Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—NDSCt: Steam Cleaning Business License Agreements Were Not Clear About Provision of Information, Termination, (Jan 29, 2013)

By Tobias J. Gillett, J.D., LLM.

Provisions in agreements between a steam cleaning business and licensees permitted to use its service marks and related materials were not “clear and unambiguous” regarding whether the licensees would have to provide certain business information to the licensor and whether termination of the agreements would require mutual consent of the parties, the North Dakota Supreme Court has ruled (Riedlinger v. Steam Brothers, Inc., January 29, 2013, VandeWalle, G.).

Adam Leier founded Steam Brothers Carpet Cleaning, a North Dakota business performing carpet cleaning and related services, in 1983. He later licensed five of his relatives to operate Steam Brothers businesses in different regions of North Dakota, South Dakota, and Minnesota.

The license agreements originally provided that the licensees would pay Leier franchise fees, and the licensees purchased their chemicals and supplies through him. At the licensees’ request, the parties later executed new license agreements that terminated the previous agreements and dispensed with the franchise fees, in exchange for a one-time $12,000 fee from each licensee.

The agreements stated that the parties intended to convert the “franchise relationship between the parties to a very different business relationship.” The agreements gave the licensees the right to use the Steam Brothers name, service marks, and related material in their respective geographic territories, and stated that the licensees would “conduct the subject business operation[s] in a manner that reflects favorably on such names, marks, other material, and carpet cleaning and related system.”

Steam Brothers would be entitled to obtain an injunction to remedy a violation of these provisions or an anticipatory or actual breach of the agreements, and the agreements stated that they should not be “construed to prevent [Steam Brothers] from pursuing any other remedy available.” The licensees would be prohibited from engaging in any similar business for five years after termination of the agreements. The parties would not “have the power to obligate” each other, except as set forth in the agreements, and the agreements would be “the entire understanding of the parties.” Their duration would be the period during which the Licensee would “be involved in the subject business.”

Leier later sold Steam Brothers to Jerry Thomas, who requested certain business information from the licensees that he claimed was necessary to monitor their use of the Steam Brothers marks. The licensees refused, claiming that they were not required to provide that information under the agreements, and filed suit for a declaration of their rights under the license agreements. Steam Brothers counterclaimed for breach of contract and trademark infringement.

The district court granted summary judgment to the licensees, concluding that the license agreements were “clear and unambiguous and did not require the licensees to provide the requested business information,” and that “the license agreements could not be terminated without the parties’ mutual consent.”

The North Dakota Supreme Court reversed. The district court had determined that provisions in the present license agreements did not address the licensees’ obligation to provide business information, which differed from provisions in the original agreements. The district court had found that this difference, combined with the circumstances under which the new agreements were executed, meant that “it can be concluded that the disclosure of the requested information is not required under the current license agreements.”

The Supreme Court found that this analysis relied on extrinsic evidence in a manner that was “contrary to its conclusion the agreements were clear and unambiguous and to the applicable rules for granting summary judgment.” Although the licensees’ interpretation of the agreements as reflecting the parties’ intent to leave the obligation to provide information out of the agreements was one reasonable interpretation, the provisions requiring the licensees to conduct their businesses in a manner that reflected favorably on Steam Brothers did “not contemplate unfettered and uncontrolled use of Steam Brothers’ service mark.” The provision stating that the parties would not “have the power to obligate” each other” referred “to the power of one party to obligate the other to third parties,” in the court’s view.

The court concluded that the provisions giving Steam Brothers “some control over the licensees’ use of Steam Brothers’ name and service mark” would have meaning if the licensees were required to disclose some information. However, the language would be “unclear if the licensee may not obtain any business information under the agreements.” Therefore, the court held that “rational arguments could be made for different interpretations of those agreements,” and hence that summary judgment was inappropriate.

Moreover, the Supreme Court found the district court erred in holding that the agreements could not be terminated without the parties’ mutual consent. Although the agreements provided that their terms would be the periods during which the licensees were involved in their businesses, the agreements also permitted Steam Brothers to obtain an injunction for breach of their provisions, and specifically did not preclude Steam Brothers “from pursuing any other remedy.”

The Supreme Court concluded that this language was “not clear and unambiguous about termination of the agreements for breach,” and hence that its interpretation was inappropriate for summary judgment. The Supreme Court therefore remanded the case to the district court.

The case is No. 2013 ND 14.

Attorneys: Rob A. Stefonowicz (Larkin Hoffman Daly & Lindgren Ltd.) for John Riedlinger. Benjamin J. Hasbrouck (Fredrikson & Byron, P.A.) for Steam Brothers, Inc.

Companies: Steam Brothers, Inc.

Cases: FranchisingDistribution NorthDakotaNews