Carvel Corp. v. Baker
| Decision Date | 22 July 1997 |
| Docket Number | No. 3:94CV1882 (AVC).,3:94CV1882 (AVC). |
| Citation | 79 F.Supp.2d 53 |
| Court | Connecticut Supreme Court |
| Parties | CARVEL CORPORATION, Plaintiff and Counterclaim Defendant, v. James BAKER, et al., Defendants and Counterclaim Plaintiffs. |
Robert A. Izard, Jr., Christopher John Hug, David T. Ryan, Anne S. Fassler, Robinson & Cole, Hartford, CT, Mitchell A. Karlan, Beth L. Golden, Marshall R. King, Gibson, Dunn & Crutcher, New York City, Richard P. Weinstein, Weinstein & Wisser, P.C., West Hartford, CT, David Kaufman, Kaufmann, Feiner, Yamin, Gildin & Robbins, New York City, Daniel Gildin, New York City, Keith J. Kanouse, Kanouse & Walker, PA, Boca Raton, FL, for Carvel Corporation, plaintiff.
Ross G. Fingold, Levy & Droney, P.C, Farmington, CT, John Soroko, Wayne A. Mack, Mark B. Schoeller, J. Manly Parks, Duane Morris & Heckscher, Philadelphia, PA, for Abdul Aziz Hoodbhoy, John K. Hazelton, Mary Lisa Hazelton, Edward Gromelski, Marcia Finkle, Nelson Finkle, Suleman Hoodbhoy, Dost M. Khemani, John G. Hughes, Beverly A. Papp, Ash Family Trust, Robert A. Morath, Iqbal Naviwala, Estelle McNerney, Pen Li Wang, Christel Scinski, Stanley Sicinski, Josephine Ingenito, Angela Sparacino, Gaspare Sparacino, Peter Marsella, Jerome Lang, Margaret C. Lang, Nasim Athsed Chugtai, Robert Spielman, Joseph A. Rotondo, Paula Rotondo, Valerie Cristiano, Stephen Vangelder, Joseph A. Giampapa, Elizabeth A. Noonan, John D. Noonan, Mildred Miller, Dora Lee Shock, Bruce Mordaunt, Rosemarie Mordaunt, John Schneider, Josephine Ann Schneider, Carlton K. Harding, Judith M. Harding, Anthony Iaquinta, Frank Iaquinta, MD, Kenneth Mounts, Shirley Mounts, Burton G. Fischer, Lynn Kohler, Robert Kohler, Don Roggie Siclait, Wilfrid Siclait, Ismail Tawfik, Noor J. Tawfik, Maria Capodieci, Randy hyde, Robert Noorigian, Geraldine McCormack, Vincent Valva, Stephen Kwacz, All Conpla, consolidated plaintiffs.
Ross G. Fingold, Levy & Droney, P.C, Farmington, CT, John Soroko, Wayne A. Mack, Mark B. Schoeller, Thomas P. Cassidy J. Manly Parks, Duane Morris & Heckscher, Philadelphia, PA, Keith J. Kanouse, Kanouse & Walker, PA, Boca Raton, FL, for Jerry Capodieci, Carol Guadagno, Chin Tien Hsieh, Margaret Y.M. Hsieh, Diane Humphrey, Christine Liberti, Hugo Liberti, Mary H. Lisa, Robert T. Maida, Jeanne V. Marsella, George M. Piquette, Jr., Ketki P. Shah, Pankaj Shah, Douglas Casavant, Barbara Casavant, John Lynch, Catherine Lynch, Nasim Arhsed Chugtai, H. Martin Popiel, Joyce Popiel, Armand Liguori, Michael Bailey, Denise Bailey.
RULING ON THE PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT
This is an action for declaratory judgment. It is brought pursuant to 28 U.S.C. § 2201, and concerns the validity of the plaintiff's wholesale ice cream distribution program (hereinafter "the supermarket program"). By way of amended counterclaim, the defendants aver that the supermarket program violates various state statutory prohibitions against unfair trade practices, and common law tenets concerning tortious interference with business relationships, fraudulent concealment, and breach of contract. The amended counterclaim seeks damages, declaratory and injunctive relief. Carvel asserts, and the defendants do not dispute, that New York law governs the action to the extent that it relates to the performance of their agreements.
Carvel now moves for summary judgment on its claim for declaratory relief to the effect that its supermarket program does not violate its franchise agreements with the defendants.
The issues presented are: 1) whether the supermarket program violates the express terms of Carvel's Type A franchise agreement; 2) whether the supermarket program violates the Type A franchise agreement's implied covenant of good faith and fair dealing; 3) whether the supermarket program violates the express terms of Carvel's Type B franchise agreement; and 4) whether the supermarket program violates the Type B franchise agreement's implied covenant of good faith and fair dealing.
For the reasons hereinafter set forth, the motion is granted in part, and denied in part.
Examination of the complaint, affidavits, local rule 9(c) statements, and other supporting materials accompanying the motion for summary judgment, and the responses thereto, disclose the following undisputed, material facts. The plaintiff and counterclaim defendant, Carvel Corporation (hereinafter "Carvel"), is a Delaware Corporation having its principal place of business in Farmington, Connecticut. Since 1934, Carvel has been in the business of producing and selling specialty ice cream cakes and frozen desserts. In 1947, Carvel began franchising others to operate separately standing Carvel ice cream stores, and to sell at retail Carvel ice cream and other frozen dessert products. The defendants and counterclaim plaintiffs are several Carvel ice cream store franchisees or co-franchisees (hereinafter "the defendants"), situated in several states along the eastern seaboard, including Connecticut, New York, Florida, New Jersey, Pennsylvania, Massachusetts, Rhode Island, and New Hampshire. Currently, there are approximately 435 Carvel stores nationwide, both company owned and franchised. The defendants comprise approximately 11% of Carvel's franchisees.
Under the Carvel franchise system, Carvel sells a liquid dairy mix by the gallon to its franchisees. The franchisees manufacture Carvel ice cream on their premises by feeding the mix into machines, and then sell the finished product to the public. In order to become a part of the franchise system, franchisees are required to pay an initial licensing fee of between $10,000 and $25,000 dollars. In addition, the franchisees are required to purchase Carvel equipment and pay a royalty and an advertising fee on each liquid gallon of mix. The advertising and royalty payments are calculated based upon a minimum annual gallonage (typically 10,000 gallons of mix), with a requirement that the franchisee pay a minimum mix surcharge regardless of the amount of mix actually consumed by the store.
Traditionally, Carvel stores (both company owned and franchised) were the only authorized retail outlets for Carvel products. Supermarkets, convenience stores, restaurants and other frozen dessert retail stores were not authorized to sell Carvel ice cream. Both Carvel and the defendants viewed such venues as their direct competitors in the specialty ice cream market.1 As of 1990, Carvel's chief executive officer, Steve Fellingham, had assured franchisees that Carvel had no plans to enter the supermarket business due to the devastating effect such a policy would have on its franchisees.2
In the Fall of 1992, Carvel entered the supermarket business. Carvel adopted the "branded freezer program", whereby it began selling its products out of branded freezers in Pathmark supermarkets in New Jersey. According to Steve Fellingham, the branded freezer program was only a "test" to see whether the products would sell in supermarkets, and if sales were successful, Carvel products would only be made available in areas of the country where there were no pre-existing Carvel franchise stores.
In April 1993, over the defendants' objections, Carvel announced that it was establishing a "Cooperation Policy for Supermarket Expansion" (hereinafter the "AOI Policy"). Under this policy, Carvel envisioned selling its products in branded freezers in the same market areas as existing franchisees, but not within any franchisee's exclusive territory. The AOI policy allowed approved dealers (including franchisees), to sell their products through branded freezers at approved locations within the dealers "area of inclusion", that is, an area with a radius of 5 miles from the Carvel store or within an area containing a population of 25,000. In order to participate in the AOI program, a dealer had to purchase its own freezers at a cost of $5,000 per freezer.
On June 30, 1994, over the defendants' objections, Carvel announced that it was expanding its wholesale distribution of ice cream through a method called the "Supermarket Route Program." The program was designed to increase distribution of Carvel products to supermarkets, convenience stores, and other approved wholesale accounts. Under the program, Carvel secures contracts with major supermarkets to supply Carvel ice cream at certain wholesale prices. The Carvel franchisees closest to those supermarkets are afforded the opportunity to fulfill those contracts as route dealers. Carvel estimates that the total initial investment to participate as a route dealer is approximately $34,500 - $65,000. Both the AOI policy and the Supermarket Route Program comprise the supermarket program.
Carvel products sold under the supermarket program are advertised, marketed and promoted by Carvel, subsidized by Carvel through coupon redemption, and in some cases offered at prices that are significantly lower than the prices for the same products in franchise stores. While Carvel permits its franchisees to participate in the supermarket program, the defendants herein claim that they cannot afford to expend the additional sums, time and effort required for participation, and cannot make a reasonable profit selling their products at the wholesale prices set by Carvel.
The defendants claim they never expected that Carvel would compete with them for sales and revenue by supplying supermarkets and other accounts at wholesale. Rather, the defendants claim that at the time they purchased their respective franchises, there was an expectation that the franchise system would remain the exclusive means for Carvel ice cream distribution. Absent this expectation, the defendants claim they would not have purchased their franchises.
Carvel, on the other hand, claims that it created the supermarket program out of necessity. Specifically, Carvel claims that the supermarket program was (and is) calculated to respond to the consumer trend of purchasing ice cream mainly in...
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