Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION: Huddle House Fails to State Unjust Enrichment, Negligence, and Punitive Damages Claims Against Former Franchisee, (Apr 5, 2013)

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

Restaurant franchisor Huddle House, Inc. failed to state unjust enrichment, negligence, and punitive damages claims against a former franchisee that, following termination of the franchise agreement, allegedly refused to return proprietary items, continued to operate a restaurant using Huddle House’s logos, and failed to pay past due obligations and liquidated damages from termination, the federal district court in Atlanta has ruled (Huddle House, Inc. v. Two Views, Inc., April 4, 2013, Story, R.).

In 2009, Two Views, Inc. entered into a franchise agreement with Huddle House to operate a Huddle House franchise restaurant. According to Huddle House, during an inspection in May 2012, Huddle House discovered that Two Views possessed and sold certain unapproved products. Despite repeated inspections and warning letters, Two Views continued to use those unapproved products, and on July 3, 2012, Huddle House terminated the franchise agreement.

Huddle House demanded that Two Views cease operation of its Huddle House restaurant and return all proprietary items to Huddle House. Despite receiving these demands, Two Views refused to return certain proprietary items, and continued to operate a restaurant at the same location with items bearing Huddle House’s logos, although the restaurant was renamed "The Gravy Boat." Two Views also failed to pay past-due obligations and liquidated damages for termination.

Huddle House brought suit, asserting a variety of claims against Two Views and its guarantors. The defendants filed a motion to dismiss Huddle House’s claims for unjust enrichment, negligence, and punitive damages.

Unjust enrichment. The court initially addressed Huddle House’s claim for unjust enrichment. The court explained that under Georgia law "the theory of unjust enrichment applies when there is no legal contract and when there has been a benefit conferred which would result in an unjust enrichment unless compensated." The court noted that a Georgia Court of Appeals had held that a party could not "assert a claim for unjust enrichment in the alternative to a claim for breach of contract where any benefit conferred on the defendant was triggered by a provision in the contract, the validity of which neither party challenges."

Here, neither Huddle House nor Two Views disputed the existence or validity of the franchise agreement, and all benefits conferred on Two Views "accrued only as a result of the franchise agreement." Therefore, the court dismissed Huddle House’s unjust enrichment claim.

Negligence. The court then rejected under the economic loss rule Huddle House’s negligence claim that Two Views owed Huddle House duties not to compete with Huddle House or use its "proprietary products, trademarks, and logos," and that Two Views breached those duties. The court explained that the economic loss rule "generally provides that a contracting party who suffers purely economic losses must seek his remedy in contract not in tort."

Here, Huddle House alleged only economic damages sustained as a result of Two Views’ alleged breach of the franchise agreement and use of Huddle House’s trademarked property, in the court’s view. The court found no support for Huddle House’s contention that "property damage" from trademark infringement could be actionable in tort, finding that the only "damage to property that is actionable in tort despite the economic loss rule is that which arises from accident or other physical injury." Therefore, the court dismissed Huddle House’s negligence claim.

Punitive damages. Finally, the court considered Huddle House’s contention that its claims for negligence and trademark infringement under Georgia law warranted an award of punitive damages. The court first observed that it had already dismissed the negligence claim, and "in any event, it is well-settled that punitive damages are not recoverable for negligence." With respect to the trademark claim, the court observed that Georgia statute provided for recovery of "liquidated damages" or "actual damages," but did not mention punitive damages. Therefore, the court concluded that "the Georgia legislature did not intend to make punitive damages available for" trademark infringement, and dismissed Huddle House’s punitive damages claim.

The case is Civil Action No. 1:12-CV-03239-RWS.

Attorneys: Anne Peirce Caiola (Slotkin Law Firm, P.C.) for Huddle House, Inc. Hayden R. Pace (Pace Law, P.C.) for Two Views, Inc.

Companies: Huddle House, Inc.; Two Views, Inc.

Cases: FranchisingDistribution GeorgiaNews