Several individual and putative state and nationwide class actions have been filed by franchisees against their franchisor, and in each case the courts enforced or denied enforcement of the class action bar for different reasons. Two of these cases were filed in US federal courts – Bonanno v The Quiznos Franchise Co, LLC,(1) and Martrano v The Quiznos Franchise Co, LLC.(2) The plaintiff franchisees in these cases alleged that Quiznos fraudulently sold and managed the termination of franchises nationwide. A third case, Gold v Melt Franchising, LLC,(3) was filed in California state court by Melt franchisees alleging, among other things, that Melt fraudulently induced them to purchase Melt Gelato franchises and violated state franchise statutes.
The franchise agreements in all of these cases contained provisions prohibiting franchisees from bringing claims against their franchisors on a class-wide basis. In each case the plaintiffs argued that enforcement of the class action bar was unconscionable. While the disparity in the opinions in these cases may raise some eyebrows, it is the disparity in their analysis that is perhaps most startling.
District of Colorado decision in Bonanno
The district court in Colorado began its analysis in Bonanno by tracing the evolution of the class action in US jurisprudence to determine the level of scrutiny to apply to such a contractual provision. The court concluded its historical tour by finding that class certification under Rule 23 is a procedural tool, rather than a substantive or jurisdictional right. The court reasoned that "a lesser level of scrutiny is applicable to an agreement by a party not to proceed as a class, as compared to the level of scrutiny that the court would apply to a similar agreement purporting to waive a substantive right", such as the right to a jury trial.
The court then extensively analyzed the law that applies to the enforceability of the class bar and concluded that Colorado contract law regarding unconscionability provides the test for enforceability. Further, the district court concluded that the burden was on the plaintiffs, as the parties seeking to escape the application of the unambiguous class action bar contractual provision, to show that the class action bar was unenforceable as a matter of state law. After reviewing previous class bar decisions and applicable Colorado contract law, the court concluded that the Quiznos class bar provision was not unconscionable under Colorado contract law and was enforceable.
The court cautioned that enforcement of the class action bar provision was limited to the facts and circumstances of this specific case, noting that it is possible for parties to "intrude on the province of the court by waiving procedural matters that affect case management and judicial economy" in such a way that the court would not tolerate. The court then warned that "other contractual deviations from the Federal Rules of Civil Procedure may be unconscionable or stricken if they intrude on the court's ability to manage litigation".
District of Western Pennsylvania decision in Martrano
Two months after the Bonanno decision, the US District Court for the District of Western Pennsylvania issued its decision in Martrano, which involved an almost identical set of allegations. It rejected the Colorado court's analysis and held that federal law, not state contract law, governs the enforceability of the class action bar provision.
The court began its analysis of the class action bar provision with the assertion that: "Federal Courts sitting in diversity apply state substantive law and federal procedural law." Because the court concluded that consolidation and class-wide adjudication are governed respectively by Rules 42 and 23 of the Federal Rules of Civil Procedure, the court held that the inquiry was whether the waiver arising out of the contract comported with those federal rules.
Like the Bonanno court, the Martrano court noted the dearth of authority on the enforceability of class action bars. Therefore, the Martrano court looked to the jurisprudence of forum selection clauses as a starting point for its analysis.
The court noted that class action bars differ from forum selection clauses, where the parties' preferences have substantial weight, because "consolidation is a matter to be decided by the Courts, not the parties, based on the Court's view of efficiency". Thus, if the prerequisites of Rule 23 are met, the focus shifts to whether "a class action is superior to other methods of adjudication", not whether a class action is preferred by the parties.
The court flatly stated that "the ultimate governing standard is furtherance of efficient judicial administration, which leaves no room for enforceability of private agreements among litigants". As such, the court found that the class could be certified notwithstanding the contrary provision in the franchise agreement.
Just a few days after the Pennsylvania federal court issued its decision, the Tenth Circuit Court of Appeals denied an interlocutory appeal by the plaintiffs in Bonanno. Thus, both Quiznos opinions currently stand.
California appellate court decision in Gold
More recently, the state appellate court in Gold held the class action bar in a franchise agreement to be enforceable and therefore restricted the application of the principle espoused in Discover Bank v Superior Court.(4) In Gold, the trial court sustained the franchisor's demurrer without leave to amend and dismissed the complaint based on the prohibition on class actions in the franchise agreements. The appellate court found that the plaintiffs had shown neither procedural nor substantive unconscionability and affirmed the trial court's judgment. It further held that both must be present for a court to refuse to enforce a contract provision, and that a sliding scale is used to measure the degree of procedural and substantive unconscionability.(5)
The court explained that procedural unconscionability arises from unequal bargaining power where one party with superior bargaining strength drafts a contract provision and forces it on the other party to comply with or reject the contract. Substantive unconscionability occurs when a contact provision is unfairly one-sided. Under the sliding scale approach to analysis of unconscionability, a provision which is only marginally procedurally unconscionable can still be unenforceable if it is substantively of greater harshness or unreasonableness:
"In other words, the more substantively oppressive the contract term, the less evidence of procedural unconscionability is required to come to the conclusion that the term is unenforceable, and vice versa."(6)
The court explained that Discover Bank held class action waiver in the credit card agreement procedurally unconscionable because the plaintiff credit card holders were forced to accept the class action waiver contained in an amendment to their credit card agreement or close their accounts. It also found the class action waiver substantially unconscionable because the waiver was one-sided, in that it was unlikely that a group of credit card issuers would seek to file a class action case against credit card holders. In Gold, the court did not find the same elements of procedural and substantive unconscionability in the Melt franchise agreements.
The only similarity between these opinions is how unequivocal each court was in its stance on the enforceability of the class action bar. The opinions, however, could not be more at odds in their analysis and outcome. Indeed, these opinions are a cautionary tale regarding the risk of inconsistent outcomes in multiple litigations.
More importantly, the divergent nature of the outcome and the analysis of the courts have implications for drafting class action bar provisions. With diametrically opposing authority on the issue, the enforceability of the class action bar provision in franchise agreements may be determined more by where a franchisor gets sued than the language of its franchise agreement.
For further information on this topic please contact Jeffrey A Brimer or Heather Perkins at Faegre & Benson LLP by telephone (+1 303 607 3500), fax (+1 303 607 3600) or email (firstname.lastname@example.org or email@example.com).
(4) 113 P 3d 1100, 36 Cal 4th 148 (2005), where the California Supreme Court held that a class action waive in a credit card agreement was unconscionable where it appeared in a consumer contract of adhesion and each individual's claim was small, but, in the aggregate, the class' claims were large.
(5) The court also found a second ground for sustaining the demurrer – because each of the franchise agreements were governed by the law of the state where the franchisee was located, the substantive law of these state would apply to determine the franchisees' claims and, therefore, their claims lacked sufficient unity of interest to be consolidated.
(6) Citing Armendariz v Foundation Health Psychcare Services, Inc, 6 P.3d 669, 24 Cal 4th 83, 114 (2000).
Brandan Dullum, a 2010 graduate of the University of Texas School of Law, assisted in the preparation of this update.
Citing Armendariz v. Foundation Health Psychcare Services, Inc., 6 P.3d 669, 24 Cal.4th 83, 114 (2000).
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