Free Trial Brief - District Court of Colorado - Colorado

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Civil Action No. 04-cv-01062-ZLW-BNB THE QUIZNO'S MASTER LLC and THE QUIZNO'S FRANCHISE COMPANY LLC, Plaintiffs, v. R&B MANAGEMENT GROUP, LLC, an Alabama limited liability company, ROYCE GWIN, an individual, and REBECCA GWIN, an individual Defendants.

DEFENDANTS' TRIAL BRIEF

Defendants, R&B MANAGEMENT GROU0P, LLC, ROYCE GWIN, AND REBECCA GWIN, (collectively "Gwins") by and through their attorneys as shown below, hereby collectively submit their Trial Brief:

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I. HISTORY OF CASE AND FACTUAL BACKGROUND The Gwins are from Alabama and acted as Area Directors (sub-franchisors) of Quizno's. This Court has previously ruled on Gwins' Motion for Partial Summary Judgment on June 2, 2005, that the Gwins were at least entitled to a 1% commission on sales from various Quizno's restaurants, even if rightfully terminated. The Court also ruled the Gwins were terminated only for alleged failure to meet sales and opening quotas, not for any other grounds. Quizno's sole remaining claim is for declaratory relief that it had a right to terminate the Gwins. The Gwins' remaining counterclaims involve breach of express or implied contract, fraud and deceit, negligent misrepresentation and promissory estoppel. The Gwins maintain affirmative defenses including waiver, estoppel and unconscionability, and also seek a declaratory judgment. interests and costs. In 1998, Quizno's was a Colorado based franchise (not the international franchise superpower it has become), had less than 100 stores. Few, if any, were outside urban areas. Rural Alabama and Georgia did not have any Quizno's in 1998 with the closest store being in Atlanta. The Gwins had no restaurant or franchise experience, which is encouraged by Quizno's, so they can be a clean slate for Quizno's training and system. The Gwins entered into an Area Director Marketing Agreement ("ADMA") on September 30, 1998, to be Quizno's ADs in Alabama and Georgia for a ten (10) year term and paid $126,500 for training and for the right to develop 18 counties in Georgia and Alabama. Except for the county where Birmingham is located, all the counties in the Gwins' territory were in sparsely populated rural counties. The ADMA contained a Development Quota which set forth the number of franchises to
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Through their counterclaims, the Gwins also seek attorneys' fees,

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be sold and stores to be opened. Prior to executing the ADMA, Quizno's emphasized the support they would provide and the opportunities for both parties to profit from this joint business venture and promised that any development quotas were only estimates since Quizno's had little experience outside of the urban market. The Gwins were not informed until after signing up of the detailed "Quizno's Site Requirements" which set the minimum and demographic criteria required for Quizno's to approve franchise store locations sold by the Gwins. These Site Requirements included minimum populations and traffic flow requirements which were inapplicable to the mainly small rural market areas in the Gwins' territory. Quizno's officials told the Gwins that it would be developing a different site criteria for such small markets, but it never did. The Gwins undertook their task with vigor. Despite their efforts, the Gwins were unable to meet their Quota, which was known to Quizno's. Although they asked for assistance from Quizno's, they received very little. The Gwins worked hard but could not open a single store in their first years, mainly because there were no Quizno's stores in their territory. Driving

approximately 8 hours to Atlanta to see a Quizno's store was impractical. As a result, the Gwins negotiated with Quizno's to permit them to open their own franchise store in their territory in hopes that their own store function as a show unit. Soon after the Gwins opened their own and first franchise store in the territory, the Gwins began selling and opening stores. However, the Gwins were never in compliance with the Quotas and received various certified mail notices from Quizno's on February 2, 2000, August 22, 2001, July 27, 2002, November 13, 2002, and September 23, 2003, for "failure to meet sales and opening goals." However, Quizno's never enforced any of these notices until it finally used the last default notice
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as the basis for terminating the Gwins in January 2004 on the stated ground of failure to meet sales and opening goals. After the Gwins received the repetitive default notices, the Gwins were reassured by Quizno's representatives that Quizno's would not take over their territory. Then, in June 2002, at meetings in Denver, Mr. Gwin personally met with Mr. Steven Schaffer, then Executive Vice President of Franchise Support Services (currently President of Quizno's). Mr. Schaffer told Mr. Gwin that Quizno's was not interested in taking back their territory and that they simply wanted him to succeed by continuing to develop the territory and "not to worry about meeting sales goals as long as they worked hard and close the gap." Mr. Schaffer testified at his deposition that he made such comments that there would be no terminations if the Gwins closed the gap. The Gwins relied on these representations from Quizno's representatives. After that June 2002 meeting with Mr. Schaffer, the Gwins hired an outside marketing specialist, Mr. Randy Trotter of HPC Franchising, to help market their territory. During the period from the June 2002 meeting until the September 23, 2003 default notice, the Gwins nearly tripled the number of franchises sold (from 9 sold to 26 sold) and more than doubled the store opening numbers (from 4 opened to 10 opened), thus closing the quota gap. They accomplished more sales and openings in that period than they had from the start in 1999 to June 2002, the date of the meeting with Mr. Schaffer. Nonetheless, they were terminated in on January 5, 2004, even though they had sold at least three more franchise stores which were pending opening. Immediately after terminating the Gwins, Quizno's took over the Gwins' territory as a company territory by replacing the Gwins with a Quizno's salaried employee.

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II. LEGAL AUTHORITY A. Breach of Contract / Breach of Implied Covenant of Good Faith and Fair Dealing. "Every contract contains an implied duty of good faith and fair dealing." Wells Fargo Realty Advisors Funding, Inc. v. Uioli, Inc., 872 P.2d 1359, 1362 (Colo. App. 1994); Amoco Oil Co. v. Erwin, 908 P.2d 493, 498 (Colo. 1995). "The duty of good faith and fair dealing applies when one party has discretionary authority to determine certain terms of the contract, such as quantity, price, or time." (Emphasis added.) Amoco Oil Co. v. Erwin, 908 P.2d, supra; Bayou Land Co. v. Talley, 924 P.2d 136, 154 (Colo. 1996) "The covenant may be relied upon . . . when the manner of performance under a specific contract term allows for discretion on the part of either party. . . . [Para.] Discretion occurs when the parties, at formation, defer a decision regarding performance terms of the contract." Amoco Oil Co. v. Erwin, 908 P.2d, supra. The covenant "may be used to protect a "weaker" party from a "stronger" party;" or more specifically, to protect the party (the "weaker" party) that defers, by way of the agreement, control of a contract term to the other party (the "stronger" party). Id. As more specifically stated by the Wells Fargo court: Each party to a contract has a justified expectation that the other will act in a reasonable manner in its performance. When one party uses discretion conferred by the contract to act dishonestly or to act outside of accepted commercial practices to deprive the other party of the benefit of the contract, the contract is breached." Wells Fargo Realty Advisors Funding, Inc. v. Uioli, Inc., 872 P.2d, supra, at 1363. In the present action, both the contract terms dealing with the Quotas and termination
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leave the issues of "quantity" and "time" in the discretion of Quizno's. The Gwins contend Quizno's acted dishonestly and in bad faith by massaging these terms to their benefit by so terminating the Gwins in order to replace them with a corporate employee of Quizno's. B. Fraud / Deceit. 1. Intentional Misrepresentation. In order to prevail on their claim for fraud, the

Gwins must establish by a preponderance of the evidence that Quizno's made a false representation of a material fact knowing that representation to be false; that the person to whom the representation was made was ignorant of the falsity; that the representation was made with the intention that it be acted upon; and, that the reliance resulted in damage to the Gwins. C.R.S. § 13-25-127(a); Coors v. Security Life of Denver Ins. Co., 112 P.3d 59, 66 (Colo. 2005). "A claim of fraud may be premised upon one party's `promise concerning a future act ... coupled with a present intention not to fulfill the promise.'" Brody v. Bock, 897 P.2d 769, 776 (Colo. 1995). "[A] false representation of a past or present fact is any words or conduct which create an untrue or misleading impression of the actual past or present fact in the mind of another." Russell v. First Am. Mortg. Co., 565 P.2d 972, 975 (Colo.App. 1977). "[W]here one party to a transaction induces the other party to enter it by willful misrepresentations, the representor cannot escape liability for his fraud by claiming that the representee could have investigated the representations made and would then have found that they were untrue." Hayden v. Perry, 134 P.2d 212, 214 (Colo. 1943). Fraud may be shown by circumstantial evidence including evidence of other similar transactions in the course of a systematic way of doing business. Kopeikin v. Merchants Mortg. and Trust Corp., 679 P.2d 599, 601 (Colo. 1984). Direct evidence of reliance is not required. Id. at 602.
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The Gwins anticipate the evidence will show Quizno's withheld site criteria until after the Gwins paid $126,000.00, and represented to the Gwins, without believing it to be true, that they would not be terminated if they worked hard and closed the developmental gap. Quizno's also represented to the Gwins that Quizno's would create site selection criteria for rural areas. The Gwins ultimately relied on those representations to their detriment and damage when they were terminated by Quizno's. 2. Nondisclosure. "The elements of the tort of fraudulent concealment are: (1) the

defendant's concealment of a material existing fact that in equity or good conscience should be disclosed; (2) the defendant's knowledge that the fact is being concealed; (3) the plaintiff's ignorance of the fact; (4) the defendant's intent that the plaintiff act on the concealed fact; and (5) the plaintiff's action on the concealment resulting in damage." Sussman v. Stoner, 143 F.Supp.2d 1232, 1239 (D. Colo. 2001). "A defendant has a duty to disclose to a plaintiff with whom he or she deals material facts that 'in equity or good conscience' should be disclosed," especially when he has stated facts that he knows will create a false impression unless other facts are disclosed. Mallon Oil, 965 P.2d 105, 111 (Colo. 1998). C. Negligent Misrepresentation. The tort of negligent misrepresentation provides a

remedy when money is lost due to misrepresentation in a business transaction. Western Cities Broadcasting, Inc. v. Schueller, 849 P.2d 44, 49 (Colo.1993). A claim of negligent

misrepresentation may be available to a party to a contract under tort law. Keller v. A.O. Smith Harvestore Prods., 819 P.2d 69, 72 (Colo.1991). "To establish a claim for negligent misrepresentation, it must be shown that the
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defendant supplied false information to others in a business transaction, and failed to exercise reasonable care or competence in obtaining or communicating information on which other parties justifiably relied." Mehaffy, Rider, Windholz & Wilson v. Central Bank Denver, N.A., 892 P.2d 230, 236 (Colo. 1995). The Gwins believe these elements are met here. D. Waiver. "Waiver has traditionally been defined as the intentional relinquishment of a

known right or privilege." Duran v. Housing Authority of City and County of Denver,761 P.2d 180, 183 (Colo. 1988). "Waiver of provisions of a lease may be inferred when a party engages in conduct which manifests an intent to relinquish the right or acts inconsistently with its assertion." Magliocco v. Olson, 762 P.2d 681, 685 (Colo.App. 1987). "The conduct must be free from ambiguity and clearly manifest the intention not to assert the right." Id. There is no breach of a contract when performance of one party is prevented by the conduct of the other party and the party thus prevented from performing is to be treated as though he has performed. American Indus. Leasing Co. v. Costello, 418 P.2d 881, 886 (Colo. 1966); Empson Packing Co. v. Clawson, 95 P. 546, 549 (Colo. 1908). More specifically, "He who prevents a thing from being done may not avail himself of the nonperformance which he has himself occasioned. Empson Packing Co. v. Clawson, supra. The Gwins contend that Quizno's waived its right to enforcement the termination term of the ADMA. E. Promissory Estoppel. The doctrine of promissory estoppel states, "A promise which the

promisor should reasonably expect to induce action or forbearance on the part of the promisee or a third person and which does induce such action or forbearance is binding if injustice can be avoided only by enforcement of the promise." Board of County Com'rs of Summit County v.
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DeLozier, 917 P.2d 714, 716 (Colo. 1996). The doctrine is an "extension of the basic contract principle that one who makes promises must be required to keep them." Id. "A promise that is binding pursuant to the doctrine of promissory estoppel is a contract, and full-scale enforcement by normal remedies is appropriate." Id. The elements of promissory estoppel are as follows: "(1) the promisor made a promise to the promisee; (2) the promisor should reasonably have expected that the promise would induce action or forbearance by the promisee; (3) the promisee in fact reasonably relied on the promise to the promisee's detriment; and (4) the promise must be enforced to prevent injustice." Patzer v. City of Loveland, 80 P.3d 908, 912 (Colo App 2003). As stated above, Mr. Schaffer made the promise to the Gwins that they would not be terminated if they worked harder and closed the development gap. By making this promise, Quizno's reasonably expected the promise would induce action by the Gwins; which the Gwins did ultimately to their detriment. Enforcement of the promise must be enforced. F. Unconscionability. "In order to support a finding of unconscionability, there must be

evidence of some overreaching on the part of one of the parties such as that which results from an inequality of bargaining power or under other circumstances in which there is an absence of meaningful choice on the part of one of the parties, together with contract terms which are unreasonably favorable to that party." Davis v. M.L.G. Corp., 712 P.2d 985, 991 (Colo.,1986) The factors the Court should consider in determining whether a contract term is unconscionable mitigating against enforcement are as follows: "(1) a standardized agreement executed by parties of unequal bargaining strength; (2) the lack of opportunity to read and become familiar with the document before signing it; (3) the use of fine print in the portion of
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the contract containing the provision; and (4) the absence of evidence that the provision was commercially reasonable or should reasonably have been anticipated. Also to be considered are: (1) the terms of the agreement, including substantive unfairness; (2) the relationship of the parties, including factors of assent, unfair surprise, and notice; and (3) all the circumstances surrounding the formation of the contract, including its commercial setting, purpose, and effect." Industrial Products Intern., Inc. v. Emo Trans, Inc., 962 P.2d 983, 988 (Colo.App.,1997) G. Quizno's Statute of Limitations Affirmative Defense on Fraud Claims. Although

Quizno's did not raise a statute of limitations affirmative defense in its Answer to the Gwins' Counterclaims, Quizno's did raise it in its Motion for Summary Judgment and were allowed to amend after discovery had closed. While Quizno's ADMA does provide for a statute of limitations different from Colorado law, the ADMA is completely silent in when the statute of limitations accrues. As such, C.R.S. 13-80-108 on accrual and case law are controlling. The statute of limitations regarding this claims did not begin to accrue until Quizno's terminated the Gwins on January 5, 2004 when the Gwins were damaged or injured. Colorado law does not permit a claim to accrue until there has been damage. Daugherty v. Allstate Ins. Co., 55 P.3d 224, 226 (Colo. App. 2002). "The limitations period only begins when the plaintiff discovers or should have discovered damage that would entitle her to maintain a cause of action based on that damage." Homes, Inc., 88 P.3d 639, 641 (Colo. App. 2003). H. Quinzo's Release Defense. The Gwins anticipate that Quizno's will claim that certain of Stiff v. BilDen

Gwins' Counterclaims were released by way of a letter agreement that allowed the Gwins to open a first store, in order to have a show unit.
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"Under Colorado law, `[a]greements attempting

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to exculpate a party from that party's own negligence have long been disfavored.'" Anderson v. Eby, 998 F.2d 858, 861 (10th Cir. 1993) (quoting Heil Valley Ranch, Inc. v. Simkin, 784 P.2d 781, 783 (Colo. 1989). In determining the validity of such agreements, the Court must "closely scrutiniz[e]" the agreement to "effectuate the manifest intention of the parties" and to ensure that such intent is expressed in clear and unambiguous language...." (Emphasis added.) Chadwick v. Colt Ross Outfitters, Inc., supra.; CMCB Enterprises, Inc. v. Ferguson, 114 P.3d 90, 96 (Colo. App. 2005). In the end, "(e)ven if the intent of the parties is unambiguously expressed in the contract, however, a release agreement may still violate public policy if it ... was entered into in an unfair manner." (Emphasis added.) Chadwick v. Colt Ross Outfitters, Inc., supra.

Demonstrating that the defense is available to Quizno's, there is actually an anti-waiver provision contained in Paragraph 4 as follows: "Acknowledgement. You also acknowledge that this Letter Agreement does not waive or vary the rights and obligations arising from any present or future franchise agreement or the area director marketing agreement between you and Quizno's . . ." Dated: February 14, 2006 R&B Management Group, LLC, Royce Gwin, and Rebecca Gwin PREEO SILVERMAN GREEN & EGLE, P.C. By: /s/ Lee H. Freedman Lee H. Freedman, Esq. Eldon E. Silverman, Esq. 1401 Seventeenth Street, Suite 800 Denver, CO 80202 (303) 296-4440

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CERTIFICATE OF SERVICE I hereby certify that on the 14th day of February, 2006, a true and correct copy of the foregoing DEFENDANTS' TRIAL BRIEF was delivered to the following by e-service and email to: Fredric A. Cohen, Esq. E-Mail Address: [email protected] Piper Rudnick 203 North LaSalle Street, Suite 1800 Chicago, IL 60601 Leonard H. MacPhee, Esq. E-mail Address: [email protected] Chantell Taylor E-mail Address: [email protected] Perkins Coie, LLP 1899 Wynkoop Street, Suite 700 Denver, CO 80202 Magistrate Judge Boyd N. Boland U.S. District Court District of Colorado 901 19th Street Denver, CO 80294 s/Laura J. Lewis Laura J. Lewis

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