South Bend Consumers Club v. United Consumers Club

• Decision Date: 07 October 1983
• Docket Number: No. S 82-0383.,S 82-0383.
• Citation: 572 F. Supp. 209
• Parties: SOUTH BEND CONSUMERS CLUB, INC., Plaintiff, v. UNITED CONSUMERS CLUB, INC., United Consumers Club Franchising Corp., Defendants, v. Andrew SPITE, South Bend Consumers Club, Inc., Third Party Defendants.
• Court: U.S. District Court — Northern District of Indiana

572 F. Supp. 209

SOUTH BEND CONSUMERS CLUB, INC., Plaintiff, v. UNITED CONSUMERS CLUB, INC., United Consumers Club Franchising Corp., Defendants, v. Andrew SPITE, South Bend Consumers Club, Inc., Third Party Defendants.

No. S 82-0383.

United States District Court, N.D. Indiana, South Bend Division.

October 7, 1983.

Franklin A. Morse, II, David R. Melton, South Bend, Ind., for plaintiff.

Byron M. Chudom, Stephen H. Meyer, Jeffery J. Dywan, Jane L. Hillebrand, Schererville, Ind., for defendants.

MEMORANDUM and ORDER

SHARP, Chief Judge.

This case arises out of an alleged violation of the Sherman Act, stemming from the termination of a franchise Agreement (Agreement) entered into between defendant United Consumers Club, Inc. and its wholly owned subsidiary United Consumers Club Franchising Corporation (hereinafter referred to collectively as "UCC") and plaintiff, South Bend Consumers Club (SBCC) in January 1974. Jurisdiction is predicated upon 15 U.S.C. § 4 and 28 U.S.C. § 1331. This matter is presently before the court on SBCC's motion for partial summary judgment. The issue to be addressed is whether the restrictive covenant not to compete, ancillary to the Agreement which UCC seeks to enforce, is reasonable and enforceable under Indiana and/or Illinois law. For the reasons discussed below, this court finds the restrictive covenant unreasonable as written and, therefore, unenforceable as a matter of Indiana law. Accordingly, SBCC's motion for partial summary judgment is granted.

The underlying facts in this case are not in dispute. On January 30, 1974, SBCC's predecessor in interest, third party defendant, Andrew Spite, entered into a franchise agreement with UCC. Subsequently, Spite assigned the Agreement to Andrew Spite Associates, Inc., the name of such corporation later being changed to South Bend Consumers Club, Inc.

The Agreement provided that SBCC would have an exclusive franchise territory consisting of St. Joseph, Marshall and Fulton counties in Indiana and Niles township in Michigan. The Agreement contained a restrictive covenant in Section V, C, which read as follows:

Upon the termination of this agreement for any cause, the franchise will not, for a period of two (2) years thereafter, directly or indirectly, enter the employment of, or render services to any person, partnership, association or corporation engaged in the same or substantially similar business covered by this agreement in any area which can be reasonably termed competitive to the franchisor or other franchisees; and during such term of two years, the franchisee will not within such territory engage in such business on his account or become interested therein, directly or indirectly, as an individual, partner, shareholder, director, officer, clerk, principal, agent, employee, trustee or in any relation or capacity whatsoever. Without limiting the generality of the foregoing, the minimum area of the competitive acts or other acts hereinbefore referred to shall be that area within twenty-five miles of the franchisee's territory or any place of business conducted by the franchisor or any other franchisee of the franchisor at the time of the termination of this Agreement.

Also of import to this action, Article VIII of the first Addendum to the Agreement, which apparently was executed at the time of the execution of the Agreement, provided that the Agreement and Addendum were to be governed and interpreted under Indiana law.

The parties continued to operate under the Agreement, modified from time to time by amending addenda, which primarily served to reflect increases in the cost of UCC memberships. A final addendum was executed on May 24, 1981, in Chicago, Illinois. As in previous instances, the Addendum dealt primarily with a provision increasing the cost of Club memberships. Its final paragraph provided:

This entire agreement shall be governed by the laws of the State of Illinois. All of the terms of said Agreement as amended shall remain the same and continue in full force and effect.

The addendum was signed by Mr. Spite, representing SBCC, in Chicago and later signed by Mr. Wittlinger, President of UCC.

Subsequent to January 30, 1974, while operating as a franchise of UCC, SBCC established lines of supply through manufacturers and suppliers other than those having a relationship with UCC. Such action was an alleged violation of the Agreement. On or about May 6, 1982, UCC issued a 30-day notice prior to termination to SBCC. Negotiations were commenced in an attempt to resolve the dispute between UCC and SBCC; however, such negotiations proved fruitless and a final termination notice was issued by UCC on July 23, 1982.

SBCC commenced this antitrust action on August 10, 1982. The essence of SBCC's complaint is that the agreement constitutes a contract in restraint of trade in the form of a tying arrangement. UCC filed a counterclaim which seeks, inter alia, an injunction prohibiting SBCC from competing with it. On July 27, 1983, UCC filed a Motion for Partial Summary Judgment seeking injunctive relief in regard to the restrictive covenant. SBCC filed a Counter-Motion for Summary Judgment on August 19, 1983 arguing that the restrictive covenant, as written, is unreasonable and, thus, unenforceable. A hearing and oral argument on this well-briefed issue was held in South Bend, Indiana on September 9, 1983. At that time UCC withdrew, without prejudice, its Motion for Partial Summary Judgment.

I.

A threshold consideration to be addressed by this court is the proper choice of law to be applied in this action. UCC argues that the entire Agreement is to be governed by Illinois law pursuant to an Addendum which purports to change the parties' previous choice of Indiana law. SBCC contends that the provision is not binding to the extent that the covenant, even if valid under Illinois law, should not be enforced if it would be invalid under Indiana law.

This court has recently set forth the procedures for determining the state whose law applies where a contract purportedly establishes a choice of law. Sullivan v. Savin Business Machines Corp., 560 F.Supp. 938 (N.D.Ind.1983). In that case, this court adopted the language of RESTATEMENT (SECOND) of CONFLICT of LAWS § 187 (1971) which provides:

(1) The law of the state chosen by the parties to govern their contractual rights and duties will be applied if the particular issue was one which the parties could have resolved by an explicit provision in their agreement directed to that issue.

(2) The law of the state chosen by the parties to govern their contractual rights and duties will be applied, even if the particular issue is one which the parties could not have resolved by an explicit provision in their agreement directed to that issue, unless either,

(a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice, or

(b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue and which, under the rule of § 188, would be the state of the applicable law in the absence of an effective choice of law by the parties.

The initial step of analysis in determining the proper law governing a contract under Sullivan is to ascertain the intent of the parties. To do this, the court must logically look to the face of the contract itself. Sullivan, supra, 560 F.Supp. at 939. Under the facts of this case, it appears that the law of Illinois should control since the Addendum to the Agreement of May 24, 1981 purports to change the initial choice of Indiana law. The first paragraph of the Addendum reads:

This entire agreement shall be governed by the laws of the State of Illinois. All of the terms of said Agreement as amended shall remain the same and continue in full force and effect.

However, SBCC contends that RESTATEMENT § 187(2)(b) would apply to this action. Under that subsection, the law of the state chosen by the parties would not be applied if the application of such law would be contrary to the public policy of the state having a materially greater interest in the transaction and the parties. Specifically, in this cause, SBCC argues that the law of Illinois would not be applied if the application of its law would be contrary to a fundamental policy of the State of Indiana and Indiana has the most significant relationship to the parties involved. Therefore, it is necessary to make a two-prong inquiry: 1) Does Indiana have a materially greater interest in the transaction and the parties; and 2) Is the enforcement of the restrictive covenant contrary to the public policy of the State of Indiana?

It is abundantly clear from the facts presented in this action that Indiana is the state that has the most significant contacts with the transaction and parties involved. Both UCC and SBCC are Indiana corporations. Andrew Spite is a citizen of Indiana. The franchise territory and the club were both located within Indiana. The original Agreement specified that Indiana law was to be applied. In fact, the sole connection between SBCC and the state of Illinois was the Addendum signed by Andrew Spite in Chicago in 1981, seven years after the agreement was entered into.

Moreover, it is equally evident that the restrictive covenant at issue would not be enforced by a court in the State of Indiana. It is generally agreed that a state has an interest in regulating the extent to which it will allow parties to restrain trade through the use of restrictive covenants. See Nordson Corp. v. Plasschaert, 674 F.2d 1371 (11th Cir.1982); Dothan Aviation Corp. v. Miller, 620 F.2d 504 (5th Cir.1980). Indiana has articulated a public policy of regulating restraint of trade both through statutory law, e.g., IND.CODE ANN. § 24-1-1-1 et seq. (Burns 1982)¹ and case law. It is well established...