July 28, 2009

Tale of Two Cases: Courts Reach Opposite Results on Enforcement of Quiznos Class Action Bar

Quiznos' Franchise Company LLC is in the midst of defending several individual and putative state- and nationwide class actions around the country. Plaintiffs in these cases allege that Quiznos fraudulently sold and managed the termination of franchises nationwide. As these cases have proceeded through the pretrial phase, different courts have reached results on a number of issues.

A recent example of divergent results is presented by two federal cases: Bonanno v. The Quizno's Franchise Co., L.L.C., No. 06-cv-02358, 2009 WL 1068744 (D. Colo. Apr. 20, 2009) and Martrano v. The Quizno's Franchise Co., L.L.C., No. 08-0932, 2009 WL 1704469 (W.D.Pa. June 15, 2009). The two federal courts have reached opposite conclusions on the enforceability of the Quiznos' class action bar, which reads:

                   The parties agree that any proceeding will be conducted on an individual, not a class-wide basis, and that any proceeding between Franchisor and Franchisee or the Bound Parties may not be consolidated with another proceeding between Franchisor and any other entity or person.

While the disparity in the outcomes of the cases may raise some eyebrows, it is the disparity in the analysis, discussed below, that is perhaps most startling.

District of Colorado Decision in Bonanno

The District Court in Colorado court began its analysis by tracing the evolution of the class action in American 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. Thus, the court reasoned, "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 analyzed what law would apply to the question of the enforceability of the class bar and, after extensive analysis, concluded that Colorado contract law regarding unconscionability should provide the test for enforceability. Further, as the parties seeking to escape the application of the unambiguous contractual provision, the District Court concluded the burden was on the plaintiffs to show the class action bar was unenforceable as a matter of state law.

After an extensive review of previous decisions regarding class bar provisions and applicable Colorado contract law, the court concluded that the Quizno's class bar provision is not unconscionable under Colorado contract law and thus was enforceable.

The court cautioned that the enforcement of the class action bar provision was limited to the facts and circumstances of that 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

Fast forward two months from the Colorado court's decision. The U.S. District Court for the District of Western Pennsylvania, on nearly the exact same set of allegations, outright rejected the Colorado court's analysis and held that federal law, not state contract law, governs the enforceability of the class action bar provision.

After declining to dismiss the case, 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 by Federal Rule 42 and Federal Rule 23, respectively, the court held that the inquiry is whether the waiver arising out of the contract comports with those federal rules.

As did the Bonanno court, the Martrano court noted the dearth of authority on the enforceability of class action bars. 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 the Colorado federal court action. Thus, both opinions currently stand.

The Lesson

The similarity between the opinions is how unequivocal each court was in its stance on the enforceability class action bar. The opinions could not be more at odds, however, 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 not only the outcome, but also the analysis of the courts, has ramifications for corporations drafting class action bar provisions. As it appears from these cases, depending on what district court you are in, the clauses may be subject to analysis under either state or federal law.

With diametrically opposing authority on the issue, and several more Quiznos franchisee actions pending in various courts around the country, the enforceability of the class action bar provision in franchising contracts may be determined more by where a franchisor gets sued than the content of its franchise agreement.

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