Williams v. Stone

Opinions of the United
1997 Decisions States Court of Appeals
for the Third Circuit

3-26-1997

Williams v. Stone
Precedential or Non-Precedential:

Docket 96-1433

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 UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT

No. 96-1433

MICHAEL WILLIAMS; MARILYN WILLIAMS, h/w,
sole shareholders in and on behalf of HELENED INCORPORATED,
a dissolved Pennsylvania Corporation,

Appellants

v.

ELLIOTT W. STONE; HAROLD G. STONE; RICHARD ABT;
JOHN L. BARRY; AL BISCARDI

On Appeal from the United States District Court
for the Eastern District of Pennsylvania
(D.C. No. 96-cv-00014)

Argued January 9, 1997

BEFORE: COWEN, ALITO and ROSENN,
Circuit Judges

(Filed March 26, 1997)

Ralf W. Greenwood, Jr., Esq. (argued)
Ralf W. Greenwood & Associates
1717 Arch Street
Bell Atlantic Tower, 37th Floor
Philadelphia, PA 19103

COUNSEL FOR APPELLANTS
MICHAEL WILLIAMS
MARILYN WILLIAMS

C. Joseph Curran, Jr.
Attorney General of Maryland
Dale E. Cantone, Esq. (argued)
Office of Attorney General of Maryland
200 Saint Paul Place
20th Floor
Baltimore, MD 21202

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 COUNSEL FOR THE
STATE OF MARYLAND
AMICUS CURIAE IN SUPPORT OF APPELLANT

Benjamin A. Levin, Esq. (argued)
Levin & Hluchan
1200 Laurel Oak Road
Suite 100
Voorhees, NJ 08043

COUNSEL FOR APPELLEES
ELLIOTT W. STONE
HAROLD G. STONE
RICHARD ABT
JOHN L. BARRY
AL BISCARDI

OPINION

COWEN, Circuit Judge.

Plaintiffs appeal from the April 16, 1996, judgment of the

district court granting defendants’ motion to dismiss the amended

complaint pursuant to FED. R. CIV. P. 12(b)(6). See Williams v.

Stone, 923 F. Supp. 689 (E.D. Pa. 1996). We will affirm the

judgment of the district court, although on different grounds

than those relied upon by the district court.
I.

West Coast Video Enterprises, Inc. (“WCVE”) is a

Pennsylvania corporation with its principal place of business in

Pennsylvania. WCVE sells franchises for retail video rental

businesses operating under the name “West Coast Video.” WCVE

supplies its franchisees with equipment, computers, software,

video films, expertise, and training in the operation of retail

video rental businesses. By September of 1986, WCVE had at least

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221 franchises in fourteen states, including eleven in Maryland.

Defendants are executives, employees, and agents of WCVE

(collectively “WCV”).

In June of 1985, plaintiffs Michael and Marilyn Williams,

residents of Pennsylvania, visited a WCVE store located in

Philadelphia for the purpose of investigating the purchase of a

WCVE franchise. By November of 1988, defendant John Barry, Vice

President of Franchise Development for WCVE, had written the

Williamses twice and phoned them six times concerning their

prospective purchase of a franchise.

In March of 1989, the Williamses visited WCVE corporate

headquarters in Philadelphia to further investigate the purchase

of a WCVE franchise. At that time executives of WCVE made a

number of representations alleged to have been fraudulent. On

March 29, 1989, the Williamses, acting through their wholly-owned

corporation, Helened, Inc., purchased a WCVE franchise located in

Ocean City, Maryland pursuant to a written franchise agreement

(“the Franchise Agreement”). The Franchise Agreement was

executed in Pennsylvania. Article IX, paragraph 2 of the

Franchise Agreement provides: “[N]either this Agreement nor any

of its rights or privileges . . . shall be assigned, transferred,

mortgaged, charged, encumbered or divided in any manner by the

Franchisee or anyone else unless the prior written approval of

the Franchisor is obtained.” App. at 209. Article IX, paragraph

2E of the Franchise Agreement provides that such approval may be

conditioned on
[t]he Execution by the Franchisee of a
release of any and all claims against

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 Franchisor, and the Franchisor’s officers,
directors, agents and employees, arising out
of or related to this Agreement, which
release shall contain such language and be of
the form chosen by Franchisor. The release
shall not release any liability specifically
provided for by any state statute regulating
franchising.

Id. at 210. Article XIII of the Franchise Agreement provides, in

part: “This Agreement shall be construed according to the laws

of the Commonwealth of Pennsylvania . . . .” Id. at 214.

The Williamses opened the store in September of 1989. They

claim that WCVE failed in several respects to abide by its

obligations as set forth in the Franchise Agreement, and they

sold the store to a third party some 27 months later. As a

condition of WCVE’s consent to this sale, the Williamses signed a

release of any and all claims against WCVE and its officers,

directors, agents, and employees (“the Release”). The Release

was executed in Ocean City, Maryland. At the time the Release

was signed, more than seven years remained on the Franchise

Agreement.

The Williamses brought this action in the district court on

January 2, 1996. In an amended complaint containing ten causes

of action, the Williamses alleged that defendants operated WCVE

as an “enterprise” in violation of the Racketeer Influenced and

Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1962(c) (1984).

In support of their RICO claims, they alleged that WCV engaged in

the following “racketeering activity,” within the meaning of 18

U.S.C. § 1961(1) (Supp. 1997): (1) criminal violations of the

Maryland Franchise Registration and Disclosure Act (“MFRDA”), MD.

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CODE ANN., BUS. REG. § 14-201 et. seq. (1992);1 (2) violations of

Federal Trade Commission regulations promulgated at 16 C.F.R. §

436.1 et seq., pursuant to 15 U.S.C. § 45(a)(1) (Supp. 1996); (3)

violations of the Aid to Small Businesses Act, 15 U.S.C. § 645(a)

(1976); and (4) bank fraud in violation of 18 U.S.C. § 1344

(Supp. 1996). The Williamses further alleged that WCV conspired

to engage in the above-described racketeering activity in

violation of 18 U.S.C. § 1962(d) (Supp. 1996).

On April 16, 1996, the district court granted WCV’s motion

to dismiss the amended complaint on the grounds that the Release

bars any action by the Williamses against WCV. See Williams, 923

F. Supp. at 693.2 This appeal followed.
II.

The district court had subject matter jurisdiction over this

federal RICO action pursuant to 28 U.S.C. § 1331 (1993).

Pursuant to 28 U.S.C. § 1291 (1993), we exercise appellate

jurisdiction over the district court’s final order dismissing the

1
We note that the current version of the Maryland Franchise
Registration and Disclosure Act (“MFRDA”) went into effect in
1992, after the operative facts relevant to this action occurred.
Because the parties have not alerted us to any relevant
distinctions between this version and the former version of the
MFRDA, we cite to the current version, as do the parties.
2
WCV raised two additional arguments in its motion to dismiss
the amended complaint: (1) that the Williamses’ RICO claims are
barred by the statute of limitations; and (2) that the Williamses
have failed adequately to plead a pattern of racketeering activity
pursuant to RICO. See Williams v. Stone, 923 F. Supp. 689, 691
(E.D. Pa. 1996). The district court relied solely on WCV’s
Release argument in dismissing the amended complaint and did not
address these two additional issues. See id. at 693 & n.3.
Accordingly, and in light of our disposition of this matter, we do
not address the additional defenses.

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amended complaint.
A.

The parties agree that, even though this matter is premised

on federal causes of action, state law governs the applicability

of a release to those causes of action. See Three Rivers Motors

Co. v. Ford Motor Co., 522 F.2d 885, 892 n.15 (3d Cir. 1975).

The parties disagree over which state law applies -- Pennsylvania

or Maryland. WCV claims that Pennsylvania law applies, given the

choice-of-law provision in the Franchise Agreement, while the

Williamses claim Maryland law applies.3

Before engaging in an extensive and complex analysis of the

thorny choice-of-law questions this case presents, we must first

determine whether there exists a true conflict between the

application of Pennsylvania and Maryland law. Under general

conflict of laws principles, where the laws of the two

jurisdictions would produce the same result on the particular

issue presented, there is a “false conflict,” and the Court

should avoid the choice-of-law question. See Lucker Mfg. v. Home

Ins. Co., 23 F.3d 808, 813 (3d Cir. 1994) (applying Pennsylvania

choice-of-law rules); Coons v. Lawlor, 804 F.2d 28, 30 (3d Cir.
1986) (same); In re Complaint of Bankers Trust Co., 752 F.2d 874,

3
WCV states that “Plaintiffs have abandoned . . . on appeal”
the argument that “the parties failed to make an effective choice
of Pennsylvania law as the law applicable to their franchise
relationship,” and now argue “for the first time that a thorough
choice of law analysis was necessary to determine the state law
applicable to the Release.” Appellees’ Br. at 2; see also id. at
8. The distinction WCV attempts to draw is without substance. We
have not been alerted to any difference between the Williamses’
position here and the position they took in the district court.

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882 (3d Cir. 1984) (same); Rohm and Haas Co. v. Adco Chem. Co.,

689 F.2d 424, 429 (3d Cir. 1982) (applying New Jersey choice-of-

law rules).

As the Williamses essentially concede, if Pennsylvania law

applies, the Release is valid and bars their action.4 However,

the parties disagree over whether the Release is valid pursuant

to Maryland law as well. Thus, in order to determine whether a

true conflict is presented, we must decide which party proffers

the correct interpretation of Maryland law.
B.

Section 14-226 of the Maryland Code Annotated, Business

Regulations provides: “As a condition of the sale of a

franchise, a franchisor may not require a prospective franchisee

to agree to a release, assignment, novation, waiver, or estoppel

that would relieve a person from liability under this subtitle”

(emphasis added). The Williamses contend that this provision
4
The Williamses also contend that the Release is invalid as
unsupported by consideration. Under both Maryland law, see
Vogelhut v. Kandel, 517 A.2d 1092, 1096 (Md. 1986), and
Pennsylvania law, see Channel Home Ctrs. v. Grossman, 795 F.2d
291, 299 (3d Cir. 1986) (applying Pennsylvania law); Stelmack v.
Glen Alden Coal Co., 14 A.2d 127, 128 (Pa. 1940); PNC Bank, N.A.
v. Balsamo, 634 A.2d 645, 655 (Pa. Super. 1993), consideration for
a promise consists of either some benefit to the promisor or some
detriment to the promisee. In a nearly identical fact pattern,
using an identical definition of consideration pursuant to
Virginia law, the Court of Appeals for the Fourth Circuit has
written that the benefit consisting of a franchisee’s “ability to
get out of a business which he had determined was not profitable .
. . constitutes sufficient consideration to support [a]
release[].” Brock v. Entre Computer Ctrs., Inc., 933 F.2d 1253,
1261 (4th Cir. 1991). We agree.
Counsel for the Williamses additionally contended at oral
argument, for the first time, that the Release was unconscionable.
In light of the delay in raising this issue, we decline to
address this contention.

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renders the Release invalid if Maryland law applies.

WCV argues that because section 14-226 protects only

“prospective” franchisees, and because the Release was signed

when the Williamses were already franchisees, the Williamses may

not rely on section 14-226 to avoid the Release, even assuming

arguendo that Maryland law applies. The district court agreed

with this reasoning and relied on it, in part, in dismissing the

amended complaint. See Williams, 923 F. Supp. at 692-93. WCV

also argues that, assuming Maryland law applies, section 14-226

invalidates the Release only as to causes of action grounded in

the MFRDA, and that the Release still bars the Williamses from

bringing this federal RICO action. Because we agree with this

second contention, we do not address whether the district court

correctly held that section 14-226 is inapplicable to this matter

on the ground that the Williamses were not “prospective

franchisee[s]” when they executed the Release.
1.

The plain language of section 14-226 supports WCV’s

contention that that provision invalidates the Release only

insofar as the Release purports to waive a cause of action

pursuant to the MFRDA. Maryland could have, but chose not to,

forbid a franchisor from requiring a franchisee to agree to a

release or waiver “that would relieve a person from liability.”

Cf. 815 ILL. COMP. STAT. ANN. 705/41 (West 1996) (“Any condition . .

. purporting to bind any person acquiring any franchise to waive

compliance with any provision of this Act or any other law of
this State is void.”) (emphasis added); S.D. CODIFIED LAWS § 37-5-

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12 (Michie 1996) (“Any condition . . . in any agreement evidenced

by a franchise agreement . . . purporting to waive compliance

with any provision of this chapter, or other provision of state

law applying to such agreements[,] is void as a matter of public

policy.”) (emphasis added); VA. CODE ANN. § 59.1-21.11(10) (Michie

1996) (“Any provision in any agreement or franchise purporting to

waive any right or remedy under this chapter or any applicable

provisions of the Petroleum Marketing Practices Act (15 U.S.C. §

2802 et. seq.) shall be null and void.”) (emphasis added). By

adding the words “under this subtitle,” the Maryland legislature

substantially limited the reach of the anti-waiver provision. We

must examine the Williamses’ claims to determine whether they are

premised on WCV’s alleged “liability under” the MFRDA.
2.

The Williamses have brought this action pursuant to 18

U.S.C. § 1962(c) and (d). Section 1962(c) provides:
It shall be unlawful for any person employed
by or associated with any enterprise engaged
in, or the activities of which affect,
interstate or foreign commerce, to conduct or
participate, directly or indirectly, in the
conduct of such enterprise’s affairs through
a pattern of racketeering activity or
collection of unlawful debt.

“Racketeering activity” is defined as, inter alia, conduct
involving any one of nine enumerated offenses that “is chargeable

under State law and punishable by imprisonment for more than one

year.” 18 U.S.C. § 1961(1)(A). Section 1962(d) forbids

conspiring to violate, inter alia, section 1962(c).

The Williamses have alleged that WCV engaged in

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“racketeering activity” by violating certain criminal provisions

of the MFRDA. Thus, the Williamses argue, WCV’s liability arises

under the MFRDA, even as this liability provides the predicate

act under RICO. According to the Williamses, the anti-waiver

provision forbidding a release “from liability under this

subtitle” prohibits WCV from extracting not only a release of

claims brought directly pursuant to the MFRDA, but also a release

of RICO claims predicated on allegations of criminal violations

of the Maryland statute.

This contention is at odds with our decision in United

States v. Forsythe, 560 F.2d 1127, 1135 (3d Cir. 1977). In that

case, criminal indictments were brought pursuant to 18 U.S.C. §

1962(c) and (d), charging defendants with “racketeering

activities” consisting of “`acts of bribery . . . in violation of

the laws of the Commonwealth of Pennsylvania.’” Id. at 1131-32

n.2 (quoting indictment) (alteration in original). The district

court dismissed some of the indictments based on the fact that

the two-year limitations period for bribery under Pennsylvania

law had expired. See id. at 1134 & n.9.

We reversed, holding that “the applicable period of

limitations is governed by federal, rather than state, law.” Id.
at 1134. We reasoned:
RICO is a federal law proscribing various
racketeering acts which have an effect on
interstate or foreign commerce. Certain of
those racketeering, or predicate[,] acts
violate state law and RICO incorporates the
elements of those state offenses for
definitional purposes. State law offenses
are not the gravamen of RICO offenses. RICO
was not designed to punish state law
violations; it was designed to punish the

10
 impact on commerce caused by conduct which
meets the statute’s definition of
racketeering activity. To interpret state
law offenses to have more than a definitional
purpose would be contrary to the legislative
intent of Congress and existing state law.

Id. at 1135 (footnote omitted); see also United States v.

Pungitore, 910 F.2d 1084, 1131 (3d Cir. 1990) (“[T]he state

offenses enumerated in section 1961(1) are merely

definitional.”); United States v. Davis, 576 F.2d 1065, 1066-67

(3d Cir. 1978); United States v. Frumento, 563 F.2d 1083, 1087

(3d Cir. 1977) (“`[R]eference to state law [in section

1961(1)(A)] is necessary only to identify the type of unlawful

activity in which the defendant intended to engage.’”) (quoting

United States v. Cerone, 452 F.2d 274, 286 (7th Cir. 1971))

(alterations added). We have applied the teachings of Forsythe

and its progeny in the civil RICO context. See, e.g., Rose v.

Bartle, 871 F.2d 331, 361-62 (3d Cir. 1989).

While this case raises a different legal issue, the

reasoning utilized in Forsythe applies here with full force.

RICO is a federal statute. It arguably incorporates elements of

certain offenses under the MFRDA as “racketeering activity,” or

“predicate acts.” However, state law in this case simply

provides the meaning of “racketeering activity” pursuant to

section 1961(1)(A). Thus, the state law offenses the Williamses

claim were committed by WCV serve no more than a “definitional

purpose” vis-à-vis an allegation of a RICO violation -- they

merely define the types of activity that may constitute predicate

acts pursuant to the federal RICO statute. The gravamen of

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their RICO cause of action is not the violation of state law, but

rather certain conduct, illegal under state law, which, when

combined with an impact on commerce, constitutes a violation of

federal law. Therefore, it is not alleged that WCV is subject to

“liability under” the MFRDA; their liability to the Williamses,

if any, stems from RICO. Assuming arguendo that Maryland law

applies, because section 14-226 invalidates the Release only

insofar as it relieves WCV of “liability under” the MFRDA, the

Release is valid to the extent it relieves WCV of liability under

any other statute, including RICO.
3.

The Williamses urge that, even if section 14-226 applies

only to those waivers of liability under the MFRDA, the Release

would be void ab initio pursuant to Maryland law because the

Release purports to waive all of WCV’s liability and because it

does not contain a severability clause. We reject this argument.

The Franchise Agreement provides that any release executed by

the Williamses in exchange for consent to assign the franchise

“shall not release any liability specifically provided for by any

state statute regulating franchising.” App. at 210.

Furthermore, the Franchise Agreement contains a severability

clause. While the Release itself contains no such exceptions and

no severability clause, the Release is inextricably intertwined

with the Franchise Agreement, because the execution by the

Williamses of the Release was required by the Franchise

Agreement. Cf. Brock v. Entre Computer Ctrs., Inc., 933 F.2d
1253, 1259 (4th Cir. 1991). Read together, again assuming that

12
Maryland law applies, the two documents carve out and preserve

WCV’s liability under the MFRDA.

Moreover, even absent those provisions in the Franchise

Agreement, section 14-226, if it is applicable in this matter, is

implicitly incorporated into the Release, rendering unenforceable

that portion that purports to waive WCV’s liability pursuant to

the MFRDA. It is
indelibly clear that Maryland adheres to the
general rule that parties to a contract are
presumed to contract mindful of the existing
law and that all applicable or relevant laws
must be read into the agreement of the
parties just as if expressly provided by
them, except where a contrary intention is
evident.

Wright v. Commercial and Sav. Bank, 464 A.2d 1080, 1083 (Md.

1983) (citing cases); see also Post v. Bregman, 686 A.2d 665, 673

(Md. App. 1996); Heyda v. Heyda, 615 A.2d 1218, 1222 (Md. App.

1992). Accordingly, no severability clause was necessary in the

Release and section 14-226 would not render the Release void ab

initio pursuant to Maryland law.
C.

We conclude that, pursuant to Maryland law, the Release

would bar this action. The parties agree that this action would

be barred by the Release pursuant to Pennsylvania law as well.

Accordingly, no true conflict is presented and the Court need not

address the choice-of-law issues.
III.

Pursuant to the law of either Pennsylvania or Maryland, the

Release is valid, at least insofar as it waives WCV’s liability

13
pursuant to RICO. Accordingly, the Williamses are barred from

bringing this RICO action regardless of which state’s law

applies. The April 16, 1996, judgment of the district court will

be affirmed.

Each party to bear its own costs.

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