any information given about the profitability as well as the costs of running a franchise:

YOUR ACTUAL FINANCIAL RESULTS ARE LIKELY TO DIFFER FROM THE FIGURES PRESENTED. THE AVERAGE GROSS SALES FIGURES PRESENTED ABOVE REPRESENT SALES BEFORE DEDUCTIONS FOR CONTINUING ADVERTISING AND ROYALTY FEES PAYABLE TO THE FRANCHISER AND ALL OTHER OPERATING EXPENSES. SEE ITEMS 6 AND 7 OF THIS OFFERING CIRCULAR FOR A PARTIAL LIST OF EXPENSES YOU WILL INCUR.

THE SALES FIGURES ABOVE ARE AVERAGES OF HISTORICAL DATA OF SPECIFIC FRANCHISES. THEY SHOULD NOT BE CONSIDERED AS POTENTIAL SALES THAT MAY BE REALIZED BY YOU. WE DO NOT REPRESENT THAT YOU CAN EXPECT TO ACHIEVE THESE SALES LEVELS.

ACTUAL RESULTS VARY FROM RESTAURANT TO RESTAURANT, AND WE CANNOT ESTIMATE THE RESULTS OF ANY PARTICULAR FRANCHISE. (UFOC at Item 19 (pp. 54-55), Ex. B to Quizno's Mem. (capitalization in the original).) Additionally, the UFOC expressly stated that potential franchisees should not rely upon any representations other than those outlined in the UFOC regarding the profitability of a Quizno's franchise.

OTHER THAN THE ABOVE INFORMATION, WE DO NOT FURNISH OR AUTHORIZE OUR SALESPERSONS TO FURNISH ANY ORAL OR WRITTEN INFORMATION CONCERNING THE ACTUAL OR POTENTIAL SALES, INCOME OR PROFITS OF A QUIZNO'S RESTAURANT. (Id. (p. 55).)

Within the UFOC that Plaintiffs received, Quizno's also made disclosures related to its relationship with suppliers:

We and our affiliates have the right to receive payments from suppliers on account of their dealings with you and other Franchisees and to use the amounts we receive without restriction (unless we or our affiliates agree otherwise with the supplier) for any purpose we or our affiliates deem appropriate. We and our affiliates negotiate purchase arrangements with suppliers for the benefit of Franchisees, which often include volume discounts. Some suppliers pay us and/or our affiliates fees for products purchased through these negotiated agreements, and willingness to pay us and/or our affiliates may be a condition of our approval of a supplier. (UFOC at Item 8 (p. 28).) The UFOC likewise estimated the costs that prospective franchisees would likely incur in connection with the initial investment. (Id. at Item 7 (pp. 23-24).) As explained above, Plaintiffs contend that Quizno's failed to disclose the markups and kickbacks that would be added to the prices of materials that franchisees were required to purchase from Quizno's or its affiliates. It is therefore notable that the UFOC repeatedly emphasizes that the costs are estimates. (Id. (pp. 24-26).)

In addition, a franchise agreement was included in the UFOC each franchisee received. The Franchise Agreement notified franchisees of potential marketing programs they might be required to take part in; each franchisee agreed to "participate in any promotion campaigns and advertising and other programs that the [Quizno's Marketing and Promotion] Fund periodically establishes." (Franchise Agreement ยง 12.3(b), Ex. A to Quizno's Mem.) According to Quizno's, this constitutes disclosure of the vendor rebates, operating costs, and marketing ...


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