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-1062-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.

PLAINTIFFS' TRIAL BRIEF

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I. INTRODUCTION This case presents a straightforward contract dispute. Quizno's terminated the contract between the parties because Defendants, whose responsibility it was to sell and open Quizno's restaurants in their territory, breached a pivotal provision of that contract -- indeed the whole purpose of the contract ­ when they failed to open the minimum number of restaurants required. Quizno's terminated the contract in accordance with its express terms, had every right to terminate the contract, and therefore, is entitled to judgment. Defendants simply struggle with the contract's express terms and their own material breach arguing that (1) they should not be held to the development quota to which they themselves agreed; (2) Quizno's somehow waited too long to exercise its right to terminate the contract; or (3) Quizno's efforts to encourage Defendants to comply with their quota somehow prevented Quizno's from terminating despite Defendants' breach and failure to cure. The evidence will not support any of these arguments. To the contrary, the evidence will show that Defendants negotiated and agreed to the quota and fully understood Quizno's could terminate the contract if they failed to meet it, and that Quizno's gave Defendants every opportunity to succeed but never waived its rights in the event Defendants failed. II. BACKGROUND Quizno's is a Denver-based franchisor which grants franchises to qualified persons to operate Quiznos Sub restaurants throughout the United States and abroad. To manage its franchise system, Quizno's engages area directors to represent it in some geographic locations. Defendants were Quizno's area directors to whom Quizno's entrusted a territory in the Birmingham, Alabama area.

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In September 1998, Defendants Royce Gwin and Rebecca Gwin entered into an Area Director Marketing Agreement ("ADMA") with The Quizno's Corporation, The Quizno's Franchise Company LLC's predecessor. The ADMA had a 10-year term. R&B assumed all obligations under the ADMA pursuant to an Agreement and Conditional Consent to Transfer ("ACCT") and the Gwins personally guaranteed all of R&B's obligations under the ADMA.1 R&B's appointment as an area director was governed by the ADMA. R&B agreed to develop the territory in accordance with a minimum specified development quota and to perform certain sales, site and support services in the territory on Quizno's behalf. In exchange, R&B was to receive a share of each franchisee's initial franchise fees and a portion of the ongoing royalty payments. A copy of the ADMA is provided herewith as Attachment 1 (it will be Exhibit 4 at trial). Defendants' principal obligation was to develop their territory in accordance with their minimum quota. R&B agreed that during the ADMA term it would "meet and maintain the franchise sales and opening goals ("Development Quota ") set forth in Exhibit I to this Agreement" by selling the agreed number of franchises and opening the agreed to number of restaurants within the territory. See ADMA § 4.1. The ADMA specifically authorized Quizno's to terminate the agreement if R&B failed to meet the quota and failed to correct such failure within 90 days after written notice. ADMA § 17.2(c).

The Gwins now are guarantors of R&B's obligations in the ADMA, but are not otherwise parties to it. Therefore, they lack standing to assert the claims they are making.

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For a franchise system and concept, like Quizno's, to succeed, it must open stores in all territories nationally. Growth is essential to the brand in order to maintain and increase market share in the highly competitive quick service restaurant industry. Growth must be constant in order to secure the best locations in a developing territory. Indeed, while Defendants were failing to open stores as required by their Area Director Agreement, Quizno's competitors were taking the good locations. Growth is also crucial because it ensures increased recognition of the brand (regionally and nationally) which in turn generates higher sales volumes at all stores. In short, growth in numbers of stores sustains the brand and marks and protects existing and future "mom and pop" franchisees whose success depends so heavily on that brand and those marks. When Quizno's entrusts development of a territory to an area director, it depends on the area director to fulfill the contractual obligation by working fulltime and exceeding the bare minimum number of store openings in the development quota. Mr. Gwin understood this and entered into the ADMA with his eyes wide open. He will admit that he read the ADMA and understood that he was required to open restaurants in accordance with his quota and that Quizno's had the right to terminate the ADMA if he failed to do so. Indeed, the evidence will show that Mr. Gwin negotiated to reduce the number of restaurants he was required to open and that Quizno's agreed to a slight reduction at his insistence. Mr. Gwin knew that by signing the ADMA it was important to Quizno's that he meet the development quota and that he bore the risk of his failure to do so. The evidence will show that contrary to the express terms of the ADMA, Mr. Gwin maintained other full time employment for the first several years of the area directorship at a bank located a several hours drive outside of his territory. His lack of attention to the territory

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manifested itself quickly as he fell behind the sales and opening quota from the beginning and never caught up. For example, Mr. Gwin was required by have three stores open by the end of the third quarter of 2000 when the first restaurant opened within the territory. Mr. Gwin was two stores behind his opening quota at that time. The gap only increased. By the third quarter of 2001, there were two stores open within Defendants' territory, as compared to the required seven ­ thus increasing the deficit to five. By the third quarter of 2002 the ADMA required 15 open stores, but there were only five; the gap now increased to ten. By the end of the third quarter 2003, there were to be 25 stores open but Gwin had only opened ten ­ the gap had increased to 15. Mr. Gwin opened zero restaurants in the next quarter, even though his schedule required him to open an additional three stores (so that the total open should have been 28). Therefore, at the end of the fourth quarter 2003 Mr. Gwin was behind by 18 stores. It was at this point that Quizno's exercised its right to terminate the ADMA. Quizno's had worked with Mr. Gwin as long as it could. Indeed, over the course of several years, particularly starting in 2002, Quizno's sent notices of default and followed up with specific conversations and inquiries with Mr. Gwin regarding his development. The constant and consistent message from Quizno's was that it wanted Mr. Gwin to succeed and it wanted him to open the necessary number of restaurants (and many more). On at least one occasion, Quizno's informed him that Quizno's would not exercise its right to terminate the ADMA as long as he was working hard and reducing his openings deficit, that is, closing the gap. But, as described above, notwithstanding Quizno's patience, the Gwins failed to close the gap. Rather, the gap continued to widen. At no time did any Quizno's representative indicate to Mr. Gwin

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that Quizno's was waiving its right to terminate the agreement or that the several notices of default were simply formalities and that he should not worry about them. Quizno's was clear that if Mr. Gwin did not close the gap, Quizno's would exercise its right to terminate the ADMA. Quizno's has now taken over the territory and is operating it as a corporate market. While Mr. Gwin left the territory in bad shape, with below average unit volumes and very limited brand recognition given the complete lack of development, Quizno's has been able to pick up the sales pace and is now developing the territory. Quizno's has found, and the evidence from various Quizno's employees and executives will show, that the territory should have been developed to a much greater extent and much quicker than the bare minimum obligations set forth in the development quota of the ADMA. Indeed, according to the population statistics and demographics, the Gwin territory will support over 90 Quiznos Sub restaurants. Further, the evidence will show that while the territory was languishing under the Gwins' watch, Quizno's competitors were developing the territory in a much more appropriate pace and saturation level. Indeed, at the time of termination, as compared to the Quizno's ten opened stores, Subway had 76 open stores and McDonald's had 79 open stores within the territory. The evidence will show that Subway and McDonald's have similar demographic and site criteria to support their stores. This is simple: the contract said develop or else, he failed, we terminated, we win. The Gwin Parties have claimed that Quizno's is liable to them for terminating the ADMA. They have claimed alternative claims and affirmative defenses in support of this contention: (1) the termination right in the ADMA was unconscionable because the sales and openings schedule was, allegedly, "unattainable" (Counterclaim, ¶ 23.2); (2) Quizno's breached the implied

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covenant of good faith and fair dealing (Id. ¶ 23.1); (3) Quizno's should be estopped from asserting or waived its right to terminate (Id. ¶ 23.4); and (4) Quizno's made misrepresentations when it indicated it would not terminate the ADMA if the Gwins were working hard and closing the development gap. Id ¶¶ 26-38.2 None of these has any basis in fact or in law. III. LEGAL ARGUMENT Quizno's has addressed the elements of Defendants' claims and affirmative defenses and some of the reasons why Defendants will not be able to prove those elements in Quizno's Motion to Dismiss and Motion for [Summary] Judgment. Quizno's incorporates those prior motions and briefs. Below is an outline of the main points. A. Defendants' Claim that the Development Quota was unconscionable fails. As described more fully in Quizno's Motion for [Summary] Judgment, the Gwins' claim that the development quota was unconscionable is barred by a release signed by the Gwins in February 2000, as well as the contractual one year statute of limitations. Further, none of the elements necessary to show an unconscionable contract are present in this case. The Defendants will not show facts to support the factors that could support a finding of unconscionability. See Davis v. M.L.G. Corp., 712 P.2d 985, 991 (Colo.1986). The Defendants will not be able to show that they did not have an opportunity to read and become familiar with the Area Director Agreement before signing it. They read it, negotiated to reduce the opening quota, and understood completely that Quizno's had the right to terminate the Area Director

2

The Court has granted Quizno's summary judgment on the claim that the parties' orally amended the

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Agreement if they failed to achieve the required sales and openings. Further, the sales and opening quotas were not in fine print. Moreover, as set forth above, the evidence will show that the claim lacks factual merit in that the territory will support many more than the 38 required stores and that any diligence by Mr. Gwin in performing his area director duties would have resulted in his exceeding the development quota.3 B. Defendants Cannot Prove that Quizno's Termination Breached the Implied Covenant of Good Faith and Fair Dealing As more fully described in the prior motions, the implied covenant of good faith and fair dealing may not be used to alter the clear terms of a contract. Bayou Land Co. v. Talley, 924 P. 2d 136, 154 (Colo. 1996). The implied covenant cannot be used to contradict the express terms of a contract. Amoco Oil Co. v. Ervin, 908 P.2d 493, 498 (Colo. 1995). Therefore, courts will not inject "new substantive terms or conditions" into the contract under the guise of the implied covenant of good faith and fair dealing. City of Boulder v. Pub. Serv. Co. of Colo, 996 P.2d 198, 204 (Colo. App. 1999). Defendants' claims that Quizno's should not be permitted to terminate the ADMA for Defendants' failure to comply with the Development Quota pursuant to the implied duty of good faith and fair dealing would require this court to alter the terms of the clear contract. The ADMA specifically provides that Quizno's may terminate it if the Defendants failed to meet

contract.
3

Defendants' arguments regarding the Quizno's site criteria are, therefore, a red herring.

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their Development Quota. §§ 4.1 and 17. Defendants do not dispute that they failed to meet their Development Quotas. C. Defendants Cannot Prove Quizno's Waived Its Right to Enforce the Development Quota or Should Otherwise be Estopped from Doing So. Defendants contend that the alleged statement by a Quizno's representative that Quizno's would not terminate that ADMA as long as they were working hard and "closing the gap" and Quizno's delay in terminating the ADMA when they were in default for years should prevent Quizno's from being allowed to terminate the ADMA. They argue Quizno's has waived its right to terminate the ADMA or should be estopped from doing so. Defendants will not present evidence sufficient to satisfy their burden of providing these affirmative defenses. Waiver is only present when a party intentionally relinquishes a known right: "Waiver is the intentional relinquishment of a known right. To establish a waiver, there must be a clear, unequivocal, and decisive act of the party demonstrating the relinquishment." See Universal Resources Corp. v. Ledford, 961 P.2d 593, 596 (Colo. App. 1998) and cases cited on pp. 13 and 14 of Quizno's Motion for [Summary] Judgment. The statement to Gwin in 2002 that Quizno's would not terminate him as long as he was closing the gap between open stores and the quota is far from the "clear, unequivocal, and decisive act" required to demonstrate an intentional relinquishment of a contract right, such that Quizno's would be "forever deprived of its benefits." Moreover, Quizno's course of conduct in sending the Defendants more than one notice letter, thereby providing them with several opportunities to achieve compliance with the terms of the ADMA, does not affect a waiver of Quizno's right to terminate the agreement due to the Defendants' breach. Boulder & B. Placer Co. v. Maxwell, 48 P. 815 (Colo. 1897) (holding that

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sellers of an equitable mortgage did not waive their right to forfeiture of the property where the evidence "teem[ed] with notices . . . that unless the plaintiff paid what was due the right of forfeiture would be exercised"). Quizno's flexibility and willingness to work with the Defendants, and its decision not to immediately exercise its right of termination does not amount to "a clear, unequivocal, and decisive act" demonstrating the intent to forever relinquish the right to enforce the ADMA's termination clause. Promissory estoppel is not available either because the Defendants will not prove detrimental reliance, as required. See Patzer v. City of Loveland, 80 P.3d 908, 912 (Colo. App. 2003). They only claim that they did what they were already required to do under the terms of the ADMA after being told Quizno's would not terminate the ADMA as long as they were working hard and closing the gap. They claim they worked hard at their already existing contractual obligations. Nor can Defendants show the asserted reliance was justified or reasonable. See Nelson v. Elway, 908 P.2d 102, 110 (Colo. 1995); Hansen v. GAB Business Servs., Inc., 876 P.2d 112, 114 (Colo.App.1994). "[W]hen a defendant makes a conditional representation to a plaintiff . . . any detrimental change of position on the part of the plaintiff prior to the occurrence of the condition is unreasonable as a matter of law." Nelson, 908 P.2d at 110. The evidence will show Defendants were not meeting the alleged condition of "closing the gap" as they were falling further and further behind on their openings Development Quota. The Gwin Parties' alleged reliance is also unreasonable because they relied on an alleged oral modification of the ADMA, and the express terms of the ADMA preclude oral modifications and would be barred by the parol evidence rule. See Nelson v. Elway, 908 P.2d

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102, 107 (Colo.1995); O'Reilly v. Physicians Mut. Ins. Co., 992 P. 2d 644, 647 (Colo. App. 1999). D. Defendants Cannot Prove Their Misrepresentation Claim Because They Cannot Prove Detrimental Reliance To prove their fraudulent or negligent misrepresentation claim, Defendants must prove that they reasonably and detrimentally relied on the alleged misrepresentation. M.D.C. Board, Inc. v. Mortimer, 866 P.2d 1380, 1381-82 (Colo. 1994). Here, for the same reasons described above, Defendants cannot show reasonable or detrimental reliance. Further, there was no misrepresentation. Quizno's conditioned its non-termination on Defendants' closing the gap between the actual number of open restaurants and the required number. Because the gap was increasing, the termination was consistent with the statement. And, it is well-settled that one cannot maintain a claim for misrepresentation with respect to a promise of future performance. IV. CONCLUSION .For the foregoing reasons, Quizno's respectfully requests that this Court enter judgment in their favor and against the Defendants with respect to all of the Defendants' claims, award Quizno's its attorneys' fees and costs pursuant to the ADMA's terms and award such further and other relief as the Court deems necessary and proper.

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Dated this 14th day of February 2005 Respectfully submitted, s/ Leonard H. MacPhee Leonard H. MacPhee Attorney for Plaintiffs Perkins Coie LLP 1899 Wynkoop Street, Suite 700 Denver, CO 80202 Telephone: (303) 291-2300 Facsimile: (303) 291-2400 Email: [email protected] and Fredric A. Cohen DLA Piper Rudnick Gray Cary 203 North LaSalle Street, Suite 1800 Chicago, IL 60601 (312) 368-4000

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CERTIFICATE OF SERVICE I hereby certify that on February 14, 2006 I electronically filed the foregoing with the Clerk of Court using the CM/ECF system which will send notification of such filing to the following email addresses:
·

Gilbert R. Engle [email protected] [email protected]

·

Eldon E. Silverman [email protected] [email protected]

and hereby certify that I have mailed the foregoing to the following non EM/ECF participant via U.S. Mail, postage prepaid:

J.E. Sawyer, Jr. Attorney at Law 203 South Edwards Street Enterprise, AL 36330

s/ Leonard H. MacPhee Leonard H. MacPhee Attorney for Plaintiffs Perkins Coie LLP 1899 Wynkoop Street, Suite 700 Denver, CO 80202 Telephone: (303) 291-2300 Facsimile: (303) 291-2400 Email: [email protected]

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