Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—EDMo: Dunkin’ Donuts Entitled to Summary Judgment on Franchisees’ Illegal Tying Claim, but Not on Missouri Franchise Act Claim, (May 16, 2013)

By Peter Reap, J.D., LL.M.

Donut shop franchisor Dunkin’ Donuts Franchising, LLC and its related entities (collectively "Dunkin’") were entitled to summary judgment on a counterclaim brought by a former franchise area developer and its two principals (collectively, the "defendants") for illegal tying, the federal district court in St. Louis has decided (Dunkin’ Donuts Franchising LLC v. Sai Food & Hospitality, LLC, May 15, 2013, Fleissig, A.). However, Dunkin’ failed to present sufficient evidence entitling it to summary judgment on the defendants’ counterclaims under the Missouri Franchise Act ("MFA").

In addition, the franchisor was granted summary judgment on the defendants’ breach of contract counterclaims, but only to the limited extent that they concerned Dunkin’s failure to offer an airport franchise to the defendants and changed its store development strategy. Dunkin’ was denied summary judgment on the defendants’ state tort counterclaims for fraud and promissory estoppel.

Background. Jayant Patel and his wife Ulka Patel signed a Store Development Agreement ("SDA") with Dunkin’, giving them the exclusive right to develop and obligation to develop and open a certain number of donut shops in the St. Louis area. Subsequently, the Patels formed the development company Sai Food & Hospitality ("SFH"). The Patels and their company eventually opened two franchises as part of the SDA.

In 2011, Dunkin’ sent the defendants a Notice of Default and Termination, terminating the two franchise agreements, a sublease, and the SDA immediately upon the defendants’ receipt of the Notice. The stated grounds for termination was fraud and violation of the law in falsely representing that only Jayant and Ulka Patel owned SFH when two additional owners, together held the majority interest in the company; and making the same false statement to the government on a tax form.

Dunkin’ then commenced suit, asserting that it would not have approved the defendants as franchisees had it known of the true nature of the ownership of SFH. It alleged claims for breach of contract and trademark infringement.

Before the court was the franchisor’s motion for summary judgment on the defendants’ counterclaims. In their nine counterclaims, the defendants alleged wrongful termination in violation of the MFA, breach of contract, promissory estoppel, fraud/misrepresentation, and illegal tying in violation of both federal and state antitrust law.

Illegal tying. Section 1 of the Sherman Act provides that “[e]very contract . . . in restraint of trade or commerce among the several States . . . is declared to be illegal.” 15 U.S.C. § 1. In Ill. Tool Works, Inc. v. Ind. Ink, Inc., 547 U.S. 28 (2006), the Supreme Court explained that “the essential characteristic of an invalid tying arrangement lies in the seller’s exploitation of its control over the tying product to force the buyer into the purchase of a tied product that the buyer . . . might have preferred to purchase elsewhere on different terms.” Id. at 34-35. The Court concluded that many “tying arrangements . . .are fully consistent with a free, competitive market.” Id. at 45. While tying arrangements that “are the product of a true monopoly” are still unlawful, “that conclusion must be supported by proof of power in the relevant market rather than by a mere presumption thereof.” Id. at 43-44.

The claimant has the burden of defining a relevant market in which the alleged market power can be assessed, the court noted. The defendants claimed that Dunkin’ unlawfully tied the sale of donut franchises/fast-breakfast food restaurant franchises to the purchase of new equipment for franchised stores.

Courts generally rejected antitrust claims based on such a purported relevant market. Moreover, the undisputed facts with regard to the equipment options available to the defendants belied their assertion of any unlawful tying arrangement, the court determined. The defendants presented no evidence to persuade the court that Dunkin’ was not entitled to summary judgment on their illegal tying claims.

Missouri Franchise Act. The defendants argued that the franchisor violated the MFA by wrongfully terminating their franchise agreements without providing the statutorily required 90-days’ notice. Dunkin’ argued that the SDA was not a "franchise" within the meaning of the MFA, and that the defendants suffered no damages resulting from their failure to receive 90-days’ notice of the termination of the franchise agreements.

The court agreed with the defendants that Dunkin’ failed to present sufficient evidence showing that it was entitled to summary judgment on the defendants’ claims under the MFA with regard to the two franchise agreements.

The defendants would have to prove their damages beyond mere speculation, but their ability to do so remained to be seen, according to the court. The defendants, however, cited no cases supporting their position that breach of the SDA was a separate claim is covered by the MFA, and the court concluded that it was not.

Breach of contract. With limited exception, the court agreed with the defendants that their breach of contract claims were flip sides of the franchisor’s breach of contract claims. Material questions of fact remained on whether Dunkin’ was entitled to terminate the agreements or whether in doing so, they breached the agreements.

However, Dunkin’ was entitled to summary judgment on the breach of contract counterclaims to the extent that they alleged that Dunkin’ breached the SDA by not offering the airport franchise to the defendants and by changing its development strategy for the location of stores. The record showed that the defendants did not have the qualifications to operate the airport franchise. In addition, the defendants’ failed to present a persuasive argument why a contractual release executed by the parties in amendments to the SDA, and/or the two-year limitations period in the SDA itself, did not preclude their breach of contract counterclaims in those respects.

State torts. To succeed in a fraud/misrepresentation claim under Missouri law, a plaintiff must prove: (1) the defendant made a material representation; (2) with knowledge of its falsity; (3) with intent that the plaintiff rely on that representation; (4) that the plaintiff was ignorant of the falsity; (5) that the plaintiff justifiably relied upon the representation; and (6) that plaintiff was damaged by that representation. To state a claim of promissory estoppel, a plaintiff must allege a promise made by the defendant; foreseeable, detrimental reliance on the promise by the plaintiff; and that an injustice would occur unless the promise is enforced.

The defendants would be allowed to proceed with their state law torts as alternative theories for relief to their breach of contract and MFA claims, the court reasoned. The defendants sought to estop Dunkin’ from terminating their one franchise that was still open, and not just damages, the court observed. Thus, the breach of contract claim with respect to that agreement did not defeat the promissory estoppel claim, the court held.

The case is No. 4:11CV01484 AGF.

Attorneys: David E. Worthen (Gray and Plant) for Dunkin' Donuts Franchising LLC. Francis X. Duda (Anderson & Gilbert) for SAI Food & Hospitality, LLC.

Companies: Dunkin' Donuts Franchising LLC; SAI Food & Hospitality, LLC.

Cases: Antitrust FranchisingDistribution MissouriNews