St. Martin v. KFC Corp.

• Decision Date: 27 March 1996
• Docket Number: Civil Action No. 3:95CV-182-J.
• Citation: 935 F. Supp. 898
• Parties: John L. ST. MARTIN and, Saints Express Corporation, a Nevada Corporation, Plaintiffs, v. KFC CORPORATION, a Delaware Corporation, Defendant.
• Court: U.S. District Court — Western District of Kentucky

935 F. Supp. 898

John L. ST. MARTIN and, Saints Express Corporation, a Nevada Corporation, Plaintiffs, v. KFC CORPORATION, a Delaware Corporation, Defendant.

Civil Action No. 3:95CV-182-J.

United States District Court, W.D. Kentucky, Louisville Division.

March 27, 1996.

COPYRIGHT MATERIAL OMITTED

Stephen Richie Price, Gregory Scott Berman, Wyatt, Tarrant & Combs, Louisville, KY, for John L. St. Martin, Saints Express Corporation, a Nevada Corporation.

Charles J. Cronan, IV, Stites & Harbison, Louisville, KY, John A. Donovan, Skadden, Arps, Slate, Meagher & Flom, Los Angeles, CA, for KFC Corporation, a Delaware Corporation.

MEMORANDUM OPINION

JOHNSTONE, Senior District Judge.

KFC Corporation (KFCC), defendant, moved to dismiss five of the nine counts of a complaint filed by John L. St. Martin and Saints Express Corporation,¹ plaintiffs, pursuant to Fed.R.Civ.P. 12(c). Based on the allegations outlined below, the plaintiffs filed suit alleging antitrust violations, Federal Trade Commission violations, breach of contract, promissory estoppel, breach of implied duty of good faith and fair dealing, breach of Section 19 rights, tort of good faith, fraud, and punitive damages. KFCC moved to dismiss: Count One (antitrust); Count Two (FTC disclosure); Count Seven (tort of good faith); Count Eight (fraud); and Count Nine (punitive damages). For the reasons that follow, KFCC's motion shall be granted with respect to Counts One and Two. Its motion shall be denied at this juncture as to Counts Seven, Eight, and Nine.

I. Allegations in Plaintiffs' Complaint

John L. St. Martin and Saints Express Corporation alleged the following facts in their complaint. For the purpose of ruling on this motion, the court will treat all of the allegations in the complaint as true. For approximately the past thirty years, John L. St. Martin and his wife, Marie St. Martin, have been operators and franchisees of KFC restaurants. At the time plaintiffs filed suit, the St. Martins had franchise agreements for traditional, freestanding KFC restaurants in Bemidji and Austin, Minnesota and Bullhead City, Arizona. These KFC restaurants were operated by three family owned corporations.

Under KFCC's and the St. Martins' Bullhead City Franchise Agreement, KFCC gave the St. Martins the right to apply for new franchise outlets near their Bullhead City store. Section 19 of this franchise agreement provided:

19. Right to Apply for New Franchised Outlets.

Before permitting the establishment of any new franchised outlet (defined below) at a location closer to the Outlet than to any other franchised outlet (except pursuant to commitments made before the Effective Date of this Agreement), KFC shall be obligated to give Franchisee 30 days prior written notice of such proposed action. During such 30-day period, Franchisee may apply to KFC for a franchise to operate an outlet at such proposed new location and KFC shall negotiate in good faith with Franchisee regarding said application, taking into consideration all relevant factors, including, without limitation: (a) the established past and present operational performance and financial capacities of Franchisee, (b) whether he is currently in compliance with financial and other obligations to KFC and under this and other franchise agreements, and (c) efforts of Franchisee that have contributed to the development of consumer demand for Kentucky Fried Chicken locally and elsewhere. As used herein "new franchised outlet" means an outlet (a) not previously in existence and (b) which will not be owned by KFC or any of its affiliates.

Pursuant to Section 19 of the Bullhead City Franchise Agreement, KFCC sent John St. Martin a letter informing him that KFCC intended to establish ten new "KFC outlets" at Turtle Stop Convenience Stores in Las Vegas, Nevada. A "KFC outlet" is a smaller, food counter which KFCC characterizes as an "Express Unit." The letter notified St. Martin that if he wished to pursue this business, he should submit a written application to KFCC within thirty days. As required by KFCC, John St. Martin notified KFCC that he would like to operate the Turtle Stop outlets.

The St. Martins expressed concerns about the profitability of the Express Unit concept in convenience stores. However, Glenn Ford, a KFCC representative, assured the St. Martins that overhead costs would be lower and profits would be higher than the costs and profits from traditional KFC outlets. Ford also informed the St. Martins that it would provide them with new restaurant equipment. These assurances were reconfirmed at a conference attended by Marie St. Martin in September 1993. At the conference, Ford informed those in attendance, including Marie St. Martin, of the expected profits, revenues, and expenses for the express units, and told them that his figures were reliable.

In November 1993, Marie St. Martin attended another conference in Fargo, North Dakota where Glenn Ford again gave a presentation. He told franchisees that Express Units were a much better investment than traditional, freestanding KFC restaurants. Ford explained that although it cost at least $500,000 to open a traditional restaurant, ten express units could be opened for this amount. In addition, express units were easier to operate and had higher profit margins. Ford also stated that KFCC would guarantee it would buy back all of their equipment if they were not fully satisfied with the success of the Express Unit Concept.

The following month, at another KFCC conference, Ford told Marie St. Martin that plaintiffs could operate a KFC Express Unit at a Turtle Stop site located at West Sahara and Fort Apache in Las Vegas, Nevada. Although the St. Martins had not received a signed license from KFCC to operate a KFC Express Unit at this site, Ford assured Marie St. Martin that KFCC would provide plaintiffs with a blanket license for all of the Turtle Stop sites to be opened in the future. Based on these assurances, the St. Martins opened their first Express Unit at that site on December 19, 1993 even though they did not yet have a signed agreement from KFCC.

Two months after the St. Martins began operating this KFC Express Unit, they received a letter from Scott McManus, President and CEO of Turtle Stop, Inc., telling them he was delighted with their operation of the KFC unit at the West Sahara and Fort Apache site. He also offered plaintiffs the exclusive rights to operate all of the future KFC Express Units within Turtle Stop convenience stores on a worldwide basis.

Based on McManus' letter and previous assurances from Ford, the St. Martins opened a second KFCC Express Unit located in a Turtle Stop store at Nellis and Vegas Valley. They also continued to make plans to open more KFC Express Units in Turtle Stop stores. Believing that they would soon operate all of the Express Units in the Las Vegas area Turtle Stop stores, they agreed to operate in locations that may not have been as profitable as other sites.

On March 29, 1994, Don Parkison, Senior Vice President for Franchising at KFCC, called John St. Martin and told him that he and his family would not be allowed to expand in the Las Vegas market. KFCC did agree, however, to permit the St. Martins to open two additional KFC Express stores. KFCC made this concession to prevent Turtle Stop, Inc. from filing suit. KFCC did not furnish the St. Martins with new equipment for these Express Units as they had done for the first two KFC units. Since then, KFCC has been unwilling to negotiate in good faith with the St. Martins for the right to acquire additional KFC franchises.

KFCC has "company markets" throughout the country in which it only allows company owned KFC outlets to operate. KFCC has a policy of preventing franchisees from obtaining franchises in these company markets (company town policy). Las Vegas is a "company market" because KFCC or its subsidiary KFC Management Company owns and operates all of the traditional KFC outlets in that city. KFCC has refused to recognize the St. Martins' Section 19 rights and has not allowed them to compete with KFCC's company-owned outlets, including those in Las Vegas. Additionally, since 1989, KFCC has prohibited most KFC franchisees, including plaintiffs, from obtaining any interest in fast food outlets other than KFC as long as they remain a KFC franchisee (non-KFC clause).

II. Standard of Review

In the present suit, KFCC's Rule 12(c) motion will be evaluated under the same standard as applied to a Rule 12(b)(6) motion. See Morgan v. Church's Fried Chicken, 829 F.2d 10, 11 (6th Cir.1987). The purpose of a Rule 12(b)(6) motion is to "allow a defendant to test whether, as a matter of law, the plaintiff is entitled to legal relief even if everything in the complaint is true." Mayer v. Mylod, 988 F.2d 635, 638 (6th Cir.1993). A complaint should not be dismissed unless "`it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief.'" Id. (quoting Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 102, 2 L.Ed.2d 80 (1957)). The complaint must be "construed in the light most favorable to plaintiff, and its well-pleaded facts must be accepted as true." Morgan, 829 F.2d at 12 (citing Scheuer v. Rhodes, 416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974)). Again, for the purposes of considering this motion, the court assumes that all of the recited allegations are true.

III. Count One — Antitrust

The St. Martins alleged that KFCC violated Section 1 of the Sherman Act by: (1) excluding franchisees in KFCC company markets throughout the country (company town policy); and (2) prohibiting franchisees from acquiring any interest in fast food outlets other than KFC outlets (non-KFC clause). Based on these two policies, the St. Martins claimed that they have not been allowed to own and operate any fast food outlets in Turtle Stop stores located in Las Vegas although they were promised the...