McDonald's Corp. v. Nelson, Civ. No. 4-92-70301

• Decision Date: 14 May 1993
• Docket Number: 4-92-70431.,Civ. No. 4-92-70301
• Parties: McDONALD'S CORPORATION, Plaintiff, v. Steven L. NELSON and Tass Enterprises, Inc., Defendants, State of Iowa, Intervenor, Iowa Franchisee Association, Intervenor. HOLIDAY INNS FRANCHISING, INC., and Holiday Inns, Inc., Plaintiffs, v. Terry BRANSTAD, John Q. Hammons, and Omaha Hotel, Inc., Defendants, Iowa Franchisee Association, Intervenor.
• Court: U.S. District Court — Southern District of Iowa

822 F. Supp. 597

McDONALD'S CORPORATION, Plaintiff, v. Steven L. NELSON and Tass Enterprises, Inc., Defendants, State of Iowa, Intervenor, Iowa Franchisee Association, Intervenor.

HOLIDAY INNS FRANCHISING, INC., and Holiday Inns, Inc., Plaintiffs, v. Terry BRANSTAD, John Q. Hammons, and Omaha Hotel, Inc., Defendants, Iowa Franchisee Association, Intervenor.

Civ. Nos. 4-92-70301, 4-92-70431.

United States District Court, S.D. Iowa, C.D.

May 14, 1993.

Kimberly J. Walker, Walker Giudicessi & Kincaid, Des Moines, IA, Alan H. Silberman, William T. Barker, Robert T. Joseph and Jill A. Thompson, Sonnenschein Nath & Rosenthal, Chicago, IL, for McDonald's of Delaware, Inc., plaintiff.

Mark Hunacek, Iowa Atty. Gen., Gen. Counsel Div., DOT, Ames, IA, for State of Iowa, intervenor and Terry E. Branstad, defendant.

Brent B. Green and Mariclare Thinnes, Duncan Green Brown Langeness & Eckley, Des Moines, IA, for Steven Nelson and Tass Enterprises, Inc., defendants.

Thomas D. Hanson, Hanson Bjork & Russell, Des Moines, IA, and John G. Parker, Paul Hastings Janofsky & Walker, Atlanta, GA, for Iowa Franchisee Ass'n, intervenor.

Edward W. Remsburg, Ahlers Cooney Dorweiler Haynie Smith & Allbee, Des Moines, IA, John G. Parker, Janet L. Kishbaugh and Ronald T. Coleman, Jr., Paul Hastings Janofsky & Walker, Atlanta, GA, for

Holiday Inns Franchising, Inc., plaintiff and Holiday Inns, Inc., plaintiffs.

Barbara A. Hering Antonio Colacino Bradshaw Fowler Proctor & Fairgrave, John J. Gajdel, Watson & Gajdel, Des Moines, IA, and Hugh D. Mauch, Great Bend, KS, for John Q. Hammons and Omaha Hotel, Inc., defendants.

MEMORANDUM OPINION, RULINGS, ADJUDICATION, AND § 1292(b) CERTIFICATION

VIETOR, District Judge.

Plaintiff McDonald's Corporation ("McDonald's") and plaintiffs Holiday Inns Franchising, Inc. and Holiday Inns, Inc. (jointly referred to as "Holiday Inns") bring separate actions for declaratory judgment seeking determinations that the Iowa Franchise Act, House File 2362 (codified at Iowa Code ch. 523H) ("Act"), violates various provisions of the United States and Iowa constitutions.¹ McDonald's and Holiday Inns each move for partial summary judgment² on their claims that the Act violates federal and state Contract Clauses, U.S. Const. art. 1, § 10, cl. 1; Iowa Const. art. 1, § 21.³ Defendants and intervenors in each case resist plaintiffs' motions. Defendant Terry Branstad in the Holiday Inns case, and intervenor State of Iowa in the McDonald's case, filed cross-motions for partial summary judgment. Plaintiffs resist the cross-motions. The court heard oral arguments, and all the motions are submitted.

SUMMARY JUDGMENT STANDARD

Rule 56 of the Federal Rules of Civil Procedure provides that summary judgment "shall be rendered forthwith if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). To preclude the entry of summary judgment, the nonmovant must make a sufficient showing on every essential element of its case for which it has the burden of proof at trial. Celotex Corp. v. Catrett, 477 U.S. 317, 322-23, 106 S.Ct. 2548, 2552-53, 91 L.Ed.2d 265 (1986); Continental Grain Co. v. Frank Seitzinger Storage, Inc., 837 F.2d 836, 838 (8th Cir.1988). The nonmoving party must go beyond the pleadings and by affidavits, or by the depositions, answers to interrogatories, and admissions on file, designate "specific facts showing that there is a genuine issue for trial." Fed.R.Civ.P. 56(e); Celotex, 477 U.S. at 324, 106 S.Ct. at 2553; Johnson v. Schopf, 669 F.Supp. 291, 295 (D.Minn.1987). The quantum of proof that the nonmoving party must produce is not precisely measurable, but it must be "enough evidence so that a reasonable jury could return a verdict for the nonmovant." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 257, 106 S.Ct. 2505, 2515, 91 L.Ed.2d 202 (1986); Johnson, 669 F.Supp. at 295-96.

On a motion for summary judgment, the court views all the facts in the light most favorable to the nonmoving party, and gives that party the benefit of all reasonable inferences that can be drawn from the facts. United States v. City of Columbia, Mo., 914 F.2d 151, 153 (8th Cir.1990); Woodsmith Publishing Co. v. Meredith Corp., 904 F.2d 1244, 1247 (8th Cir.1990).

BACKGROUND FACTS

The following facts are undisputed. From 1974 to 1982, McDonald's entered into license agreements with Arch Madden for six McDonald's restaurants in central Iowa. The license agreements run for the following terms: (1) Ankeny, December 1974 to December 1994; (2) S.E. 14th, December 1974 to December 1994; (3) S.W. 9th, April 1979 to April 1999; (4) Altoona, February 1980 to February 2000; (5) Indianola, May 1981 to May 2001; and (6) E. 14th, November 1982 to October 2002. Defendant Steve Nelson acquired the rights to all of the above license agreements in July 1990 and March 1991; each franchise agreement has been assigned to defendant Tass Enterprises, Inc. (Nelson continues to be personally liable for the obligations).

Holiday Inns has two license agreements with defendant Omaha Hotel, Inc. One of the agreements, for a hotel in Davenport, is dated August 26, 1982, and has a termination date of August 8, 1996; the other agreement, dated July 2, 1984, is for a hotel in Council Bluffs, and has a termination date of August 14, 1995. Holiday Inns also has a license agreement with defendant John Q. Hammons for a hotel in Des Moines; that agreement is dated December 30, 1986, and has a termination date of December 29, 2006.

The Iowa Legislature convened the Franchise Regulation Interim Study Committee in 1991 to examine whether franchises in Iowa needed to be regulated, and if so, what that regulation would be. The Study Committee, composed of members of both the House and Senate, met on September 27, 1991, and November 1, 1991. The Committee heard testimony and received reports from franchisors, franchisees, experts, and other interested individuals and entities. In January 1992, the Committee issued its final report containing its recommendations for legislation. After debate and compromise, the final version of the Act was passed on a 90 to 8 vote in the House and a 40 to 5 vote in the Senate. Governor Terry Branstad signed the bill on April 23, 1992. The Act became effective on July 1, 1992.⁴

INTRODUCTION

In their motions, McDonald's and Holiday Inns challenge, as violative of federal and state Contract Clauses, several sections of the Act in particular: Section 2, which makes the Act applicable to existing franchises operating in the state of Iowa; Section 5, governing transfers of franchises; Section 6, providing guidelines for new franchise encroachment on existing franchises; Section 7, regarding termination (only Holiday Inns specifically argues this section); and Section 8, on nonrenewal of franchises.

First, the court will set out the challenged statutory provisions, the contractual provisions alleged to be impaired, and plaintiffs' contentions as to the nature of the impairment. Next, the court will address two preliminary legal issues, ripeness and the Eleventh Amendment. The final section of the opinion will examine the issues presented under the Contract Clause.

STATUTORY AND CONTRACTUAL PROVISIONS

I. Transfer of Franchise

A. Section 5 of the Act

Section 5 provides that a franchisee may transfer the franchise if the transferee satisfies the "reasonable current qualifications" (qualifications based upon legitimate business reasons) of the franchisor for new franchisees. If the proposed transferee does not meet the franchisor's qualifications, the franchisor may refuse to permit the transfer, as long as the franchisor's refusal "is not arbitrary or capricious when compared to the actions of the franchisor in other similar circumstances." Iowa Code § 523H.5(1). Holiday Inns challenges subsections (1), (4), (5), and (13)(d), (e), and (f); McDonald's challenges subsections (4) and (13)(d), (f), and (g).

Subsection (4) states that a "franchisor shall not withhold consent to a franchisee making a public offering of the franchisee's securities without good cause, provided the franchisee or the owners of the franchise retain control of more than fifty percent of the voting power in the franchise."

Subsection (5) states that a "franchisee may transfer the franchisee's interest in the franchise, for the unexpired term of the franchise agreement, and a franchisor shall not require the franchisee or the transferee to enter into a new or different franchise agreement as a condition of the transfer." Subsection (13) provides that certain occurrences shall not be considered transfers requiring the consent of the franchisor. These occurrences include a "transfer within an existing ownership group of a franchise" (13(d)); a "transfer of less than a controlling interest in the franchise to the franchisee's spouse or child or children" (13(e)); and a "transfer of less than a controlling interest in the franchise of an employee stock ownership plan, or employee incentive plan" (13(f)); all with the proviso that more than fifty percent of the entire franchise is held by those who meet the franchisor's reasonable current qualifications for franchisees. Under each of these subsections, if less than fifty percent of the franchise would be owned by persons who meet the franchisor's qualifications, "the franchisor may refuse to authorize the transfer," as long as the enforcement of the qualifications is not "arbitrary or capricious when compared to actions of the franchisor in other similar circumstances." The occurrence in 13(g), which is also an occurrence not considered a transfer requiring franchisor consent, is a

grant or retention of a security interest in the franchised business or its assets, or an ownership interest in the franchisee,

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