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Federal Court in Michigan Becomes One Stop Shop for Constructing Coffin for Terminated Franchisee   1/5/2016

 

By: Jeffrey M. Goldstein

(202) 293-3947

 

          Many times a terminated franchisee fails or refuses to attend court proceedings initiated by its franchisor or distributor. The main reasons invoked by franchisees for failing to attend such proceedings vary, including (1) having no money; (2) believing that the franchisor is limited by law regarding how much or the type of relief that can be awarded against it where the franchisee fails or refuses to defend; or (3) imagining that the franchisee or dealer has no real defenses to the claims. A case decided in federal court on New Year’s Eve, 2015, Domino's Pizza Franchising, LLC, Plaintiff, v. VTM Pizza, Inc., and Terrence M. Williams, Defendants, shows just how far an aggressive franchisor and a motivated court can go ‘in just one court hearing’ in deciding against an absent franchisee.

          Generally, when a dealer or franchisee defendant fails to answer or reply to a Complaint, the Court will enter a default, meaning that the franchisee has a judgment entered against it for all of the substantive claims asserted by the franchisor in its Complaint. The next, and related step, is where the franchisor requests that the Court award it money damages for the franchisee’s alleged misconduct underlying the Complaint; claims for such monetary damages are asserted via a motion for default judgment. These two steps usually are separated by a period of weeks, with the latter award regarding monetary damages frequently denied pending the production of more details showing damages. In turn, the franchisor presents by a preponderance of the evidence damages caused by the claims against the franchisee. This evidence, depending upon the court, may be presented either by Affidavit or in a live Hearing with witnesses.

          Sometimes, even after the detailed evidence of damages is presented, it turns out that the franchisor’s calculation of damages includes alleged lost future damages consisting of royalties that it argues would have been paid by the franchisee in the future, had the franchisor not terminated the franchisee. For instance, if the franchise is terminated after three years of a ten year term, the franchisor requests, as a component of damages, all of the royalties that it would have been paid by the franchisee had the franchisee remained in business for the full ten years, and not terminated by the franchisee after three. Depending upon the circumstances (e.g., the specific language of the franchise agreement; the relevant state’s franchise law; the relevant state’s common law; the judge’s view of the relative equities of the positions), the Court could enter a judgment for the franchisor, requiring that the franchisee pay immediately for the discounted value of all of these future unpaid royalties.

          Many times, however, even where the Court is inclined to rule for the franchisor and award all of the lost future royalty damages, the franchisor carelessly fails to present the Court with evidence of how much it – the franchisor — would have spent on the franchisee (e.g., advertising, support, training) during the very same future period for which it has requested that the Court award lost royalties. So, in the above example, the accurate measure of damages during the seven year future period would not be solely the amount of royalties paid by the franchisee over that time, since the franchisor, presumably, during that time, would also have been providing certain costly benefits to the franchisee; thus, the amount of royalties during that additional seven year period must under the law be adjusted downward to reflect the costs that would have been incurred by the franchisor during that period. A failure to prove such costs with evidence would justify a court’s refusal to provide any lost future royalty damages. Similarly, since rudimentary economic principles show that a dollar now is worth more than a dollar later, any amount of lost future damages must be discounted back to current value. There are times where franchisors forget to present evidence of this relatively simple number; without it, courts cannot provide a value for lost future damages, and the franchisor’s claim for such can be denied on this basis alone.

          When all of the stars align regarding language in a franchise agreement, local law, the jurisprudential vision of the Judge, causation of the termination, the franchisor lawyer’s dotting all the I’s and crossing all the T’s, a franchisee that refuses to appear in court can have the table run against it, as occurred in the Domino’s case. Not only did the Court in Domino’s grant a default against the franchisee, but it also entered a default judgment in favor of the franchisor, also required the franchisee to pay very significant future royalty fees, also awarded attorney’s fees to Domino’s, and, incredibly, also shut down the former franchisee’s independent pizza business – in one fell swoop; and, all in a courtroom in which the terminated franchisee failed to appear.

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Domino’s Franchising v. VTM Pizza

United States District Court for the Eastern District of Michigan, Southern Division

December 31, 2015, Decided

 Case No. 15-13312

2015 U.S. Dist. LEXIS 173115

 Domino's Pizza Franchising, LLC, Plaintiff, v. VTM Pizza, Inc., and Terrence M. Williams, Defendants.

Opinion [*1] ORDER GRANTING PLAINTIFF'S MOTION FOR DEFAULT JUDGMENT [17]

Plaintiff Domino's Pizza Franchising, LLC, filed its complaint on September 18, 2015, alleging three counts of breach of contract pursuant to a franchise agreement. The clerk entered defaults against Defendants VTM Pizza, Inc., and Terrence M. Williams on October 28, 2015. (Dkt. nos. 11, 12.) On November 30, 2015, Plaintiff filed a motion for default judgment (dkt. no. 17) against Defendants, seeking injunctive relief, damages in the amount of $188,010.42 plus attorneys' fees in the amount of $39,317.97.

A.  Background

Certificates of service show that Defendants received service of the summons and complaint on October 6, 2015. (Dkt. nos. 6, 7.) Defendants have not appeared, nor otherwise attempted to defend this case. The Court held a hearing on this matter on December 7, 2015, and took further evidence related to damages. In response to the Court's request for additional evidence related to attorneys fees in this matter, Plaintiff thereafter submitted supplemental exhibits and served same by mail upon Defendants.

(Dkt. nos. 19, 20.)

The Court treats the well-pleaded allegations in the complaint, other than those related to the [*2]  amount of damages, as true. See Fed. R. Civ. P. 8(b)(6); see also Antoine v. Atlas Turner, Inc. , 66 F.3d 105 (6th Cir. 1995). Plaintiff's claims are based on a franchise agreement entered into by Plaintiff and Defendant VTM on or about December 16, 2009.

(Compl. ¶ 8, Ex. A at 39.) The agreement was a renewal. Contemporaneous with the execution of the franchise agreement, Defendant Terrence Williams, the sole shareholder of VTM, executed a Covenants of Owners document, under which he guaranteed performance by VTM under the franchise agreement and agreed to be bound by the franchise agreement. (Compl. ¶ 9, Ex. B.)

Plaintiff alleges that Defendants breached the franchise agreement when they "repeatedly failed to comply with Domino's requirements and specifications concerning the quality, service and cleanliness of their Store and the products and services sold, offered for sale, or provided at the Store." (Compl. ¶ 15.) Plaintiff also alleges that Defendants failed to submit profit and loss statements, as required under section 14.2 of the franchise agreement. (Compl. ¶ 16.) Plaintiff alleges that between May 2014 and April 2015, it sent Defendants "9 separate notices of default based on their repeated failure [*3]  to comply with Domino's standards and meet their obligations under the Franchise Agreement." (Compl. ¶ 17.) In April 2015, Plaintiff notified Defendants that the Franchise Agreement was terminated, after Defendants had received a score of 44 out of a possible 100 on an evaluation of the Store's operations. (Compl. ¶ 18.) On April 29, 2015, the parties entered into a Franchise Stay Of Enforcement Of Termination Agreement ("Stay Agreement") under which Defendants were given time to sell the store and transfer the franchise to a new owner. (Compl. ¶ 19, Ex. C.) The parties extended the Stay Agreement several times yet Defendants were unable to sell their store. (Compl. ¶ 28.) On or about September 6, 2015,

Defendants ceased operating the store as a Domino's store. (Compl. ¶ 29.) According to

Plaintiff, Defendants continued to operate a pizza business, now called "Five Kids' Pizza," in the same location. (Compl. ¶ 31.) Five Kids' Pizza offers pizza on a carry-out and delivery basis and offers substantially the same items it offered while it was operated as a Domino's Pizza store. (Compl. ¶¶ 32, 33.) This is in violation of the franchise agreement, section 20.2, which prohibits, for a period [*4]  of one year after termination of the franchise agreement, engaging or investing in "any carry-out or delivery pizza store business located at the premises of the Store or within ten (10) miles of the premises of the Store . . . ." (Compl. ¶ 30, Ex. A.)

The Complaint alleges three counts of breach of contract. First, Plaintiff alleges that Defendants breached the franchise agreement by failing to perform post-termination obligations pursuant to the franchise agreement. Next, by failing to pay money due for royalty fees, advertising contributions, technical fees and equipment and product Defendants had purchased. (Compl. ¶ 44.) Finally, by failing to operate the store in compliance with franchisor Domino's standards and specifications resulting in the closing of the store and a loss of future royalty fees, advertising fees and profits through the remainder of the term of the franchise agreement. (Compl. ¶ 50.)

According to Plaintiff, Defendant(s) engage in the following, which are breaches of the post-termination provisions of the franchise agreement:

1. Defendant Williams "owns, is engaged in and/or employed by, and advises, assists and has an interest in Five Kids' Pizza." (Compl. ¶ 34.) [*5] 

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2. "Defendants are using the operational methods and procedures set forth in Domino's confidential Operations Manual in operating Five Kids' Pizza store" and they "have failed and refused to return that Manual to Domino's," as required by sections 18.3(a) and 20.5 of the franchise agreement. (Compl. ¶ 35.)

3. Defendants did not cease using the Domino's System and Domino's Marks as required by section 18.3 (b), (e) of the franchise agreement. (Compl. ¶ 39.)

4. Defendants continued to use the phone number of the former Domino's Pizza Store and did not execute the documents or take steps necessary to enable Domino's to utilize the telephone number as required by section 18.3(c) of the franchise agreement. "[T]he local telephone directory and various online directories continue to identify the telephone number of Five Kids' Pizza as being the number of a

Domino's Pizza Store." (Comp. ¶ 36.)

Plaintiff seeks injunctive relief, a monetary judgment, and attorneys fees and costs.

(Pl.'s Mot. Default J., Prayer for Relief.)

B.  Injunctive Relief

Case law suggests that injunctive relief by way of a default judgment is available, especially in cases like this one, where there is no doubt regarding Defendants' [*6]  notice of the proceedings. See e.g., U.S. v. Aiken , 867 F.2d 965 (6th Cir. 1989) (maintaining a permanent injunction and default judgment against a mining company after the sole shareholder's death).

Plaintiff has shown that it will suffer irreparable harm if an injunction is not issued enjoining Defendants from continuing to use the Domino's telephone number, to operate the pizza business in the same location, to use the Domino's marks and to fail to return the

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operating manual. Plaintiff has demonstrated likely success on the merits with respect to its breach of contract claims in light of Defendants' default. The granting of such an injunction will not result in any greater harm to Defendants in light of their failure to respond to the Complaint and the default and the granting of such an injunction is in the public interest where Defendants continue to operate in defiance of the terminated franchise agreement.

The Court will grant those terms of injunctive relief sought by Plaintiff enjoining

Defendants from operating any carry-out or delivery pizza store business at the former

Domino's Pizza store location for a period of one year and using telephone numbers that were used in connection [*7]  with the former store; and providing that Defendants will take steps to assign the telephone number to Plaintiff or its designee, to delete listings for the former store in the Yellow Pages and any other published or online directory and to terminate any directory listing that indicates that the former Domino's Pizza phone number,

423-569-2000, is affiliated with the current Five Kids' Pizza business.

C.  Damages

Plaintiff alleged in its motion that it is entitled to $188,010.42 and an additional $39,317.97 in attorneys fees. Plaintiff alleges that at the time that Defendants "ceased operating the Store as a Domino's Pizza® store, Defendants owned (sic) Domino's monies for royalty fees, advertising contributions, technical fees, and equipment and product they purchased." (Compl. ¶ 44.) Plaintiff provided the declaration of Leonard Barr, Manager-Unit

Controller in the Finance Department of Domino's Pizza, LLC, in which Mr. Barr stated that "[a]s of September 6, 2015, when VTM ceased operating the Store as a Domino's Pizza Store, VTM owed Domino's $5,133.93 for royalty fees, advertising contributions, technical

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fees and fees for equipment and product it had purchased." ((Pl.'s Mot. Default [*8]  Ex. 1, ¶¶

1, 3; Compl. ¶ 46.) At the hearing, Mr. Barr testified that this amount was reduced by

Defendants' previously earned profit-sharing, therefore the past due amount was reduced

from $5,133.93 to $2,798.69.

Plaintiff also seeks lost royalties that it would have earned for the remainder of the

ten-year term of the franchise agreement, which would have expired on May 29, 2020.

(Compl. ¶ 48; Barr Decl. ¶ 4, Pl.'s Mot. Default J., Ex. 1 ¶ 4.) The Court may award future

royalties lost due to franchisee's breach. See e.g., PSP Franchising, LLC v. Dubois , 2013

WL 782901, at *2 (E.D. Mich. Feb. 28, 2013) (Murphy III, J.) (citing American Speedy

Printing Centers, Inc. v. AM Mktg., Inc. , 69 Fed. Appx. 692 (6th Cir. 2003)). Section 6.1 of

the franchise agreement requires the franchisee to pay a royalty of 5.5% of the weekly

royalty sales of the Store. (Compl., Ex. A.) Under section 13.1, the franchisee is obligated

to pay 3% of the weekly royalty sales of the store to the advertising fund, with the franchisor

having the right to increase the contribution from time to time by an amount not to exceed

1%. (Compl. Ex. A.) At the hearing, Joseph Devereaux, Director of Franchising Services,

testified that the due to Amendments in 2009 and 2012, the advertising basis is now 6%.

With respect to the calculation of future contributions, Mr. Barr stated in [*9]  his

declaration that

The term of the Franchise Agreement was ten years, commencing on May 30,

2010. Based on the gross sales that VTM's franchise attained in the 12 months leading up to September 5, 2015 (the last day it operated as a

Domino's Pizza® store), and assuming VTM's former franchise experienced no increase in sales from that point forward, Domino's would have been paid $208,032.68 in royalty fees and advertising contributions over the remaining term of the Franchise Agreement, which would have expired on May 29, 2020.

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Using a discount rate of 5.9%, which is Domino's cost of capital, the net present value of that amount is $181,349.57 ::FOOTNOTE::1 .

As a result of not having to provide support and related services to VTM's former franchise, Domino's will save $2,280 in expenses (from, for example, travel expenses and telephone, postage and printing costs) over the remaining term of the Franchise Agreement. Accordingly, Domino's net loss is $179,069.57.

(Barr Decl., Pl.'s Mot. Default J., Ex. 1 ¶¶ 4, 5.)

Plaintiff has shown support for the value of lost royalty fees and advertising

contributions it seeks. Plaintiff provided evidence via witness testimony at the hearing and

documents [*10]  to support the amount of damages, including testimony and a spread sheet

extrapolating royalty fees and advertising fees based on the average of Plaintiff's weekly

sales for the 52 weeks from August 2014 through August 2015. This spread sheet was

prepared by Mr. Barr, who also testified at the hearing. (Identified as Plaintiff's Exhibit 105.)

The Court will grant Plaintiff's request for damages and finds the record supports damages

in the amount of $181,868.26 ::FOOTNOTE::2

D.  Attorneys' Fees

The franchise agreement, section 22.2, requires payment of reasonable attorneys

fees, court costs and expenses of litigation in the event that Plaintiff commences any legal

or equitable action to enforce the terms of the franchise agreement. (Franchise Agr. § 22.2,

Compl. ¶ 27 and Ex. A.) Plaintiff submitted a declaration of Norman M. Leon, one of two

::FOOTNOTE::1 The motion for default judgment cites the net present value as $182,876.49 (Pl.'s Br. In Support Of Mot. Default J. 5.) Yet the amount stated in Barr's declaration and on the spreadsheet is $181,349.57, which the Court will use. (Pl.'s Supp. Ex. 105.)

::FOOTNOTE::2 The total of $181,349.57 net present value of royalties and advertising, minus [*11]  $2,280 in expenses saved by Plaintiff, plus $2,798.69 past due.

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attorneys from the law firm DLA Piper, LLP, who appears on behalf of Plaintiff. (Pl.'s Mot.

Default J. Ex 2.) Mr. Leon sets forth both his own and colleague John Verhey's legal backgrounds and credentials. Mr. Leon testified that his billing rate is $565 per hour and he has spent 11.50 ::FOOTNOTE::3 hours on this matter through November 23, 2015. Mr. Verhey's billing rate is $616.25 per hour and Mr. Verhey has spent 43.80 hours on this matter through November 23, 2015. This is a total of $33,479.00 in attorneys' fees and $275.94 in costs.

As Mr. Leon notes in his supplemental declaration, at the hearing the Court expressed concern with the extent of legal fees in this matter. In light of this, Plaintiff is not seeking recovery for attorneys' fees after November 23, 2015, and is not seeking attorneys' fees for Mr. Leon's time on the file. (Suppl. Decl. Leon, Suppl. Exs., dkt. 19.) The DLA Piper attorneys' fee sought by Plaintiff is $26,981.50; this amount is reduced to $26,868.55 to account for the .20 hour attributed to Mr. Verhey.

Plaintiff is also represented by local counsel, who submitted an affidavit in which he testifies [*12]  that the total amount of attorney fees and paralegal costs incurred by Domino's in this action through Mr. Hood's firm, Clark Hill, is $5,057 (11.4 attorney hours at $405 per hour and 2.2 paralegal hours at $200 per hour) and costs of $506.03. (Hood Supp. Aff.,Supp. Ex. 3.) Local counsel did not include professional time or costs spent arranging for the admission of out-of-state counsel. The Court has reviewed the billing records and finds that the attorneys' fees and costs in the amount of $32,431.58 are reasonable as

::FOOTNOTE::3 The invoices show that Mr. Leon has spent 11.70 hours on the matter for a total $6,610.50. (Suppl. Exs. Ex. 2.) Mr. Verhey as spent 43.60 hours on this matter for a total $26,868.50. ( Id. )

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required by the franchise agreement and in light of the work on the file, which included the filing of a motion and brief seeking a preliminary injunction prior to Defendants' default.

E.  Conclusion

IT IS ORDERED that Plaintiff's motion for default judgment [17] is GRANTED.

IT IS FURTHER ORDERED that the Court will enter judgment against Defendants jointly and severally in the amount of $181,868.26 and $32,431.58 in attorneys fees.

IT IS FURTHER ORDERED that

1. Defendants [*13]  VTM Pizza, Inc. and Terrence M. Williams and their agents, servants, employees and all those individuals in active concert or participation with Defendants, are hereby permanently enjoined from:

a. Directly or indirectly, or through or on behalf of or in conjunction with any other person, partnership or corporation, owning, engaging in, being employed by, advising, assisting, investing in, franchising, making loans to, or having any other interest, whether financial or otherwise, in any carry-out or delivery pizza store business located at, or within 10 miles of, Highway 27 (Alberta Street) and Church

Avenue in Oneida, Tennessee (the location of the former Domino's Pizza store), for a period of one (1) year from entry of this judgment;

b. Using the telephone numbers used in connection with the operation of Defendants' former Domino's Store, including the number 423-569-2000.

2. Defendants VTM Pizza, Inc. and Terrence M. Williams shall immediately execute

such documents and/or take such steps as may be necessary or appropriate to assign the

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telephone number 423-569-2000 to Plaintiff Domino's Pizza Franchising, LLC or its designee; and

3. Defendants VTM Pizza, Inc. and Terrence M. Williams [*14]  shall immediately take such

steps as may be necessary or appropriate to delete the listings for their former Domino's

Store in the Yellow Pages and any other published or online directory, and to terminate any

other directory listing that indicates that the telephone number 423-569-2000 is affiliated

in any respect with Defendants' current pizza business Five Kids' Pizza.

SO ORDERED.

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