Captain D's LLC v. Arif Enters. Inc.
| Decision Date | 06 December 2010 |
| Docket Number | NO. 3:09-00809,3:09-00809 |
| Parties | CAPTAIN D'S, LLC, Plaintiff, v. ARIF ENTERPRISES, INC. and ARIF M. DEEN, Defendants. |
| Court | U.S. District Court — Middle District of Tennessee |
Plaintiff, Captain D's, LLC, filed this action under 28 U.S.C. § 1332, the federal diversity statute, against the Defendants, Arif Enterprises, Inc. and Arif M. Deen. Plaintiffs claims are that Defendants breached the terms of the Restaurant License Agreements (the "License Agreements") between the parties. Specifically, Plaintiff alleges that Defendants failed to operate five Captain D's franchise restaurants in the Houston, Texas area (the "Arif Franchises") according to the standards and uniformity of operation provisions in the License Agreements.
Before the Court is Plaintiff's motion for partial summary judgment (Docket Entry No. 52), contending, in sum, that the undisputed facts establish Defendants' breach of the License Agreements, entitling Plaintiff to liquidated damages. In response, Defendants contend: (1) that they were attempting to comply with the terms of the License Agreements when Plaintiff terminated the agreements; (2) Defendants did not sustain any damages from Defendants' acts and omissions; (3) Plaintiff caused its alleged damages; and (4) the liquidated damages provision constitutes an unenforceable penalty. Plaintiff did not file a reply to Defendants' response.
For the reasons set forth below, the Court concludes that the undisputed material facts clearly establish Defendants' breach of their License Agreements with Plaintiff, and the liquidated damages provisions providing for future royalties payments are reasonable. Accordingly, Plaintiff's motion for partial summary judgment should be granted.
Plaintiff, Captain D's, operates a brand of quick service seafood restaurants with more than 550 company-owned and franchised restaurants. (Docket Entry No. 54, Plaintiff's Statement of Undisputed Material Facts at ¶ 1). Defendant Arif Enterprises, Inc. ("Arif Enterprises") was a Captain D's franchisee operating five Captain D's restaurants in and around Houston, Texas. Id. at ¶ 2. For these franchises, Defendants entered into restaurant license agreements with or consented to the assignment of license agreements to Arif Enterprises for the operation of the following Captain D's restaurants: 10232 South Post Oak Road, Houston, Texas 77096 (the "Post Oak Restaurant"); 12161 Southwest Freeway, Stafford, Texas 77477 (the "Stafford Restaurant"); 10703 Jones Road, Houston, Texas 77065 (the "Jones Road Restaurant"); 27704 FM 149, Tomball, Texas 77375 (the "Tomball Restaurant"); and, 595 West Little York Road, Houston, Texas 77091 (the "West Little York Restaurant"). Id. at ¶ 3. The License Agreements remained in effect until Captain D's terminated them in July 2009 due to Arif Enterprises' breaches of those License Agreements. Id. at ¶ 4.
Each of Captain D's License Agreements set forth provisions for standards and uniformity of operation:
Standards and Uniformity of Operation. Licensee recognizes the mutual benefit to Licensee, Licensor and other licensees of Licensor of the uniformity ofappearance, service, products and advertising of the Captain D's System and understands that such uniformities are necessary for the successful operation of the Captain D's restaurants. Licensee also acknowledges that products sold under the Captain D's name and restaurants using the Captain D's System have a reputation for excellence. This reputation has been developed and maintained by Licensor, and Licensee acknowledges that it is of the utmost importance to Licensor and to all other licensees that such reputation be maintained. To this end, Licensee covenants and warrants with respect to the operation of the Captain D's restaurant at the Franchised Site that Licensee and its employees will comply with all of the requirements of the Captain D's System and will throughout the term of this Agreement:
(a) Operate the restaurant and prepare and sell all products sold therein in accordance with the specifications, standards, business practices and policies of Licensor now in effect or hereinafter promulgated by Licensor for its licensees, and comply with all requirements of the Captain D's System as they are now or hereafter established....
(b) Maintain and operate the restaurant in good condition and repair and in a proper and businesslike manner, and use Licensee's best efforts to maintain a clean, quiet and respectable atmosphere therein and do such redecoration, repairing and restoration as from time to time may be required to meet Licensor's standards....
The License Agreements authorized Captain D's to terminate these agreements for, among other things, "[f]ail[ure] to perform any of the terms and conditions contained in this Agreement,..." Id. at ¶ 6. Upon termination, each of the License Agreements states:
Upon termination of this Agreement..., all rights of Licensee hereunder shall cease, and Licensee shall pay to Licensor all sums then due plus damages for the right to receive the royalty fees for each year or portion thereof remaining in the original term of this Agreement, together with any other damages suffered by Licensor as a result of such default, and Licensee shall have no further claim hereunder.... Licensee shall pay to Licensor in addition to any amounts found to be due and owing, all expenses incurred by Licensor as a result of any such default, including reasonably attorneys' fees....
Id. at ¶7. Deen personally guaranteed the performance of Arif Enterprises under each of the License Agreements. Id. at ¶8.
On April 3, 2008, William E. Nelson, Captain D's vice president of franchise operations, wrote a letter to Arif Enterprises citing specific deficiencies in its restaurants' operations citing:
• The windows looked like no one had cleaned them in months.
• Paint was flaking off the gutters in huge chunks at many of your locations.
• The drive-thru menu boards had paint flaking off them.
• The indoor window sills looked like no one had cleaned them in months....
• In addition, the building at Stafford had the following major issues:
o The building needs painting....
* * *
o As described in Chris Kane's e-mail of December 13, 2007, the main sign lighting has not worked for months.
Id. at ¶ 9. Deen does not dispute that these deficiencies existed as of April 3, 2008. Id. at ¶ 10. Nelson's July 3rd letter also served as Arif Enterprises' written notice of default of the License Agreements based on its failure to correct any of the deficiencies listed in the April 3, 2008 letter. Id. at ¶ 13. Deen admits receiving the notice of default. Id. at ¶ 14.
Nelson initially demanded that the deficiencies be remedied on or before May 31, 2008. Id. at ¶ 11, but extended this deadline until August 15, 2008. Id. at ¶ 12. In a September 8, 2008 letter, Nelson informed Arif Enterprises that:
Pursuant to my letters dated April 3, 2008 and July 3, 2008, and your failure to complete the required work outlined in those letters... Captain D's...is hereby notifying you that, unless you present an acceptable plan to complete the work on or before September 17, 2008, the License Agreements for the above-referenced locations will terminate on that date without further notice.
Deen admits that the work outlined in previous letters had not been completed as of Nelson's September 8, 2008 letter. Id. at ¶¶16-17. Additionally, Deen did not present a plan to complete the work to Nelson by September 17, 2008. Id. at ¶ 18. By letter dated September 17, 2008, Nelson extended the September 17, 2008 deadline in light of a recent hurricane in the Houston area, stating "You do not need to submit a plan; however, you must complete the remodel of the above-referenced restaurants by December 31, 2008...." Id. at ¶¶ 19-20. Deen admits receiving this letter. Id. at ¶ 21.
On November 17, 2008, Nelson notified Arif Enterprises of its failing score on Captain D's operational standards audit that was conducted at the Tomball Restaurant. Id. at ¶ 22. On June 2, 2009, Nelson provided Arif Enterprises with its last and final notice of default and termination. Id. at ¶ 23. Nelson's June 2nd letter cited the recent inspection of Defendants' Post Oak and Stafford Restaurants by Nelson, Captain D's President, David Head, and Captain D's Director of Franchise Operations, Chris Kane. Id. at ¶ 24. Nelson's June 2nd letter also notified Arif Enterprises of the failing scores of its West Little York, Jones Road, and Post Oak Restaurants. Id. at ¶ 27. Nelson's June 2nd letter required, inter alia, that Arif Enterprises "[c]omply with the Captain D's Operational Standards as outlined in the attached Standard Operating Procedures, and pass a re-inspection at all of your restaurants[.]" Id. at ¶ 28. That letter stated, "Clearly neither restaurant meets the minimum operational standards that a franchisee must maintain to operate a Captain D's." Id. at ¶ 25. Deen does not dispute the condition of the Post Oak and Stafford Restaurants during the May 21, 2009 visit. Id. at ¶ 26.
As of July 7, 2009, all of the deficiencies noted during the Captain D's operational standards audit had not been cured. Id. at ¶ 29. On July 28, 2009, Nelson sent Arif Enterprises a Termination Notice, stating, "[P]ursuant to paragraph 19(b)(1) of the License Agreements, the License Agreements, together with all of your rights thereunder, are hereby terminated, effective immediately. Id. at ¶ 30.
The License Agreements provide a method to calculate of damages for royalties in the event of termination, and Nelson sent Arif Enterprises a calculation of its damages for royalties owed by Arif Enterprises to Captain D's as a result of its breach. Id. at ¶ 31. Pursuant to this calculation, Captain D's asserts damages in the amount of $719,031.54. Id. at ¶ 32. Deen testified that sales from 2006 to 2008 were accurately...
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