La Quinta Corp. v. Heartland Properties LLC

• Decision Date: 28 April 2010
• Docket Number: No. 08-6368.,08-6368.
• Citation: 603 F.3d 327
• Parties: LA QUINTA CORPORATION; Baymont Franchising LLC, Plaintiffs-Appellees, v. HEARTLAND PROPERTIES LLC; David W. Adams; Betty L. Adams, Defendants-Appellants.
• Court: U.S. Court of Appeals — Sixth Circuit

603 F.3d 327

LA QUINTA CORPORATION; Baymont Franchising LLC, Plaintiffs-Appellees, v. HEARTLAND PROPERTIES LLC; David W. Adams; Betty L. Adams, Defendants-Appellants.

No. 08-6368.

United States Court of Appeals, Sixth Circuit.

Argued: August 3, 2009.

Decided and Filed: April 28, 2010.

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ARGUED: George R. Carter, George R. Carter, Attorney at Law, Louisville, Kentucky, for Appellants. Joel D. Siegel, Sonnenschein Nath & Rosenthal LLP, Los Angeles, California, for Appellees. ON BRIEF: George R. Carter, George R. Carter, Attorney at Law, Louisville, Kentucky, for Appellants. Joel D. Siegel, Sonnenschein Nath & Rosenthal LLP, Los Angeles, California, David R. Simonton, Sonnenschein Nath & Rosenthal LLP, San Francisco, California, Theresa A. Canaday, J. Kendrick Wells, IV, Frost Brown Todd LLC, Louisville, Kentucky, for Appellees.

Before: SILER, GIBBONS, and GRIFFIN, Circuit Judges.

OPINION

GRIFFIN, Circuit Judge.

In this action alleging breach of a hotel franchise agreement and federal trademark infringement, defendants Heartland Properties LLC, David W. Adams, and Betty L. Adams appeal the district court's denial of discovery-related motions, grant of summary judgment in favor of plaintiffs La Quinta Corporation and Baymont Franchising LLC, and the award of liquidated and treble damages to Baymont. We affirm.

I.

In 1994, Heartland Properties LLC and its guarantors, David and Betty Adams (collectively referred to as "Heartland"), entered into a franchise agreement with Budgetel Franchises International, Inc., the corporate predecessor to Baymont Franchising LLC ("Baymont"), to operate a Budgetel Inn in Shepherdsville, Kentucky. Baymont is a wholly-owned subsidiary of La Quinta Corporation ("La Quinta").¹

The License Agreement granted Heartland a license to operate the Shepherdsville Inn using Baymont's unique internal operating "System" which included, inter alia, Baymont's federally-registered trademarks, logos, reservation system, and other intellectual property. The Agreement required Heartland to maintain certain "System Standards" for its facilities, technology, and service, and gave Baymont the right to "amend, modify, delete or enhance any portion of the System." Heartland agreed to carry the costs for compliance with these standards, including any updates in computer hardware and software.

Specifically, the License Agreement provided that Baymont would maintain a reservation system that "in its sole discretion, it determines will best serve the System"; conversely, Heartland "agreed to participate in the Reservation System" and to "bear ... telephone line connection charges, supply costs and other such expenses of meeting System Standards and participating in the Reservation System." In addition, Heartland was obligated to pay monthly "Recurring Fees" to Baymont. These fees included a royalty of five percent of Heartland's gross room revenues, as well as marketing and reservations assessments.

Pursuant to Section 13.b of the License Agreement, Baymont could terminate the franchise arrangement "at any time ... if: (i) "Licensee fails fully to remedy specified Agreement breaches within 30 days of Baymont's written notice; ... (vi) Licensee fails to pay its debts as they fall due; ... or (xi) with good cause, for any other reason." In the event of Heartland's failure to "operate under the System for any reason including, but not limited to, Section 13.b termination for Licensee's uncured default," Heartland agreed to pay liquidated damages to Baymont in "an amount equal to 100% of the aggregate Recurring Fees which accrued with respect to Inn operations during the immediately preceding 36 full calendar months." Heartland's right to use the System and all trademarks, signage, logos, and equipment ended immediately when the license term expired or was terminated earlier for any reason. Additionally, upon termination of the franchise, Heartland "shall promptly pay all sums then owed to Baymont."

Heartland possessed the right to terminate the Agreement "by giving at least 12 months prior written notice to Baymont, but only effective on ... the tenth anniversary of the Opening Date September 26, 2006...."

In the fall of 2004, Baymont adopted a new System Standard for computerized reservations known as the L.I.S.A. System, which necessitated the installation of updated computer hardware and software at its franchise hotels. The L.I.S.A. System was designed to improve the centralized reservation system and ensure the integration of all of Baymont's franchisees into the shared reservation system used by Baymont's affiliates, La Quinta Inn & Suites and La Quinta Inn. As part of the upgrade, Baymont required its franchisees to sign a software license agreement—the "L.I.S.A. Agreement"—pursuant to which franchisees' payments for the acquisition, installation, and initial training on the system were amortized over a period of 120 months, commencing upon installation of the new computer system. Under the terms of the L.I.S.A. Agreement, Heartland was to pay a total of $35,000 over the ten-year period for L.I.S.A.-associated costs. However, if the License Agreement expired or was terminated for any reason, Heartland would be obligated to pay in full the remaining balance owed for the L.I.S.A. System.

In October 2004, the Baymont Inns Franchise Advisory Council, consisting of representative Baymont franchisees, approved the adoption of the L.I.S.A. System. In late 2004, Baymont shipped the components for the L.I.S.A. System to Heartland, along with a copy of the L.I. S.A. Agreement. In January 2005, Baymont conducted a series of conference calls and training sessions with its franchisees to ease the transition to the new computer program. The parties disagree about the extent of Heartland's participation in these events. In February 2005, Baymont attempted to work with Heartland to bring it into conformance with the L.I. S.A. System, but installation was never completed because Heartland allegedly refused to provide Baymont with access to its facilities. It is undisputed that Heartland neither signed the L.I. S.A. Agreement nor made the L.I.S.A. System operational at its hotel.

Consequently, on February 24, 2005, Baymont sent a letter notifying Heartland that it was in default under Sections 5 and 7 of the License Agreement due to its failure to execute the L.I.S.A. Agreement and install the L.I.S.A. System. Baymont ordered Heartland to cure the default within thirty days, but Heartland failed to do so.

Heartland attributes its refusal to sign the L.I.S.A. Agreement to Baymont's failure to address its concerns, purportedly shared by other franchisees, about conflicts between the terms of the original License Agreement and the L.I.S.A. Agreement—precisely, the L.I. S.A. Agreement's effect on Heartland's non-renewal option at the ten-year anniversary date under Section 13.a of the License Agreement. Heartland also cites sloppy and disruptive installation of the computer infrastructure and related technical problems as factors in its decision not to sign the L.I. S.A. Agreement or participate in the L.I. S.A. System. Heartland claims that Baymont terminated the License Agreement before arrangements could be made for Heartland's representatives to attend any training seminars and before rescheduled work could be completed on the L.I. S.A. System.

On March 25, 2005, after unsuccessful attempts to resolve these controverted issues, Baymont notified Heartland by letter that its rights under the License Agreement would be terminated effective April 30, 2005.

On May 17, 2005, Heartland filed suit against La Quinta in the Kentucky state circuit court, alleging breach of the License Agreement and the implied covenant of good faith and fair dealing, and seeking injunctive relief. La Quinta removed the action to federal court, where it was ultimately consolidated with Baymont's separate action against Heartland.² Baymont's seven-count complaint averred federal trademark infringement and false designation of sponsorship under the Lanham Act, 15 U.S.C. §§ 1114(1) and 1125(a), misappropriation of trade secrets, and breach of contract; Baymont also sought declaratory relief to prevent Heartland's continued use of Baymont's trademarks and intellectual property.

In February 2006, with the stipulation of the parties, the district court entered a preliminary injunction against Heartland, precluding further use of Baymont's name, trademarks, and System Standards. Discovery concluded on November 17, 2006, after an extension of the original discovery deadlines. An extended deadline for the filing of dispositive motions expired on January 5, 2007. On that date, the parties filed cross motions for summary judgment. In addition, Heartland filed three discovery-related motions—a motion to produce, a motion to compel, and a motion to reopen discovery. Heartland maintained that the failure of Baymont and La Quinta to cooperate with discovery and to identify all of their employees with knowledge of the dispute justified reopening discovery.

In an order entered on March 20, 2007, the magistrate judge declined to reopen discovery and denied Heartland's three discovery-related motions, citing Heartland's "entirely unacceptable" delays in the context of the current posture of the proceedings. Over Heartland's objections, the district court affirmed the magistrate's decision, and thereafter granted summary judgment on all claims in favor of La Quinta and Baymont, and denied Heartland's cross motion for summary judgment.

The district court dismissed La Quinta from the action, finding that "as the claims devolve solely into an analysis of the rights and liabilities under the license agreement, La Quinta was not a proper party to the action" because it was not shown to be a party to the License Agreement. With regard to Baymont's liability for breach of contract, the district court ...