Antitrust, Fraud And RICO Claims Are Dismissed Westerfield v. The Quizno's Franchise Company, LLC (E. D. Wis., November 5, 2007).

Quizno's operates a chain of fast food restaurants known for their toasted submarine sandwiches. Plaintiffs, twelve Wisconsin franchisees brought an action under the Sherman Act, RICO, the Wisconsin Anti-Trust Act, and other Wisconsin consumer protection laws in the United States District Court for the Eastern District of Wisconsin, alleging, inter alia, that Quizno's "fraudulently induced plaintiffs and the Class to purchase franchises and thereafter exploited their control and economic power in order to extract exorbitant and unjustifiable payments." The plaintiff franchisees sought class certification, preliminary and permanent injunctive relief, and statutory, compensatory and punitive damages.

Referring to the current relationship with their franchisor, plaintiffs alleged that the Quizno's advertising slogan "Get Toasted" had taken on a "new and unhappy meaning". Quizno's, however, responded "Where's the beef?" Quizno's filed a motion to dismiss pursuant to Federal Rule of Civil Procedure 12(b)(6), and argued that each of the claims was "conclusively gutted by the explicit disclosures and the express terms of the Franchise Agreement between the parties." The district court granted the motions based upon fraud allegations, and for the claims based upon the Sherman Act and Wisconsin consumer protection laws. The complaint was dismissed.[1] The district court held that the specificity of the disclosures of the Franchise Agreement were fatal to the plaintiffs' claims. In so holding, the court cited the recent Supreme Court decision in Bell Atlantic Corp., as well as the explicit heightened pleading standard requirement in fraud cases, as set forth in Federal Rule 8(a).[2]

The district court noted that the fraud claims were fatally undermined by the expressed disclosures, disclaimers, and non-reliance clauses set forth in both the Franchise Agreement, as well as the Uniform Franchise Offering Circular (UFOC), and that each plaintiff was a signatory to the express terms of the Franchise Agreement. Each of the plaintiffs had acknowledged that there were no representations made by Quizno's as to projected sales volumes, market potential, revenues, profits, or operational assistance, other than as stated in the Franchise Agreement. The court also noted that each franchisee had been advised to seek the assistance of legal counsel, and that the success of the business venture involves substantial risks, and was dependent upon the franchise ability as an independent business person for its own success.

The Franchise Agreement also provided that the franchisees must "purchase all equipment, products, services, supplies, and materials required for the operation of the Restaurant from manufacturers, suppliers, or distributors designed by Franchisor." It noted that the Agreement provided that the designated supplier could be a single supplier, or even be Quizno's, itself, or its affiliates. Finally, the court noted that the Franchise Agreement specifically disclosed that the Franchisor and its affiliates may receive payments from suppliers on account of these suppliers' dealings with the franchisees, and they used the amounts received without restriction for any purpose.[3] As to the antitrust claims, the court noted that Quizno's was correct in arguing that there was no suggestion in the complaint that the plaintiffs were somehow forced to become franchisees, as there were plenty of other franchise opportunities available.

Plaintiffs claimed that Quizno's illegally tied the sell of their franchises (the Tying Product) to the subsequent sell of "essential goods", required to operate the franchises (the Tied Products). Plaintiffs allege that because Quizno's enjoyed "substantial market power in the Quick Service Toasted Sandwich Restaurant Franchise" market, the tying arrangement under which the franchisees must purchase "essential goods" were unlawful. In rejecting this claim, the district court relied on the Third Circuit decision in Queen City Pizza v. Domino's Pizza, Inc.[4] The court agreed with Quizno's that the antitrust claims failed because the complaint failed to allege a proper relevant market in which the anticompetitive effects of the challenged activity could be assessed. In Queen City Pizza[5] the Third Circuit affirmed the district court's 12(b)(6) dismissal of the plaintiff's Sherman Act claims for failure to plead a valid relevant market. The Queen City Pizza court held that,

"[w]here the plaintiff failed to define its proposed relevant market with reference to the sale of reasonable interchangeability and cross-elasticity of demand, or alleges a proposed relevant market that clearly does not encompass all interchangeable substitute products even when all factual inferences are granted in plaintiff's favor, the relevant market is legally insufficient and a motion to dismiss may be granted."[6]

Plaintiffs argued that they should be granted a "Kodak moment", and that pursuant to the Supreme Court's ruling in Eastman Kodak Co. v. Image Technical Services, Inc.[7] The complaint stated a claim, as there was a factual issue as to whether the franchisees were "locked in" to the franchise system, and that Quizno's was thus able to extract unlawful concessions because of its incumbent market power.

This argument was rejected out of hand. The court held that in the area of franchises, such as Quizno's, the relevant product market would include equivalent investment opportunities. Citing Siberman[8] the court held that plaintiffs' assertion that the relevant market was "Quick Service Toasted Sandwich Restaurant Franchise" was "patently absurd."[9] Citing Will v. Comprehensive Accounting Corp.[10] In citing Tominaga v. Shepherd[11] the court held that in assessing tying claims against combination chicken/pizza franchises, "possible relevant markets include take out pizza franchises, fast food franchises or restaurant franchises in general."[12] Both Queen City, Tominaga, and Mozart Co. v. Mercedes-Benz of North America, 833 F.2d 1342 (9th Cir. 1987) rely on the seminal article by Benjamin Klein & Lester F. Saft, The Law and Economics of Franchise Tying Contracts, 28 J.L. & Econ. 345 (1985). Under the Klein and Saft analysis, the relevant market must be viewed as of the time of the franchise contract formation, and include all plausibly foreseeable economic franchise opportunities available to the potential franchisee. In disposing of Kodak, the court again relied on Queen City Pizza and observed,

"Plaintiffs need not have become Domino's franchisees. If the contractual restrictions in section 12.2 of the general franchise agreement were viewed as overly burdensome or risky at the time they were proposed, plaintiffs could have purchased a different form of restaurant, or made some alternative investment. They chose not to do so. Unlike the plaintiffs in Kodak, plaintiffs here must purchase products from Domino's Pizza not because of Domino's market power over a unique product, but because they are bound by contract to do so. If Domino's Pizza, Inc. acted unreasonably when, under the franchise agreement, it restricted plaintiffs' ability to purchase supplies from other sources, plaintiffs' remedy, if any, is in contract, not under the antitrust laws."[13]

Thus, it is the plaintiffs' complaint that is "toast".