Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—WDTex: Benihana Must Reveal Criteria for Rating Franchises in Response to Interrogatories, (Jan 8, 2013)

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

The federal district court in Austin, Texas, has granted a terminated franchisee’s motion to compel Benihana National Corporation to amend its response to an interrogatory requesting information concerning Benihana’s method of evaluating its franchises, but denied the motion to the extent it requests information regarding the performance of specific franchisees other than the plaintiff (Meltzer/Austin Restaurant Corp. v. Benihana National Corp., January 4, 2013, Austin, A.). The order also denies the franchisee’s motion to compel Benihana to amend its initial disclosures, grants the franchisee’s motion for a standard-form protective order, and denies the franchisee’s motion to compel Benihana to amend its response to other interrogatories.

According to the franchisee, the franchisee had operated two successful Benihana restaurant locations in Austin and San Antonio. The franchisee claimed that, in 2008, Benihana began sending the franchisee violation notices for items that Benihana had previously approved. In November 2010, the franchisee received notices of default regarding both of his restaurants, for actions the franchisee claimed had previously been approved by Benihana, and on June 23, 2011 the franchisee received a notice of termination. The franchisee also alleged that, in addition to spending tens of thousands of dollars in attempting to bring his restaurants into compliance, he had also purchased property for a third restaurant in reliance on Benihana’s misrepresentations.

The franchisee filed suit, alleging breach of the franchise agreements and fraud. Benihana responded by filing suit alleging the franchisee had improperly used its trademarks and service marks. The franchisee then filed another suit alleging fraud, negligent misrepresentation, and other causes of action regarding the purchase of property for a new restaurant. The three actions were then consolidated.

Motion to Compel Interrogatories

The franchisee filed a motion to compel Benihana to amend its responses to seven interrogatories. One of these requested Benihana to reveal the factors it used in “rating successful franchises.” Benihana argued the terms “factors” and “successful” were not defined and subjective, and that to the extent the franchisee sought information about other franchises the information was irrelevant and confidential. The franchisee argued the information was necessary to show whether Benihana had treated other franchisees differently in response to actions similar to those that it cited in terminating the franchise agreement.

However, at a hearing Benihana represented that it would not object to disclosing the general criteria it used to determine the success of a franchise. Based on these representations, the court determined that it would grant the franchisee’s motion to the extent that it requested information regarding the general criteria Benihana used in rating its franchises, but would deny it to the extent it requested information regarding specific franchises other than the franchisee’s.

The court also denied the franchisee’s motion to compel amendments to Benihana’s responses to other interrogatories. Three of the requests asked for information regarding other franchisees, such as other similar violations by other franchisees, the identities of franchisees that had been required to provide financial statements, and royalty payments for each of the Benihana restaurants. The franchisee asserted that this information was necessary to demonstrate that Benihana treated the franchisee differently from other franchisees.

The franchisee claimed that the contracts between the franchisee and Benihana were governed by New York law, and thus contained an implied covenant of good faith and fair dealing, while Benihana argued that Texas law applied, and therefore that Benihana had no duty to treat franchisees equally. Moreover, Benihana claimed that even if New York law applied, the duty only extended to the specific obligations in the contract, not to additional duties.

The court concluded that the disposition of this dispute depended on the determination of the choice of governing law, an issue involved in a motion to dismiss the franchisee’s fourth amended complaint currently pending before another judge. Therefore, the court denied the franchisee’s request for discovery on the treatment of other franchisees, but would permit the franchisee to conduct discovery on those issues if the other judge’s ruling made them relevant.

The court also denied a request concerning information regarding a Benihana employee’s departure from Benihana, a person the franchisee claimed had been engaged in a struggle for control of the company with a person responsible for many of the actions Benihana took against the franchisee. The court deemed this request “to derive from multiple levels of speculation,” and noted that the franchisee had provided no evidence to support it.

The court also denied a motion to compel amendment of Benihana’s responses to two interrogatories requesting the identity of “all persons who you believe have knowledge of relevant facts and the issues upon which you believe they have knowledge,” and, if Benihana had a partnership, subsidiary, or affiliate relationship with a publicly owned corporation, or if a publicly owned corporation had a financial interest in the outcome, the identity of the publicly owned corporation.

The court determined that Benihana had provided information regarding all individuals that Benihana believed would have knowledge of relevant facts, which was all the interrogatory requested. The court also found that Benihana had provided sufficient information to answer the second interrogatory, since it had stated that it was a privately held corporation, and not a subsidiary or affiliate of a publicly-held corporation. A change in the group of shareholders owning the corporation would not change this result. Moreover, Benihana would have a duty to supplement its responses if it became aware of more relevant information.

Motion to Compel Amendment of Initial Disclosures

The court also denied the franchisee’s motion to compel Benihana to amend its initial disclosures. The franchisee claimed that the less than four pages of information provided by Benihana, and Benihana’s failure to mention key individuals or sufficient information regarding insurance coverage, did not satisfy the purpose of Federal Rule of Civil Procedure 26(a), and that Benihana should either be compelled to provide more information or to be limited to offering at trial only those witnesses and documents listed in the initial disclosures.

The court disagreed, noting that Rule 26(a) only required initial disclosure of individuals and documents that the disclosing party may use to support its claims or defenses. Even if the franchisee believed the case was more expansive, the rule only required Benihana to disclose the information it considered to be likely to be necessary to its case. Moreover, Benihana would have a duty to amend its disclosures if it intended to use additional individuals and documents at trial. Furthermore, Benihana’s unequivocal statement that it was unaware of any applicable insurance policy was sufficient to comply with Rule 26(a).

Motion for Protective Order

The court granted the franchisee’s motion for the court to impose its standard form “Confidentiality and Protective Order.” The franchisee had asserted that the parties had been unable to agree on a stipulated protective order. The parties disputed a paragraph requiring the franchisee not to disclose documents to any third parties, and prohibiting the use of any confidential documents in other disputes.

The court noted that Benihana had been “unable to articulate any factual reasons why the paragraph was needed,” and that there was no evidence of the franchisee improperly using Benihana’s documents. Moreover, the standard form order already contained a provision that all classified information “shall be used solely for the purpose of preparation, trial, and appeal of this litigation,” and that the information “shall not be disclosed except in accordance with the terms hereof.” The court deemed this provision adequate to meet Benihana’s needs, and thus entered the standard form protective order.

The case is No. A-11-CV-542-LY-AWA.

Rain Levy Minns (Minns Law Firm, P.C.) for Austin Restaurant Corp. Hal Sanders Jr. (Haynes Boone, LLP) for Benihana National Corp.

Cases: FranchisingDistribution TexasNews