Opinion
Case No. 1:02-CV-401
May 2, 2003
OPINION
Plaintiff, DRG, Inc. ("DRG"), is a franchisee of Defendant, Talent Tree, Inc. ("Talent Tree"). DRG alleges that Talent Tree broke certain portions of the Franchise Agreement, as modified by its Amendment Rider, between the parties. Before the Court are the parties' cross-motions for summary judgment, as well as DRG's motion to strike Samuel S. Crocker's declaration or, alternatively, to continue Barry Brown's deposition.
Factual and Procedural Background
Beginning in 1991 and continuing through the present, DRG operated a temporary staffing company as a franchisee of Talent Tree. (Compl. ¶ 6.) Some type of written franchise agreement between the parties was in effect from March of 1991 through December of 2000. (Compl. ¶ 7.) A new, integrated Franchise Agreement was executed in December of 2000, including an Amendment Rider. (Compl. ¶ 10, 12.) Paragraph 11 of the Amendment Rider states:
The initial franchisor was Initial Staffing Services, Inc., a predecessor in interest to Talent Tree.
Section 10(k) of the Franchise Agreement states:
This agreement constitutes the entire agreement between the parties with respect to the subject matter hereof and their franchise relationship and supercedes all prior agreements and understandings. The parties further acknowledge and agree that there are no representations, inducements, promises, agreements, arrangements or undertakings, oral or written, between the parties other than these set forth herein.
(Franchise Agreement § 10(k).)
If, during the term of the Agreement, INITIAL develops and offers to new or renewing franchisees a new form of franchise agreement which contains terms that are more favorable to a franchisee than the terms contained in the Agreement, FRANCHISEE may elect to replace the Agreement with the new form of franchise agreement for the balance of the term of the Agreement. INITIAL agrees to give FRANCHISEE notice of the development of any such new form of franchise agreement and the opportunity, exercisable for a period of ninety (90) days, to replace the Agreement with the newly developed form of franchise agreement.
(Amend. Rider ¶ 11 (emphasis added)). With regard to renewal, the Franchise Agreement states:
8(a) Expiration of Agreement
The Agreement will terminate automatically on the 5th anniversary of the date that it was approved and executed by INITIAL, unless it is terminated earlier or renewed. If it is renewed, it will be subject to the same automatic termination rule at the end of each renewal term.
8(b) Renewal
After the initial 5-year term of the Agreement, FRANCHISEE will have the right to renew the franchise an unlimited number of times, each time for a 5-year term. To exercise this right, FRANCHISEE must declare its intentions to renew no later than 7 months prior to the expiration date of the Agreement and must execute for the renewal period the then-current form of franchise agreement used by INITIAL with appropriate changes to reflect its status as a renewed franchise. . . .
(Franchise Agreement §§ 8(a)-(b).) The new Franchise Agreement is scheduled to expire on December 6, 2005. (Franchise Agreement § 8(a).)
Talent Tree subsequently executed Termination Agreements with four of its other franchisees, whose franchise agreements were scheduled to expire in approximately six months. (Gill Dep. at 63-66.) The Termination Agreement recitals state: "FRANCHISEE does not desire to renew the Franchise Agreement, but does seek time to transition out as a franchisee." (Termination Agreement at 1.) Paragraph 8 of the Termination Agreement, which deletes Section 8(a) of the Franchise Agreement, states that "[t]here is no right to renewal, which right is expressly waived and released by FRANCHISEE." (Id. ¶ 8.) The Termination Agreements change the service fee that the franchisee pays to Talent Tree from 40% of the franchisee's positive gross margin to 30%, commencing approximately six months from the date the franchise agreement is scheduled to expire. (Id. ¶ 1; Franchise Agreement ¶ 6.) The Termination Agreement also extends the franchise relationship for a period of one year beyond the scheduled expiration date. (Termination Agreement ¶ 8.) Additionally, the Termination Agreement relieves the franchisee of the post-termination covenant not to compete, and provides the franchisee with the option of paying Talent Tree a fee for Talent Tree's agreement to forebear from competing with the franchisee for up to two years after the franchisee severs its relationship with Talent Tree. (Id. ¶ 10.)
DRG argues that, pursuant to Paragraph 11 of the Amendment Rider, it may avail itself of the terms of the Termination Agreements, because those agreements constitute "a new form of franchise agreement which contains terms that are more favorable to a franchisee." (Compl. ¶ 19-24.) Talent Tree rejects DRG's assertion, and contends that Paragraph 11 of the Amendment Rider is inapplicable to the Termination Agreements because the Termination Agreements are not (1) "a new form of franchise agreement" developed by Talent Tree; and (2) Talent Tree has not offered the Termination Agreements to new or renewing franchisees. (Def.'s Opp'n Pl.'s Mot. Summ. J. at 5.) DRG, however, claims that Talent Tree has breached the Franchise Agreement by not allowing DRG to adopt the terms of the Termination Agreement for the duration of DRG's Franchise Agreement. (Compl. ¶ 19-24.)
On August 13, 2002, the Court denied Talent Tree's motion for judgment on the pleadings pursuant to Rule 12(c) of the Federal Rules of Civil Procedure. DRG, Inc. v. Talent Tree, Inc., No. 1:02-CV-401, slip op. (Aug. 13, 2002). The Court's decision turned on whether, under Texas law, the phrase "new form of franchise agreement" in Paragraph 11 of the Amendment Rider contained latent or patent ambiguities. Id. at 5-7. The Court concluded that the phrase "is subject to more than one reasonable interpretation." Id. at 7. Thus, the Court stated that these ambiguities "can only be resolved after more evidence of the parties' intent and negotiations" is before the Court. Id. at 8.
Standard of Review
Summary judgment is appropriate if there is no genuine issue as to any material fact and the moving party is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56. Material facts are facts which are defined by substantive law and are necessary to apply the law. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248, 106 S.Ct. 2505, 2510 (1986). A dispute is genuine if a reasonable jury could return judgment for the non-moving party. Id.
A motion for summary judgment is properly supported if the moving party shows that there is no evidence to support the non-moving party's case. Celotex Corp. v. Catrett, 477 U.S. 317, 324-25, 106 S.Ct. 2548, 2553-54 (1986). If the moving party makes its showing, the non-moving party must demonstrate with "concrete evidence" that there is a genuine issue of material fact for trial. Id.; Frank v. D'Ambrosi, 4 F.3d 1378, 1384 (6th Cir. 1993). The court must draw all inferences in a light most favorable to the non-moving party when evaluating a summary judgement motion. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 578-88, 106 S.Ct. 1348, 1352-58 (1986). It may, however, grant summary judgment when "the record taken as a whole could not lead a rational trier of fact to find for the non-moving party." Agristor Fin. Corp. v. Van Sickle, 967 F.2d 233, 236 (6th Cir. 1992) (quoting Matsushita Elec. Indus. Co., 475 U.S. at 587, 106 S.Ct. at 1356).
Discussion
I. Motions for Summary Judgment
In its August 18, 2002, Opinion, the Court considered only whether the phrase "a new form of franchise agreement" in Paragraph 11 of the Amendment Rider contained latent or patent ambiguities. The Court did not, however, address the phrase "offers to new or renewing franchisees," which immediately precedes "a new form of franchise agreement." Talent Tree asserts that the preceding phrase only allows DRG to avail itself of "a new form of franchise agreement" that Talent Tree offers to either of two distinct categories of franchisees: (1) new franchisees; or (2) renewing franchisees. In short, Talent Tree argues that this limitation evidences that Paragraph 11 is not a "most favored nation clause" as DRG contends, because it does not apply to modifications or termination agreements offered to existing franchisees. Thus, even if the phrase "a new form of franchise agreement" is ambiguous, if Talent Tree has not offered the Termination Agreement to any "new or renewing franchisees," then Paragraph 11 of the Amendment Rider is inapplicable to the instant case. The Court agrees.
In Section 10(d) of the Franchise Agreement, Talent Tree and DRG agreed that the Franchise Agreement should be interpreted under Texas law. (Franchise Agreement § 10(d).) In National Union Fire Insurance Co. of Pittsburgh, PA. v. CBI Industries, Inc., 907 S.W.2d 517, 520 (Tex. 1995), the Supreme Court of Texas stated:
The primary concern of a court in construing a written contract is to ascertain the true intent of the parties as expressed in the instrument. If a written contract is so worded that it can be given a definite or certain legal meaning, then it is not ambiguous. Parol evidence is not admissible for the purpose of creating ambiguity.
If, however, the language of a policy or contract is subject to two or more reasonable interpretations, it is ambiguous. Whether a contract is ambiguous is a question of law for the court to decide by looking at the contract as a whole in light of the circumstances present when the contract was entered. Only where a contract is first determined to be ambiguous may the courts consider the parties' interpretation, and admit extraneous evidence to determine the true meaning of the instrument.
An ambiguity in a contract may be said to be "patent" or "latent." A patent ambiguity is evident on the face of the contract. A latent ambiguity arises when a contract which is unambiguous on its face is applied to the subject matter with which it deals and an ambiguity appears by reason of some collateral matter. If a latent ambiguity arises from this application, parol evidence is admissible for the purpose of ascertaining the true intention of the parties as expressed in the agreement.
Id. The Court must thus determine whether the limiting phrase "offers to new or renewing franchisees" contains latent or patent ambiguities.
It is uncontested that the Termination Agreements were offered to existing franchisees, thus eliminating the category of "new franchisees" from consideration. The question that remains is whether the Termination Agreements constituted a renewal of the existing franchise agreement that they modified, because the Termination Agreements extended the length of the franchise agreements from five years to six years. Section 8(b) of the Franchise Agreement defines "renewal" as follows:
8(b) Renewal
After the initial 5-year term of the Agreement, FRANCHISEE will have the right to renew the franchise an unlimited number of times, each time for a 5-year term. To exercise this right, FRANCHISEE must declare its intentions to renew no later than 7 months prior to the expiration date of the Agreement and must execute for the renewal period the then-current form of franchise agreement used by INITIAL with appropriate changes to reflect its status as a renewed franchise. . . .
(Franchise Agreement §§ 8(a)-(b) (emphasis added).) Section 8(b) indicates that a "renewal" constitutes the franchisee's acceptance of an additional five-year franchise agreement with a right to renew at the conclusion of the five-year term. Additionally, the "renewal" agreement must reflect that it is in fact a renewal agreement. There is no indication that "renewal" includes a termination agreement, which merely extends an existing franchise agreement and provides no right to renew.
The text of the Termination Agreement also evidences that it was not contemplated to be a renewal under Section 8(b). Most strikingly, the Termination Agreement recitals state: "FRANCHISEE does not desire to renew the Franchise Agreement, but does seek time to transition out as a franchisee." (Termination Agreement at 1.) This stands in stark contrast to Section 8(b)'s requirement that a renewal agreement include "appropriate changes to reflect its status as a renewed franchise." Additionally, Paragraph 8 of the Termination Agreement, which deletes Section 8(a) of the Franchise Agreement, states that "[t]here is no right to renewal, which right is expressly waived and released by FRANCHISEE." (Id. ¶ 8.) This also conflicts with the statement in Section 8(b) that the renewing franchisee "will have the right to renew the franchise an unlimited number of times." Finally, the Termination Agreements merely extend the life of the existing franchise agreement by one year, rather than the "5-year term" contemplated in Section 8(b).
The primary thrust of DRG's motion for summary judgment, as well as its response to Talent Tree's motion for summary judgment, is that the fact that the Termination Agreements extend their respective franchise agreements renders them renewal agreements. First of all, DRG ignores the notable fact that the Termination Agreement extends the relevant franchise agreements beyond their normal expiration date, while DRG wishes to utilize the Termination Agreements to terminate prior to its normal expiration date. In this respect, the Termination Agreements are not "more favorable" to DRG, and DRG's argument that the Termination Agreements allow early terminations, as distinguished from an extension beyond the normal termination date, turns the facts of this case upside down. Furthermore, DRG's interpretation is not supported by the language of either the Franchise Agreement or the Termination Agreements. The Termination Agreements are agreements between Talent Tree and an existing franchisee to modify an existing agreement. Contrary to DRG's assertion in its Complaint, Paragraph 11 of the Amendment Rider does not cover all agreements between Talent Tree and existing franchisees. Rather, Paragraph 11 is only applicable to offers made by Talent Tree "to new or renewing franchisees."
DRG asserts in its Complaint that the parties:
intended for paragraph 11 of the Amendment Rider to the Franchise Agreement to serve as the "most favored nation" clause demanded by DRG whereby Initial is required to offer to DRG, at its sole election, any agreement between Initial and new, existing or renewing franchisee that is more favorable to the franchisee than the terms contained in the Franchise Agreement with DRG, as amended.
(Compl. ¶ 14.)
Since the scope of Paragraph 11 of the Amendment Rider is limited, it cannot be read as a "most favored nations clause." DRG's argument, as well as its motion for summary judgment, will therefore be denied.
As the text of the Franchise Agreement is clear with regard to the definition of a "renewing franchisee," the Court finds no latent or patent ambiguities in the phrase "offers to new or renewing franchisees" in Paragraph 11 of the Amendment Rider. Therefore, since the Termination Agreements do not fit within the definition of "offers to new or renewing franchisees" in their stated purpose or effect, Paragraph 11 of the Amendment Rider is inapplicable to the instant case and summary judgment will be granted in favor of Talent Tree.
II. Motion to Strike Declaration
DRG has filed a motion to strike the affidavit of Samuel S. Crocker, Talent Tree's in-house counsel, submitted by Talent Tree in response to DRG's motion for summary judgment. DRG asserts that during its deposition of Talent Tree employee Barry Brown, Talent Tree's attorney, instructed Brown not to answer questions that could reveal advice given to Brown by attorney Crocker. Although there may be merit to DRG's argument, the Court will deny the motion as moot because the Court did not rely upon Crocker's affidavit in addressing the cross motions for summary judgment.
Conclusion
For the foregoing reasons, Talent Tree's motion for summary judgment (docket no. 46) will be granted and DRG's motion for summary judgment (docket no. 25) will be denied. Additionally, DRG's motion to strike Samuel S. Crocker's declaration or, alternatively, to continue Barry Brown's deposition (docket no. 38) will be denied as moot. An Order consistent with this Opinion will be entered.