Kutka v. Temporaries, Inc.

• Decision Date: 15 August 1983
• Docket Number: Civ. A. No. H-82-2071.
• Citation: 568 F. Supp. 1527
• Parties: Mike KUTKA, Plaintiff, v. TEMPORARIES, INC., Defendant.
• Court: U.S. District Court — Southern District of Texas

568 F. Supp. 1527

Mike KUTKA, Plaintiff, v. TEMPORARIES, INC., Defendant.

Civ. A. No. H-82-2071.

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

August 15, 1983.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

C. Leland Hamel, Dickerson, Hamel, Early & Pennock, Houston, Tex., for plaintiff.

Stephen B. Hammerstein, Fidler & Hammerstein, Houston, Tex., Michael A. Schuchat, Washington, D.C., for defendant.

MEMORANDUM AND ORDER

SEALS, District Judge.

This is a diversity action for injunctive and declaratory relief brought pursuant to the Court's removal jurisdiction.¹ Plaintiff, Mike Kutka, the franchisee, is seeking to prevent defendant, Temporaries, Inc. (hereinafter TI), the franchisor, from terminating his franchise in El Paso, Texas.² TI has interposed a counterclaim, based upon an alleged breach of the franchise agreement. TI has asked the Court to declare the plaintiff in default of the franchise agreement, and further, it seeks an order to compel plaintiff to turn over the franchise to TI pursuant to the termination provisions of their agreement.

The Court issued a temporary restraining order on July 23, 1982, restraining TI from terminating plaintiff's franchise. The restraining order has been extended by agreement of the parties. On September 20, 1982, TI filed a motion for summary judgment and for dismissal of this action. On October 6, 1982, plaintiff filed his cross-motion for summary judgment. A hearing was held on November 29, 1982, to address the issues raised in the parties' cross-motions for summary judgment. Following a review by the Court of the pleadings, depositions, affidavits, and proposed findings of fact and conclusions of law, the Court requested the parties to submit supplemental briefs on several issues not sufficiently addressed in their earlier submissions. There being no genuine issue as to any material fact, this matter is properly determinable, to the extent discussed herein,³ on the parties' cross-motions for summary judgment.

TI is a foreign corporation, incorporated under the laws of the District of Columbia, and has its principal office in the District of Columbia. TI is in the business of providing temporary office help to other businesses and organizations. It has twenty-nine offices throughout the United States, twenty-five branch offices and four franchise operations. In addition to plaintiff's franchise in El Paso, Texas, there are six branch offices located in Texas which are operated by a wholly owned subsidiary of TI called Temporaries, Inc., Texas.

On December 7, 1979, while employed as TI's southwest regional manager and vice president, plaintiff entered into a franchise agreement with TI (plaintiff had been employed by TI since 1970). The agreement granted plaintiff a license to operate a temporary help office in El Paso, Texas, using TI's trade name and methods of operation.

On December 7, 1981, plaintiff, with the approval of TI, assigned the El Paso franchise to Timothy Martin, Inc., a Texas corporation. Plaintiff owns ninety-five percent of the stock of Timothy Martin, Inc. The remaining five percent is owned by Ms. Gail Darling, the general manager of the El Paso franchise.

In March of 1982, plaintiff resigned his position as southwest regional manager and vice president of TI. In June of 1982, TI maintains that it received information that plaintiff was calling on customers in Houston, Texas, on behalf of Manpower Temporary Services of Houston, Inc. (hereinafter Manpower), a competitor of TI. Plaintiff confirmed this fact to TI's counsel, and further informed him that he would be formally employed by Manpower on July 1, 1982. On July 1, 1982, plaintiff became employed as a vice president and general manager of Manpower, having responsibility for the supervision of its five offices in the Houston area.⁴ Plaintiff maintains that both before and after going to work for Manpower, he tried without success to find a qualified buyer for the El Paso franchise. By letter dated June 23, 1982, TI notified plaintiff that his activities on behalf of Manpower were in violation of the franchise agreement, and, if these activities continued, TI would exercise its right to terminate the franchise. On July 23, 1982, TI informed plaintiff that it was exercising its right to terminate the franchise.

TI contends that plaintiff has violated paragraph 11(c) of the franchise agreement, which provides as follows:

Without the prior written consent of TI, LICENSEE shall not do business under any other name but TEMPORARIES INCORPORATED, nor engage in any other business than that licensed herein. The foregoing shall not be interpreted to prevent LICENSEE from making personal investments in other businesses which are not competitive to TEMPORARIES INCORPORATED, and which do not require any substantial time or attention by LICENSEE.

The main thrust of TI's argument is that paragraphs 11(b) and (c) were intended to operate as a provision requiring the franchisee to devote full-time and attention to the operation of the franchise, and as an in-term covenant not to compete, respectively. Further, TI maintains that amendment 1 to the franchise agreement, executed contemporaneously with the franchise agreement, which is a waiver of the full-time and attention provision of paragraph 11(b),⁵ was only intended to relieve plaintiff of the requirement that he devote his full-time and attention to the El Paso franchise so that he could perform other duties for TI as its regional manager. TI maintains that by entering the employ of a competitor, while operating as a franchisee of TI, plaintiff has breached a material covenant of the franchise agreement, entitling TI to terminate the franchise pursuant to paragraph 15(c) of the agreement, and to buy back the franchise according to a formula set out in paragraph 16 of the agreement.⁶

Before discussing the material provisions of the agreement, two preliminary matters bear examination. Plaintiff maintains that TI, through its activities as franchisor of the El Paso, Texas, franchise, is "doing business" in the state of Texas, for purposes of in personam jurisdiction, and for the purpose of bringing into play article 8.18, Tex.Bus.Corp.Act Ann. (Vernon 1982). The Court agrees. The activities of TI in authorizing and acting in the establishment of the franchise in El Paso, Texas, and receiving franchise fees from the operation of the franchise, are sufficient for federal due process purposes and for purposes of the Texas long-arm statute.⁷ See Hytken and Pelletier, Doing Business in Texas: A Legal Briefing for the Incoming Franchisor, 35 Tex.B.J. 23 (1972). The more troubling question is whether TI's failure to obtain a certificate of authority pursuant to article 8.18 precludes it from asserting its counterclaim in this Court.

Article 8.18 precludes a foreign corporation, which is transacting, or has transacted business in Texas, without a certificate of authority, from obtaining affirmative relief in the courts of Texas on any matter arising out of the transaction of intrastate business. This applies as well to a federal district court sitting in diversity. Waggener Paint Co. v. Paint Distributors, Inc., 228 F.2d 111 (5th Cir.1955). The failure to obtain a certificate of authority does not impair the validity of the franchise agreement, nor does it prevent TI from defending this action. It does, however, preclude the granting of any affirmative relief on TI's counterclaim. See Hightower Petroleum Corp. v. Story, 236 S.W.2d 679 (Tex.Civ.App. — Fort Worth 1951, writ ref'd).

The determination of whether the character of the business and the nature of the transaction involved are intrastate or interstate must be decided on the facts of the individual case. Ramsey v. Investors Diversified Services, Inc., 248 S.W.2d 263 (Tex.Civ.App. — Travis 1952, writ ref'd n.r. e.). Whether the contract is wholly performable in the state through a local representative is an important consideration. Davis v. United Shoe Repairing Machinery Co., 92 S.W.2d 1107 (Tex.Civ.App. — Beaumont 1936, writ dism'd w.o.j.); Alexander Film Co. v. Boxwell, 56 S.W.2d 676 (Tex. Civ.App. — Amarillo 1933, no writ); Finance Corp. of America v. Stone, 54 S.W.2d 254 (Tex.Civ.App. — Amarillo 1932 no writ); Motor Supply Co. v. General Outdoor Advertising Co., 44 S.W.2d 507 (Tex.Civ.App. — Texarkana 1931, no writ). Also, where the activities of a foreign corporation are at least in part of a local nature, the activity is intrastate and subject to regulation. Normandie Oil Corp. v. Oil Trading Co., 139 Tex. 402, 163 S.W.2d 179 (1942); Motor Supply Co., 44 S.W.2d at 506.

Determining the presence of the two factors necessitating the acquisition of a certificate of authority (i.e., (1) whether the party has transacted or does transact business in Texas, and (2) whether the transaction sued upon is intrastate in nature) is a factual matter, and therefore not ordinarily capable of resolution on motion for summary judgment. Altheimer & Baer, Inc. v. Vergal Bourland Home Appliances, 369 S.W.2d 478 (Tex.Civ.App. — Fort Worth 1963, writ ref'd n.r.e.). Here, however, even aside from TI's activities through its wholly owned subsidiary, Temporaries, Inc., Texas, there are sufficient undisputed facts to make such a determination. TI admits that it has not obtained a certificate of authority to transact business in Texas. TI has transacted, and is transacting business in Texas by: (1) its activities in authorizing and establishing the El Paso franchise; (2) receiving fees from the operation of the franchise; and (3) requiring the use of its name, forms, methods of operation, and advertising materials. Further, it is undisputed that the activities of the franchise are wholly local in nature — the providing of temporary office personnel to businesses in El Paso, Texas. Additionally, it is undisputed that the cause of action arose out of intrastate activities.⁸ Thus, the Court...