Motor City Bagels, L.L.C. v. American Bagel Co., Civ. S-97-3474.

• Court: U.S. District Court — District of Maryland
• Writing for the Court: Smalkin
• Citation: Motor City Bagels, L.L.C. v. American Bagel Co., 50 F.Supp.2d 460 (D. Md. 1999)
• Decision Date: 07 June 1999
• Docket Number: No. Civ. S-97-3474.,Civ. S-97-3474.
• Parties: MOTOR CITY BAGELS, L.L.C., et al., Plaintiffs, v. The AMERICAN BAGEL COMPANY, et al., Defendants.

50 F.Supp.2d 460

MOTOR CITY BAGELS, L.L.C., et al., Plaintiffs, v. The AMERICAN BAGEL COMPANY, et al., Defendants.

No. Civ. S-97-3474.

United States District Court, D. Maryland.

June 7, 1999.

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Thomas J. Minton, Quinn, Ward and Kershaw, Baltimore, MD, John Thomas Ward, Ward, Kershaw and Minton, P.A., Baltimore, MD, for Randall S. Flinn, plaintiff.

Peter J. Kadzik, Dickstein, Shapiro & Morin, L.L.P., Washington, DC, for The American Bagel Company, Alan Manstof, Michael Robinson, defendants.

James Allen Kaffenbarger, Jr., Budow and Noble, Bethesda, MD, Roberta R. Wilson, Doepken Keevican & Weiss, P.C., PH, Pittsburgh, PA, for Dan Rowe, a Virginia resident, defendant.

Christine Ella Connelly, Wiley, Rein and Fielding, Washington, DC, James C. Rubinger, Wiley, Rein & Fielding, PH, Washington, DC, David A. Huberman, Wiley, Rein & Fielding, PH, Washington, DC, for AFC Enterprises, Inc., defendant.

Thomas J. Minton, Quinn, Ward and Kershaw, Baltimore, MD, John Thomas Ward, Ward, Kershaw and Minton, P.A., Baltimore, MD, for Randall S. Flinn, counter-defendant.

MEMORANDUM AND ORDER

SMALKIN, District Judge.

This case is before the Court on the following motions: (1) Motion for Summary Judgment by Defendants, American Bagel Company, Alan Manstof, and Michael Robinson; (2) Motion for Summary Judgment by Defendant, Dan Rowe; (3) Motion for Summary Judgment by Defendant/Counterclaim-Plaintiff, AFC Enterprises, Inc.; and (4) Cross Motion for Partial Summary Judgment by Plaintiffs/Counterclaim-Defendants, Joe Anthony, Randall Flinn, and Motor City Bagels L.L.C. The issues pertinent to the disposition of these motions have been fully briefed, and no oral hearing is necessary. Local Rule 105.6 (D.Md.).

I. Background

Beginning in the fall of 1993, Plaintiff, Joseph Anthony, began researching franchise opportunities as a possible entrepreneurial venture. At that time, Mr. Anthony had an M.B.A. in finance and accounting from the Tuck School of Business Administration at Dartmouth College and had extensive experience in commercial real estate investment and management. By the spring of 1994, Mr. Anthony intensified his evaluation of potential franchise opportunities, focusing particularly on the bagel industry. While researching various bagel franchisors, Mr. Anthony initiated discussions with Chesapeake Bagel Bakery through its sales representative Steve Vierra.¹ After some preliminary discussions on the telephone, Mr. Anthony traveled to McLean, Virginia during the spring of 1994 to meet with Mr. Vierra and to tour a handful of Chesapeake stores in the Washington, D.C. area.

Early in the summer of 1994, Plaintiff, Randall Flinn, teamed with Mr. Anthony in assessing the feasibility of operating a bagel franchise. Mr. Flinn, a friend of Mr. Anthony's from college, had an M.B.A. from the J.C. Kellogg Graduate School of Management and was working as a Senior Product Manager for Teradyne, an Illinois telecommunications concern. By late July 1994, Mr. Anthony and Mr. Flinn received an American Bagel Uniform Franchise Offering Circular, dated August 23, 1993 ("1993 UFOC"), which disclosed information about the Chesapeake Bagel Bakery franchise system, including estimates of initial investment costs experienced by franchisees.

The 1993 UFOC provided an estimate for initial investment costs for Chesapeake Bagel Bakeries, "based on the latest available data," ranging from $240,400 to $304,500. 1993 UFOC at 8. Mr. Anthony and Mr. Flinn used the cost figures provided in the 1993 UFOC as a central assumption in an extensive, written business plan analyzing the viability of owning and operating Chesapeake Bagel Bakery franchises. The plaintiffs used the midpoint in the range provided in the disclosure document, $275,000, to determine the amount of capital required to open an individual store.

Although the plaintiffs used the cost figures from the August 23, 1993 UFOC in drawing up their business plan, American Bagel had actually updated its disclosure information through a revised UFOC, filed in Mr. Anthony's home state of Indiana on April 21, 1994 ("1994 UFOC"). This revised UFOC contained a higher range of estimated initial investment costs than was included in the 1993 UFOC. The 1994 UFOC stated that, "based on the latest available data," start-up costs for individual Chesapeake Bagel Bakery stores ranged between $288,300 and $376,000.

In November 1994, American Bagel mailed Mr. Anthony a second UFOC. The defendants contend that they sent the 1994 UFOC with the revised estimates of initial investment costs. The plaintiffs, however, vehemently deny this assertion, claiming that they received a UFOC with the same cost estimates that they had received in July. In any event, Plaintiffs, Mr. Anthony, Mr. Flinn, and Motor City Bagels, L.L.C., signed an Area Franchise Development Agreement ("AFDA") on December 3, 1994 pursuant to which they received the exclusive right, subject to certain terms and conditions, to develop Chesapeake Bagel Bakeries in Oakland County, Macomb County, and the city of Grosse Pointe, Michigan. Under the agreement, the plaintiffs had to pay $25,000 at the time of signing, $10,000 prior to December 31, 1994, and an additional $50,000 within forty-five days. That same day, the plaintiffs also entered into two franchise agreements, obligating the plaintiffs to pay license fees of $22,500 and $20,000 by December 31, 1994.

On June 15, 1995, the plaintiffs signed another AFDA pursuant to which they were granted, under certain terms and conditions, the exclusive right to develop Chesapeake Bagel Bakeries in Washtenaw, Livingston, Clinton, Eaton, and Ingham Counties, Michigan, another franchise agreement, and a promissory note for $10,000 payable to American Bagel. Under the AFDA, the plaintiffs paid to American Bagel $60,000 in franchise fees and the franchise agreement required the plaintiffs to pay an additional $17,500 in license fees.

Allegedly unbeknownst to the plaintiffs, American Bagel had again updated its UFOC between the signing of the first wave of agreements on December 3, 1994, and the second wave on June 15, 1995. On January 25, 1995, the Federal Trade Commission approved the revised offering circular submitted by American Bagel ("1995 UFOC"). In this updated disclosure form, American Bagel had again increased the estimated initial costs that prospective franchisees could expect to spend to a range of $328,800 to $431,000.

Pursuant to the two franchise agreements signed on December 3, 1994, the plaintiffs opened a Chesapeake Bagel Bakery on December 27, 1995 in Northville, Michigan, and a second one in Troy, Michigan on March 6, 1996.² According to the plaintiffs, their start-up costs greatly exceeded the amounts represented by the defendants in the 1993 UFOC. Mr. Anthony estimated that in the Northville store, the plaintiffs spent $425,000 on tenant improvements and equipment, and that franchise fees and expenses associated with training, advertising, and deposits pushed the total cost of the store over $500,000. Similarly, the plaintiffs assert that it cost approximately $400,000 to construct and equip the Troy store, even before accounting for franchise fees, advertising, training, and other sundry start-up expenses.

After Northville and Troy, the plaintiffs failed to open up any additional Chesapeake Bagel Bakery restaurants as required by the Consolidated, Amended and Restated Area Development Agreement, signed by the plaintiffs on August 10, 1996.³ Mr. Flinn testified at his deposition that the plaintiffs refused to open more stores because they had "been fraudulently induced into signing the contracts and the agreement with [American Bagel] to open these stores through the representation of construction costs that were dramatically lower than the actual costs." Flinn Dep. at 196. The plaintiffs had exhausted their capital in starting up the Northville and Troy restaurants, and the debt burden resulting from the unexpectedly high construction costs was "putting a real strain on the profitability of the stores." Id. at 25. Mr. Flinn explained that "at $400,000 to open a store, it's not a viable business. So, yes, we said if it's going to cost us $400,000 to open stores, we are not going to be able to open any additional stores." Id. at 26-27. In addition to not constructing additional stores, the plaintiffs, in November 1996, likewise decided to stop paying various monthly franchise fees to American Bagel and its successor, Defendant, AFC Enterprises, Inc. ("AFC"), arising from the ongoing operations at their Northville and Troy stores.⁴

As a result of this failed business relationship, the plaintiffs filed an eight-count suit against the defendants alleging violations of Indiana franchise law, fraud, negligent misrepresentation, violations of Maryland franchise law, breach of contract, unjust enrichment, and misappropriation of trade secrets. In addition, the plaintiffs seek declaratory judgment against AFC, arguing that the contracts at issue in this case are void ab initio and thus unenforceable. Additional facts will be discussed, as needed, within the framework of the legal issues presented in the individual claims.

II. Standard for Summary Judgment

Under Rule 56(c) of the Federal Rules of Civil Procedure, summary judgment is appropriate when there is no genuine issue as to any material fact and the moving party is entitled to summary judgment as a matter of law. In Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 249, 106 S.Ct. 2505, 91 L.Ed.2d 202 (1986), the Supreme Court explained that, in considering a motion for summary judgment, "the judge's function is not himself to weigh the evidence and determine the truth of the matter but to determine whether there is a genuine issue for trial." A dispute about a material fact is genuine "if the evidence is such that a reasonable...