Bland v. KENTUCKY FRIED CHICKEN CORPORATION

• Decision Date: 09 November 1971
• Docket Number: Civ. A. No. 71-H-440.
• Citation: 338 F. Supp. 871
• Parties: Linwood BLAND, Individually, and as Custodian Under the Texas Gifts to Minors Act for Nancy Diane Bland, et al. v. KENTUCKY FRIED CHICKEN CORPORATION, and Colonel Sanders Inn, Inc.
• Court: U.S. District Court — Southern District of Texas

338 F. Supp. 871

Linwood BLAND, Individually, and as Custodian Under the Texas Gifts to Minors Act for Nancy Diane Bland, et al. v. KENTUCKY FRIED CHICKEN CORPORATION, and Colonel Sanders Inn, Inc.

Civ. A. No. 71-H-440.

United States District Court, S. D. Texas, Houston Division.

November 9, 1971.

Mike Willatt, Houston, Tex., for plaintiff.

Bracewell & Patterson, John R. Cope, Houston, Tex., for defendant.

MEMORANDUM AND ORDER:

SEALS, District Judge.

This action is predicated upon the alleged breach of a contract between Plaintiff Bland on the one hand and Defendant Colonel Sanders' Inn, Inc., (CSI), on the other, for the purchaser of "French Quarter Inn" in New Orleans, Louisiana, from Bland by CSI in exchange for shares of common stock in Kentucky Fried Chicken Corporation (KFC) which CSI would cause to be issued. KFC owns 95% of the stock in CSI and is its creator, having joined with two businessmen (Monson and Heatherington) to form a subsidiary corporation to exploit the opportunities KFC perceived in the motel industry. One of the motels acquired by the subsidiary was the "Houstonaire Inn" owned by Bland. It was during and after this acquisition that Bland and CSI discussed and finally agreed to a similar acquisition of the "French Quarter Inn."

The suit was commenced, by Bland in the 127th District Court, Harris County, Texas. Service was made upon CSI through its appointed agent, C. T. Corporation System, in Dallas, Texas. Service was made upon KFC by substitute service on the Texas Secretary of State pursuant to Vernon's Ann.Tex. Civ.St. art. 2031b. KFC removed the action to the federal courts and then filed a motion to dismiss for lack of jurisdiction over the person of KFC and for improper venue, and to quash service of process.

The question of "long-arm," or "substitute service," jurisdiction has two distinct facets. The first issue is whether the state statute provides for substitute service on these facts, i. e. is the defendant "doing business" within Texas? This is a matter of state law. The second issue presents a federal question, namely whether the defendant's contacts with the state, upon which jurisdiction is based, are such that the maintenance of the suit does not offend traditional notions of fair play and substantial justice embodied in the due process clause of the Fourteenth Amendment. International Shoe Company v. State of Washington, 326 U.S. 310, 66 S.Ct. 154, 90 L.Ed. 95 (1945).

Does Kentucky Fried Chicken do business in Texas within the meaning of V. A.T.S. art. 2031b, sec. 4 so as to be amenable to substitute service under section 3?

Based upon the depositions, affidavits, and exhibits of the parties and the briefs of counsel, the Court makes the following Findings of Facts:

1. Kentucky Fried Chicken Corporation (KFC) is a Delaware corporation with its principal place of business and corporate headquarters in Louisville, Kentucky.

2. KFC is engaged in the franchise food business and markets a production process to franchisees in various states, including thirty-two in Texas.

3. KFC licenses the franchisees to use its trade name in connection with their business, but does not own or manage local fried chicken outlets.

4. KFC provides franchisees with the opportunity to buy from national suppliers at discounts, but does not tie franchisees to specific suppliers.

5. All franchise agreements are negotiated and executed in the State of Kentucky.

6. For its part KFC is entitled to a percentage of the gross receipts of its franchisees.

7. KFC uses a portion of this return from its franchisees to finance a continuous nationwide advertising campaign for the mutual benefit of KFC and its franchisees, using the name "Kentucky Fried Chicken," the image of a Kentucky colonel, "Colonel Harlan Sanders," and various promotional slogans.

8. KFC does not maintain any plants, warehouses, offices, or production facilities in Texas.

9. KFC is not licensed to do business in Texas and does not have a designated agent in Texas to accept service of process.

10. CSI is a subsidiary of KFC formed and capitalized by KFC pursuant to a contract with Monson and Heatherington to establish a chain of motels using the good will of the national image of KFC's "Colonel Sanders."

11. In exercising its contract rights KFC appointed three of CSI's five directors and acquired 95% of its stock.

12. KFC agreed in its contract with Norman P. Monson and Thomas F. Heatherington to cause them to be employed by CSI as President and Chairman, respectively, of CSI for a term of five years under certain conditions and for salaries which KFC would cause CSI to pay.

13. KFC agreed in its contract with Monson and Heatherington to provide the subsidiary, CSI, with shares of KFC common stock which would be used to acquire motel properties from third persons.

14. KFC represented CSI as one of its assets on its consolidated stockholders statement.

15. The contract between the plaintiff Bland and CSI was made and was to be performed in Houston, Texas.

It is obvious that vis-a-vis its Texas franchisees, KFC is doing business in Texas. In Atwood Hatcheries v. Heisdorf and Nelson Farms, 357 F.2d 847 (5th Cir. 1966), a Washington franchisor was held within the reach of Texas' long-arm by virtue of its franchise contracts with several Texas outlets. Although the contracts were made and executed wholly within the State of Washington, they were to be performed in Texas for the mutual benefit of the franchisor and franchisee. That is the case with KFC. Unlike Atwood Hatcheries, the contract dispute here is not between an outraged franchisee and a bashful franchisor. Here the litigants are a frustrated seller and his buyer, who happens to be a 95% subsidiary of KFC formed to buy the type of properties seller is selling.

The Texas law is stated in O'Brien v. Lanpar Co., 399 S.W.2d 340 (Tex. 1966) which involved the question whether an Illinois court had in personam jurisdiction over a nonresident Texas corporation against whom it had rendered a default judgment. In deciding that such long-arm jurisdiction had been perfected, Justice Pope cited favorably a Washington Supreme Court decision, Tyee Construction Co. v. Dulien Steel Products, Inc., 62 Wash.2d 106, 381 P.2d 245 (1963), which established three basic factors which must coincide if jurisdiction over a nonresident corporation is to be entertained:

(1) the nonresident corporation must purposefully do some act or consummate some transaction in the forum state;

(2) the cause of action must arise from, or be connected with, such act or transaction; and

(3) the assumption of jurisdiction must not offend traditional notions of fair play and substantial justice, considering the quality, nature and extent of the activity in the forum state, the relative convenience of the parties, the benefits and protection of the laws of the forum state afforded the respective parties, and the basic equities of the situation. 399 S.W.2d at 342.

That this is the law in Texas there can be no doubt. The O'Brien decision was followed in Sun-X International Co. v. Witt, 413 S.W.2d 761 (Tex.Civ.App. — Texarkana, 1967, n.r.e.) and the Supreme Court's refusal of a writ of error with the notation "no reversible error" indicates that the Court of Civil Appeals correctly stated the law.

Applying these principles to the situation presented here, it is apparent that KFC has purposefully consummated acts and conducted commercial transactions in Texas by granting licenses to use its trade name and processes in Texas to Texas franchisees, by conducting advertising and promotional campaigns intended to increase the Texas sales of its franchisees, and by exacting a percentage of the gross receipts from its Texas franchisees. However, the second item in this trinity is not presented by the franchise relationship in this case. The plaintiff's cause of action has nothing to do with the granting or promoting of commercial franchise food operations in Texas, or with their success. The plaintiff's complaint is grounded upon a contract he has with a subsidiary of KFC to sell a Louisiana motel to that subsidiary. The Texas long-arm statute has not yet been interpreted to subject a nonresident person or corporation who conducts business in Texas to the jurisdiction of Texas courts for some claim having nothing to do with its Texas operations. This court declines to do what Texas has not done. See this Court's opinion in Odom v. Thomas d/b/a S & R Cattle Company, et al., 338 F. Supp. 877 (S.D.Tex., August 26, 1971).

This is not to say that Texas could not choose to do so constitutionally. The burgeoning of franchise operations, the intricate relationship of franchisors, franchisees, subsidiaries and suppliers, and the impact they have on the local economy might well compel a State to assert more control over these multifarious operations. It would not fly in the face of due process for a State to do so.

As a second theory for sustaining the validity of the service the plaintiff contends that he is the third party...