Continental Basketball Ass'n, Inc. v. Ellenstein Enterprises, Inc.

• Decision Date: 19 September 1994
• Docket Number: No. 87A01-9312-CV-428,87A01-9312-CV-428
• Citation: 640 N.E.2d 705
• Parties: CONTINENTAL BASKETBALL ASSOCIATION, INC., Appellant-Defendant, v. ELLENSTEIN ENTERPRISES, INC., Appellee-Plaintiff.
• Court: Indiana Appellate Court

Page 705

640 N.E.2d 705

CONTINENTAL BASKETBALL ASSOCIATION, INC., Appellant-Defendant, v. ELLENSTEIN ENTERPRISES, INC., Appellee-Plaintiff.

No. 87A01-9312-CV-428.

Court of Appeals of Indiana First District.

Sept. 19, 1994.

Rehearing Denied Nov. 17, 1994.

Leslie C. Shively, Noffsinger, Price, Bradley & Shively, Evansville, for appellant.

Marilyn R. Ratliff, Kahn, Dees, Donovan & Kahn, Evansville, for appellee.

ROBERTSON, Judge.

Continental Basketball Association, Inc. (CBA) appeals a partial summary judgment in favor of Ellenstein Enterprises, Inc. (Ellenstein) on Ellenstein's cross-complaint against CBA and the denial of CBA's motion for summary judgment on its counterclaim. We affirm the entry of partial summary judgment on Ellenstein's cross-complaint, as well as the denial of summary judgment on CBA's counterclaim.

CBA operates a professional basketball league and in the course of its business, sells what it calls "franchises" or memberships in the association. CBA membership is limited to sixteen active clubs. Each franchise authorizes its owner or owners to operate a club in a designated geographical area at least forty miles from any other club and grants the club exclusive rights to any city in which its team has played six or more home games during any season. Players are under contract with the CBA and part of the purchase price is attributable to the purchase of player contracts.

In May, 1984, Ellenstein entered into an agreement to purchase a franchise from CBA for a professional basketball club to be affiliated with CBA and to be located in Evansville, Indiana, by tendering a "Franchise Purchase Offer" to CBA upon a CBA form Ellenstein had modified. By the express terms of the offer, the "total purchase price for the franchise [was] Three Hundred Thousand Dollars ($300,000)." Ellenstein agreed to pay the fee in "assessments" or annual installments of $60,000 each and to abide by the terms of the CBA by-laws, CBA Operations Manual and "any rules and regulations."

In exchange, Ellenstein would share equally in the distribution of franchise fees from franchisees entering the CBA for the 1985-86 and later seasons; royalties, payments and profits from CBA Properties, Inc., CBA Entertainment, Inc. and all revenue derived from television, radio and broadcasting or any other source not specifically described; and, upon payment in full of the franchise fee, would receive a share of NBA revenue, which "includes all money or cash value of all services received from the National Basketball Association, NBA Properties, Inc., NBA Entertainment, Inc., NBA teams, including but not limited to money or services received for referee, player, coaching or front office development, computer programs or halftime promotional activities." Ellenstein also purchased rights to any player who plays or has played college basketball at Notre Dame Purdue University, and Indiana University not under contract to another team, and the opportunity to participate in a dispersal draft conducted by the other teams to obtain twelve players.

This litigation developed when members of the Evansville Thunder, the team operating under the franchise purchased by Ellenstein, sought an injunction to prevent the CBA and Ellenstein from excluding them from the CBA Western Division playoffs following the 1985-86 season. Ellenstein brought a four-count cross-claim against co-defendant CBA alleging franchise and common law fraud. CBA responded with a counterclaim against Ellenstein for amounts owed on the purchase agreement.

In their motions for summary judgment, both parties asked the trial court to determine with respect to Ellenstein's three statutory claims against CBA whether, upon the undisputed facts of the case, the contract between CBA and Ellenstein constituted a franchise as defined by the Indiana Franchises Act and the Indiana Deceptive Franchise Practices Act. The trial court resolved this question in favor of Ellenstein, finding that the agreement between the parties did constitute a franchise as defined by the Indiana Franchises Act.

CBA also argued that, as to the three statutory counts, Ellenstein had failed to specifically plead a claim of actionable fraud, setting forth the elements of common law fraud, and that the undisputed facts showed all payments required under the contract had not been made. The court denied CBA a summary judgment on its counterclaim, concluding that the undisputed facts showed a violation of the statutory provisions and that it could not enforce a contractual relationship created in violation of statute.

Summary judgment is appropriate only if the pleadings and evidence sanctioned by Ind.Trial Rule 56(C) show there is no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law. Oelling v. Rao (1992), Ind., 593 N.E.2d 189, 190. The reviewing court faces the same issues that were before the trial court and follows the same process. Greathouse v. Armstrong (1993), Ind., 616 N.E.2d 364, 366. Although the party appealing from the grant of summary judgment has the burden of persuading the court that the grant of summary judgment was erroneous, the reviewing court carefully scrutinizes the trial court's decision to assure that the party against whom summary judgment was entered was not improperly prevented from having its day in court. Id.

The burden is on the moving party to prove the non-existence of a genuine issue of material fact. Rao, 593 N.E.2d at 190. Any doubt about the existence of a factual issue should be resolved against the movant, with all properly asserted facts and reasonable inferences construed in favor of the nonmovant. Id. Even if the facts are undisputed, summary judgment is not proper if those undisputed facts "give rise to conflicting inferences which would alter the outcome." Bochnowski v. Peoples Federal Savings & Loan Ass'n (1991), Ind., 571 N.E.2d 282, 285.

In 1975 and 1976, the Indiana General Assembly enacted two pieces of legislation regulating trade in a particular kind of property right or interest which it calls a "franchise" in an effort to prevent fraud and to assure that investors are afforded a reasonable opportunity to exercise independent judgment in franchise transactions. See Enservco, Inc. v. Indiana Securities Division (1993), Ind., 623 N.E.2d 416, 425. Indiana Code 23-2-2.5 governs the offer and sale of franchises or interests in franchises and contains registration and disclosure provisions as well as a general antifraud provision akin to federal securities rule 10b-5, 17 C.F.R. § 240.10b-5 (1992), Enservco, 623 N.E.2d at 421-2, while I.C. 23-2-2.7 seeks to protect franchisees by restricting the types of clauses that can be written into franchise agreements, by restricting the acts and practices of franchisors, and by establishing restrictions on the ability of the franchisor to terminate a franchise agreement. Implement Service, Inc. v. Tecumseh Products Co. (S.D.Ind., 1989), 726 F.Supp. 1171, 1176.

To fall within the scope of these enactments, a person must offer or sell a "franchise" as defined by the legislature. We are bound by that definition, even if it conflicts with the common meaning of the word. Consolidation Coal Co. v. Indiana Department of State Revenue (1991), Ind., 583 N.E.2d 1199, 1201. Accord Wright-Moore Corp. v. Ricoh Corp. (7th Cir.1990), 908 F.2d 128, 134 (It is for Indiana legislature to decide what "hallmarks" of franchise are and it has done so through its statutory enactment). For purposes of both chapters,

"[f]ranchise" means a contract by which:

(1) a franchisee is granted the right to engage in the business of dispensing goods or services, under a marketing plan or system prescribed in substantial part by a franchisor;

(2) the operation of the franchisee's business pursuant to such a plan is substantially associated with the franchisor's trademark, service mark, trade name, logotype, advertising, or other commercial symbol designating the franchisor or its affiliate; and

(3) the person granted the right to engage in this business is required to pay a franchise fee.

I.C. 23-2-2.5-1(a). See also, I.C. 23-2-2.7-5. Unless an exemption or exception applies, I.C. 23-2-2.5 and 2.7 govern all agreements occurring after July 1, 1976, which meet the criteria set forth in I.C. 23-2-2.5-1(a) and either involve an Indiana offeree or franchisee or contemplate the operation of a franchise business in the state of Indiana, I.C. 23-2-2.5-2; I.C. 23-2-2.7-1; I.C. 23-2-2.7-2, regardless of the legal terminology in which the transaction is clothed.

Thus, we consider whether the agreement between CBA and Ellenstein meets the indicia of a franchise established by the Indiana General Assembly. The CBA is an association of member clubs in the business of providing entertainment to the public in the form of professional basketball games between clubs. Entertainment is considered a service in connection with the law of service marks. Dallas Cowboys Cheerleaders v. Pussycat Cinema, Ltd. (S.D.N.Y.1979), 467 F.Supp. 366, 373, affirmed, 604 F.2d 200. In exchange for its investment, Ellenstein purchased the right to provide CBA professional basketball entertainment in the Evansville, Indiana area. According to the designated evidentiary materials, Ellenstein bought the right to operate a team in the league, entitling it to an equal share of the revenue generated by the league for its teams, once it had fully paid its franchise fee, as well as whatever profits it made by engaging in the business of operating a team.

Ellenstein agreed to comply with the CBA by-laws, a 100-150 page "Operations Manual" and the CBA's rules and regulations. These documents controlled the transfer of title to an interest in the league, and nearly every other aspect of the selling of CBA professional basketball entertainment, including the acquisition and signing of coaches and players; the responsibilities of owners,...