My Pie Intern., Inc. v. Debould, Inc.

• Decision Date: 17 August 1982
• Docket Number: 81-2443 and 81-2583,Nos. 81-2418,s. 81-2418
• Citation: 687 F.2d 919
• Parties: MY PIE INTERNATIONAL, INC., Plaintiff-Appellant, Plaintiff-Appellee, Cross-Appellant, v. DEBOULD, INC., Dowmont, Inc., Arnold Germain and Judith Germain, Defendants-Appellees, Defendants-Appellants, Cross-Appellees.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 919

687 F.2d 919

220 U.S.P.Q. 398

MY PIE INTERNATIONAL, INC., Plaintiff-Appellant Plaintiff-Appellee, Cross-Appellant, v. DEBOULD, INC., Dowmont, Inc., Arnold Germain and Judith Germain, Defendants-Appellees Defendants-Appellants, Cross-Appellees.

Nos. 81-2418, 81-2443 and 81-2583.

United States Court of Appeals Seventh Circuit.

Argued April 14, 1982.

Decided Aug. 17, 1982.

Charles A. Laff, Laff, Whitesel, Conte & Saret, Chicago, Ill., for My Pie Intern., Inc.

Leon E. Lindenbaum, Walsh, Case, Coale, Brown & Burke, Chicago, Ill., for Debould, Inc., et al.

Before BAUER, ESCHBACH and POSNER, Circuit Judges.

POSNER, Circuit Judge.

The plaintiff in these consolidated actions, My Pie International, Inc., is an Illinois corporation that has franchised a total of 13 restaurants throughout the country. The restaurants sell mainly pizza. Each restaurant operates under the name "My (Greek letter pi)," the plaintiff's trademark. The individual defendants are two residents of Illinois who own the corporate defendants, Dowmont, Inc. and Debould, Inc., each of which is a former My Pie franchisee. Dowmont owns a restaurant located in Glen Ellyn, Illinois, a suburb of Chicago. Dowmont operated this restaurant under a My Pie franchise between July 1976 and May 1980, and since then has operated it under the name Arnold's. Debould owned a restaurant in Boulder, Colorado that operated under a My Pie franchise from October 1977 until August 1980 and thereafter (until sold) under the Arnold's name. My Pie brought this suit to recover royalties under and damages for breach of the franchise agreement and also damages for trademark infringement and theft of trade secrets after the termination of the franchises. The defendants counterclaimed for the royalties they had paid My Pie under the franchise agreements. Federal jurisdiction of the suit is conferred by My Pie's trademark infringement claim, based on the Lanham Act, 15 U.S.C. §§ 1114(1), 1125(a). All of My Pie's other claims, and the counterclaims, are pendent or ancillary claims based on Illinois law. The district court, after a bench trial, dismissed all of My Pie's claims except for royalties, and also dismissed the defendants' counterclaims. The case is before us on the parties' cross-appeals.

Whenever a franchise relationship is terminated and the franchisee decides to carry on the business in the same place, he must discontinue using his exfranchisor's trademarks and trade secrets. My Pie's only trademark is the name "My (pi)." Although the defendants stopped using it when their franchises were terminated, and switched to the name "Arnold's," My Pie contends that the defendants retained so many of the distinctive features of the My Pie operation that patrons of Arnold's were likely to think that it was still a My Pie franchise-features such as Tiffany-style lamps and a distinctive fireplace and the slogan "unique pizza in the pan." The district court found that these were not distinctive features and that patrons would not be misled. These are findings of fact that we may not set aside unless clearly erroneous. See Fed.R.Civ.P. 52(a). Because My Pie evidently misunderstands the standard of review, and except for a perfunctory obeisance to the clearly-erroneous standard takes issue with the district court's factfindings as erroneous rather than clearly so, most of its argument to us is simply misdirected.

The district court also found as a fact that the defendants had not stolen any of My Pie's trade secrets. Again My Pie makes little effort to show that this finding is not just erroneous but clearly so; again the only issues are factual, and of limited interest. We shall not fill up the pages of the Federal Reporter discussing such questions as whether the ratio of yeast to flour in Arnold's pizza dough was stolen from My Pie or taken out of a cookbook. It is enough to record our conclusion that none of the district court's findings of fact with respect to My Pie's trademark and trade secret claims is clearly erroneous; having done so, we turn to the pretermination issues.

The defendants argue that the franchise agreements were void under Illinois' Franchise Disclosure Act, Ill.Rev.Stat.1981, ch. 1211/2, §§ 701 et seq. Although this statute has been on the books for more than eight years there has been virtually no judicial interpretation of it, and we must guess how the Illinois courts would resolve several novel questions under the Act.

Modeled loosely on the new-issue provisions of federal securities and state blue-sky laws and closely on franchise-disclosure statutes in several other states, the Act seeks to prevent fraudulent and unsound franchise promotions in Illinois by requiring the franchisor to give prospective franchisees extensive and verified written information, in the format prescribed in section 5 of the Act, on the background and resources of the franchisor and its principals, the terms of the franchise relationship, and the franchisor's prospects. See section 2; Rudnick & Ginsburg, The Illinois Franchise Disclosure Act, 62 Ill.Bar.J. 256 (1974). Section 4(2) of the Act makes it unlawful to sell a franchise without providing the prospective franchisee with a copy of the disclosure statement specified in section 5 at least seven days prior to the execution of a binding franchise or the receipt by the franchisor of "any consideration," whichever comes first. Any sale of a franchise in violation of the Act is voidable at the election of the franchisee, provided that notice of election to rescind is given by the franchisee to the franchisor within 90 days of the franchisee's first learning of a violation of the Act. §§ 21(2) (a), (b).

Dowmont and Debould first received the required disclosure statement from My Pie on November 30, 1977. This was more than two years after Dowmont had executed its franchise agreement with My Pie. It was also six weeks after Debould had begun doing business as a My Pie franchisee. And though it was more than seven days before Debould's franchise agreement with My Pie was executed, Debould had already paid two invoices for supplies furnished it by My Pie, including menus and employee T-shirts bearing My Pie's trademark; if these payments were "consideration" within the meaning of section 4(2), My Pie's failure to give Debould a copy of the disclosure statement at least seven days before the payments were made was a violation of the Act.

We think they were consideration even though they were not a fee for the franchise itself. "Franchise fee" is a term of art carefully defined and frequently invoked in the Act. See sections 3(14), 4.2, 5(10), 5(11), 11. If the draftsmen had meant the running of the seven-day period in section 4(2) to be triggered only by the payment of franchise fees and not by consideration more broadly conceived, probably they would have used the term franchise fee. But more important than this textual point is the fact that franchisors often derive an important part of their franchise income from the sale of incidental supplies to the franchisees. The objective of the Franchise Disclosure Act-to protect uninformed franchisees-would be seriously undermined if the franchisor could collect income in this form from its franchisees indefinitely, without complying with the statutory disclosure requirement, simply by not executing written franchise agreements. We think therefore that the idea behind the reference to consideration in section 4(2) must be that the receipt of franchise-related income by the franchisor is sufficient evidence of a franchise relationship to trigger the statutory disclosure requirement.

My Pie argues in the alternative that it did not have to give Debould a disclosure statement because Debould was merely taking over an existing franchise. We need not consider whether the Act applies to a transfer. There had indeed been another franchisee at the location but there is no evidence that Debould received a copy of that franchisee's disclosure statement, and in any event My Pie purported to sell Debould a new franchise rather than transfer an existing one.

We conclude that My Pie violated the Franchise Disclosure Act with respect to both franchisees, who therefore were entitled to rescind the franchises. But we have still to consider whether they did so within the statutory time limit. Both Dowmont and Debould gave My Pie notice of their election to rescind on February 22, 1980, which was more than 90 days-indeed more than two years-after the alleged violations occurred. They say they did not know about the violations until a conference with their attorney on January 11, 1980, and if so they were within the statutory period for the election even if their attorney knew earlier. See Brenkman v. Belmont Marketing, Inc., 87 Ill.App.3d 1060, 1065, 43 Ill.Dec. 500, 504, 410 N.E.2d 500, 504 (1980). While My Pie is skeptical of this assertion in light of the history of My Pie's relationship with Dowmont and its principals (about which more presently), My Pie has not proved that the defendants had earlier knowledge of the violations and in its briefs in this court seems willing to assume they did not. Hence the defendants were entitled to rescind the franchises unless they either waived their rights under or are estopped to plead the Franchise Disclosure Act by virtue of certain events in 1975.

On April 4 of that year Dowmont had signed a lease for premises located in Westmont, Illinois, intending to operate a My Pie franchise there. My Pie had not yet registered under the Franchise Disclosure Act and therefore could not lawfully franchise Dowmont. But section 12 of the Act authorizes the Attorney General of Illinois (see section 3(20)) to exempt particular franchise agreements from its requirements on various grounds, including the limited scope of the franchisor's offering; and on April 17 Dowmont applied for an exemption. Using language supplied to it by My Pie, Dowmont...