Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—DNeb: Further Discovery Ordered in Litigation over Termination of Janitorial Services Franchisee, (May 6, 2013)

By Tobias J. Gillett, J.D., LL.M.

In litigation between a janitorial services franchisor and a terminated franchisee, the federal district court in Omaha, Nebraska, has ordered the franchisor to supplement its responses to certain interrogatories and requests for production (Coverall North America, Inc. v. Verica, L.L.C., May 2, 2013, Thalken, T.). However, the court denied the franchisee’s motion to compel as to other requests and interrogatories.

Coverall North America, Inc. sells building cleaning and maintenance services franchises. Verica, L.L.C. executed a series of agreements with Coverall giving it the right to operate janitorial businesses under the Coverall name in certain areas of Nebraska and Iowa. Coverall alleged that Verica failed to make its minimum royalty payments or its payments on a promissory note after March 2009. On May 18, 2011 Coverall informed Verica that it would have to pay its past due royalties and balance due on the promissory note within 30 days or face termination, and on June 20, 2011 Coverall locked Verica out of Coverall’s accounting system and began operating the franchise territory.

Coverall also filed suit against Verica seeking a declaratory judgment that it had properly terminated the franchise agreement and recovery of promissory note and royalty payments, among other things. Verica filed an answer and counterclaims.

On April 27, 2012, Verica served Coverall with interrogatories and requests for production of documents. In the present motion, Verica sought to compel Coverall to provide more complete responses to certain interrogatories.

Verica’s fourth interrogatory sought "the amounts and dates [Coverall] paid money to Verica from January 1, 2006 to the present," while its seventeenth request for production sought "all documents referring or relating to payments of money [Coverall] made to Verica from January 1, 2006 to the present." The court concluded that Verica had provided "some justification" for the time period for which it sought documents, and met its "burden of showing payments made by Coverall to Verica related to damages and the defendants’ franchise territory bear on issues in this case and appear reasonably calculated to lead to the discovery of admissible evidence." However, the request was overbroad to the extent it sought information about unrelated payments made by Coverall. The court ordered Coverall to provide supplemental responses to interrogatories 4 and 17, but subject to the court’s narrowing of the interrogatory and request.

Verica’s fifth and sixth interrogatories sought "information about the amounts, dates, and to or from whom Coverall or its affiliates paid or received money relating to Verica’s Service Franchise and related territory, for entities other than Verica, since January 1, 2006," while its eighteenth and nineteenth requests for production sought "all documents referring to payments made or received as described in Interrogatory Nos. 5 and 6." The court found these requests to be relevant, since they were "narrowly tailored to Verica’s Service Franchise and related territory," and covered an appropriate time frame, since the "time frame encompasse[d] the period of Verica’s involvement with Coverall." Since Coverall did not show the requests would cause it any actual burden, the court ordered it to provide supplemental responses to interrogatories 5 and 6 and requests for production 18 and 19.

Verica’s seventh interrogatory sought "a summary of the transaction between [Coverall] and Centre Lande Partners in early 2011, providing whether a sale of stock, sale of assets, or any transfers or assignments of property or rights occurred as part of the transactions, and to what extent, if any, ownership of [Coverall] was changed." Coverall responded by stating that the title or rights to proceeds from the causes of action it asserted had not been transferred to any other party. Since Verica did not mention the interrogatory in its reply brief in a manner that would justify a supplemental response, the court denied Verica’s motion to compel discovery as to interrogatory 7.

Verica’s nineteenth and twentieth interrogatories sought "the identity of any person Coverall consulted to determine if the actions would comply with the Nebraska or Iowa franchise laws prior to sending Verica the May 18, 2011, letter, terminating Verica’s access to the computer systems, and invoicing Verica’s subfranchisees and customers in June and July 2011." The court concluded that Verica failed to meet its burden of demonstrating the relevance of the requests because Coverall had not indicated that it would rely on the advice of any third party, and Verica had "failed to show how the identity of a person Coverall consulted, or lack of any consultation, would bear on whether Coverall acted in good faith, assuming good faith [was] an issue."

Verica’s twelfth request for production sought "all documents regarding any discussions or determination of drafting" the letter terminating Verica’s computer access, and the compliance of that termination with state franchise law. Coverall agreed to provide documents that were not privileged. Other than Coverall’s failure to maintain a privilege log, Verica did not show that Coverall had failed to provide any documents relating to that request. Therefore the court denied Verica’s motion to compel as to that request.

Verica’s twenty-first interrogatory sought "a statement of all contract breaches and/or defaults by Verica Coverall was aware of on May 18, 2011 that [were] not stated in the May 18, 2011 letter." Coverall objected that the request was ambiguous as it was not limited as to time of a breach or breach of any particular contract or whether the breach was material, and that it could not determine what "aware of" meant. The court found Coverall had "provided a full and unequivocal response," and noted that Coverall was required to supplement its responses if additional breaches surfaced. Therefore, the court declined to compel Coverall to supplement its response to interrogatory 21.

Verica’s twenty-fourth interrogatory sought "an itemization of each admission either defendant has made against their interests in this lawsuit that Coverall has knowledge of, providing the date made, to whom, and the substance of the admission." The court found that Verica’s concern in avoiding surprise at trial, and Coverall’s concern that the request was overbroad, could be met by limiting the request to any admission against interest "that Coverall intends to use against the defendants during this lawsuit," and ordered Coverall to amend its response in conformity with that statement.

Verica’s twenty-ninth interrogatory sought "Verica’s total accounts receivable as of the date Coverall terminated Verica’s access to Coverall’s computer system in June 2011, and what of those amounts" Coverall had received, when received, and from whom. Verica’s ninth request for production sought "documents including accounting records referring or relating to the collection of Verica’s accounts receivable, from June 20, 2011 to present." Despite raising a variety of objections to these requests, Coverall produced documents disclosing "all service payments that were on Verica’s Accounts Receivable as of June 23, 2011," and "the aging report for accounts receivable as of June 20, 2011." As Verica did not :indicate any outstanding information or documents relating to this interrogatory and request, the court declined to require Coverall to supplement its response.

Verica’s thirtieth interrogatory sought "information about the parties involved and substantive terms of each proposal or agreement to market, sell, or attempt to sell a business or franchise for any part of the territory since June 1, 2011." Coverall submitted a supplemental answer interpreting "business" and "franchise" as meaning the same thing and covering only franchises like that previously operated by Verica, and stating that it had not made any such "proposal or agreement" since June 1, 2011. As Verica did not "indicate any outstanding responsive information," the court refused to require Coverall to further supplement its answer.

Verica’s fourteenth and fifteenth requests for production sought "all documents evidencing Coverall’s repurchase of a franchise or settlement with a franchisee resulting in a termination or transfer in the ten years preceding this case." Since Verica did not mention those requests in its reply or indicate any outstanding documents, the court declined to require Coverall to supplement its responses.

Verica’s sixteenth request for production sought "production of all documents referring or relating to receipts of money from Verica since January 1, 2006." Coverall produced "documents disclosing all royalty and promissory note payments received from Verica." As Verica did not demonstrate the relevance of any additional responsive documents, and since it had withdrawn its motion to compel as to its related interrogatory, the court declined to require Coverall to supplement its response.

Verica’s twentieth request for production sought "production of all documents supporting the contention that Verica refused to accept servicing The Cheesecake Factory account for the territory in 2007." Coverall produced documents which were available without the need to recreate data from backup tapes, but declined to produce documents from backup tapes unless Verica paid for the potentially burdensome costs of recreating them. As Verica only alleged general relevance as to these documents, and provided no additional justification for the added expense of recreating the backup tapes, the court refused to require Coverall to further supplement its response.

The case is No. 8:11CV255.

Attorneys: Adam W. Barney (Cune, Williams Law Firm) for Coverall North America, Inc. David J. Skalka (Croker, Huck Law Firm) for Verica, L.L.C.

Companies: Coverall North America, Inc.; Verica, L.L.C.

Cases: FranchisingDistribution NebraskaNews