Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—S.D. Ind.: Franchisor’s breach of contract claim consistent with franchise agreement, (Apr 7, 2015)

By Edward L. Puzzo, J.D.

A franchisor’s breach of contract claim against its franchisee—based the underreporting of “gross sales” and underpayment of royalties—was consistent with the franchise agreement’s breach of contract requirements and also could not be dismissed on the basis of a limitations period for “the sale of goods,” the federal district court in Indianapolis has ruled (Noble Roman’s, Inc. v. Hattenhauer Distributing Company, April 3, 2015, Lawrence, W.).

Noble Roman’s is engaged in the franchising of restaurants that feature its pizza and Tuscano’s submarine sandwiches, among other food items. In 2005 and 2006, Hattenhauer Distributing Company, an operator of convenience stores, entered into franchise agreements with Noble Roman’s for the sale of Noble Roman’s products at Hattenhauer’s locations in Wasco, Oregon and Goldendale, Washington. Subsequently, based on an audit, Noble Roman’s accused Hattenhauer of breaching the franchise agreement by under-reporting gross sales and refusing to pay royalty fees related to the under-reported sales. The royalties claimed were over $41,000 for the Washington location and over $21,000 for the Oregon location.

Basis of breach. Hattenhauer challenged the audits that gave rise to Noble Roman’s breach of contract action, claiming that they did not conform to the terms of the franchise agreements and could not form the basis for a breach of contract action.

Under the franchise agreements, Hattenhauer was required to pay the franchisor a seven percent royalty fee on the franchises’ “gross sales,” which was defined in the agreement as “the total selling price of all products and services and all income of every other kind and nature related to [the Noble Roman’s or Tuscano’s franchises].” Hattenhauer argued that Noble Roman’s complaint alleging unreported sales and unpaid royalties was devoid of the specific allegation that the franchise had failed to pay royalties based on “the total selling price of all products,” and therefore should be dismissed.

The court disagreed. Taking the franchisor’s allegations as true, gross sales were higher than reported, requiring additional royalties. Although further discovery may show this was not the case, at this phase of the litigation, Noble Roman’s had stated a plausible breach of contract claim, the court ruled.

Applicable limitations period. Hattenhauer also argued that any claims based on alleged under-reported of sales for the period prior to October 2010 were barred by Indiana’s four-year statute of limitations for “the sale of goods.” Noble Roman’s countered that the applicable limitations period was ten years for “contracts in writing other than those for the payment of money.”

Applying Indiana’s “predominate thrust” test, which looks to the agreement for the parties’ understanding of the predominant purpose of the contract, the court ruled that the predominate thrust of the franchise agreement was the granting of Noble Roman’s and Tuscano’s franchises, not merely the sale of its food products. This was shown by agreement language allowing Hattenhauer to use Noble Roma’s marks and products. Thus, the four-year statute of limitations was inapplicable and could not be used to dismiss Noble Roman’s claims, the court ruled.

The case is Civil Action No. 1:14-cv-1734-WTL-DML.

Attorneys: Andrew M. McNeil (Bose McKinney & Evans, LLP) for Noble Roman's, Inc. Dawn M. Johnson (Greensfelder, Hemker & Gale, PC) for Hattenhauer Distributing Company.

Companies: Noble Roman's, Inc.; Hattenhauer Distributing Company.

Cases: FranchisingDistribution IndianaNews