Western Chance No. 2, Inc. v. KFC Corp., CIV 88-648 TUC ACM.
| Decision Date | 31 January 1990 |
| Docket Number | No. CIV 88-648 TUC ACM.,CIV 88-648 TUC ACM. |
| Citation | 734 F. Supp. 1529 |
| Parties | WESTERN CHANCE # 2, INC., an Arizona corporation, Plaintiff, v. KFC CORPORATION, a Delaware corporation, and KFC National Management Company, a Delaware corporation, Defendants. |
| Court | U.S. District Court — District of Arizona |
George R. Brown, Robert J. Egielski, Linden, Chapa & Fields, Tucson, Ariz., for plaintiff.
Jeffrey Willis, Craig H. Kaufman, Streich, Lang, Weeks & Cardon, Tucson, Ariz., for defendants.
This is an action alleging breach of oral and written contracts (Counts One and Two) and the implied covenant of good faith and fair dealing (Count Three); tortious breach of the implied covenant of good faith and fair dealing (Count Four); fraud (Count Five); fraudulent inducement and misrepresentation (Count Six); promissory estoppel (Count Seven); and unconscionability (Count Eight). The action arises out of a course of dealing between the parties which has spanned over twenty years, and which has now resulted in a dispute over the franchising rights for Kentucky Fried Chicken ("KFC") outlets in the city of Tucson, Arizona.
On January 23, 1989, the Court granted defendants' Motion for Summary Judgment on the punitive damages prayers in Counts One, Two and Three. On February 3, 1989, the Court granted defendants' Motion for Summary Judgment on Count Four (tortious breach of implied covenant of good faith and fair dealing). Defendants then moved for summary judgment on all remaining counts of the Complaint. Plaintiff opposed this motion, and cross-moved for partial summary judgment on Counts One, Two, Three and Seven. Both sides submitted extensive memoranda and supporting exhibits. The Court has decided this matter on the papers, without the necessity of oral argument. On December 4, 1989, the Court, by minute entry, granted defendants' motion and denied plaintiff's motion. This memorandum explains the reasons for the Court's decision.
Plaintiff Western Chance # 2, Inc. is the franchisee and operator of one KFC outlet in Tucson. The shareholders, Walter H. Hill Jr., Jack L. Shettlesworth, W. Lynn Velde and Judith B. Velde, also established seven other Western Chance corporations to operate other KFC outlets in Tucson and southern Arizona. For purposes of the instant motions, Western Chance # 2, Inc. ("Western Chance") was assumed to be the alter ego of all other Western Chance entities and their common shareholders. (Statement of Undisputed Material Facts in Support of Motion for Summary Judgment ("DSOF") at 1, n. 1)
Defendant KFC Corporation is engaged in franchising KFC outlets, and is the party with whom Western Chance contracted to obtain the franchise rights for KFC outlets. Defendant KFC National Management Company ("KFC National"), a wholly-owned subsidiary of KFC Corporation, owns and operates numerous KFC outlets across the U.S., including two located within the Tucson metropolitan area. (Affidavit of Robert P. Steele ("Steele Affidavit"), Exhibit 1 to DSOF, at 1-2)
On the first Monday after Thanksgiving, 1965, Walter Hill Jr. met in Shelbyville, Kentucky with Dick Robinson, who was then an employee in the Franchise Department of KFC Corporation. (Deposition of Walter Hill Jr. ("Hill depo") at 52:12-25; 53:1-5) At the time of this meeting, Hill had recently liquidated his interests in several Mr. Donut franchises located in Illinois and Indiana. (Id. at 60:12-16)
Hill told Robinson he wanted an "exclusive", somewhere he could go where the entire market would be his to develop. Robinson offered him Tucson, Arizona or Bridgeport, Connecticut. (Robinson depo at 42:6-10, 18-23; 44:14-16; 79:7-10) According to Robinson, "exclusive" meant that no one else could come in and develop a store in the area unless Hill agreed to it. (Id. at 18:12-24; 19:2-12; 54:9-21; 56:10-16; 57:19-25; 67:11-14) (Id. at 80:1-3; 58:11-14)
Hill paid $1000.00 to keep open the option on Tucson, traveled there to look it over, and eventually chose it. (Hill depo at 61:10-25) Hill and his partners1 sent KFC Corporation two checks totalling $3000.00 for the options to develop six stores, which Robinson had determined was all the Tucson market would hold at that time. (Robinson depo at 35:6-14; 79:13-17)
According to Robinson, "nobody got a franchise from me that didn't get a letter from me stating exactly what we agreed to." (Id. at 30:10-12) Robinson would write such letters so that in the event of a "disagreement about anything, you could go back and look at the letter." (Id. at 48:20, 21) In this case, Robinson wrote Hill a letter in January, 1966, acknowledging receipt of Hill's check for $1500.00 "to apply to the options for the city of Tucson ... this option is tentative until all paperwork is cleared and we can submit your application to our Executive Committee for final approval." (Letter of 1/11/66 from Robinson to Hill, Exhibit 8 to DSOF)
No mention was made in this letter of an exclusive territorial grant for the Tucson area; nevertheless, as far as Robinson was concerned, this letter reflected the arrangement for Hill to have an "exclusive" on Tucson. (Robinson depo at 52:4-10) The length of this territorial protection was the twenty year length of the franchise contract executed for the first franchise, the implication being that it would extend if that contract was renewed: "as long as he was a franchisee, I would assume that the previous agreement would always be in effect." (Id. at 83:6-15; 35:15-18)
In February, 1966, Hill received a letter from Robinson's secretary Billie Went-worth. This letter confirmed receipt of $3000.00 from Hill and his partners for six options in Tucson, and contained a schedule for exercising the options. No mention was made of an exclusive territorial grant. The letter referred Hill for all future dealings to the Field Services Department of the executive offices of KFC in Nashville, Tennessee. (Letter of 2/24/66 from Went-worth to Hill, Exhibit 9 to DSOF) This letter represents the last contact Hill had with Robinson's office. (Hill depo at 87:10-17)
Hill and his partners exercised five of the six options for KFC outlets in Tucson. A separate Franchise Agreement was executed for each outlet. The partners employed an attorney in Illinois to review the contracts and advise them as to what those contracts meant. (Velde depo at 37:18-25; 38:1-25; 39:1-25; 40:8-11; 43:2-13; Hill depo at 94:19-25; 95:1-2) According to Lynn Velde, he exercised his own business judgment as to whether or not to sign a contract, after having it explained to him. (Velde depo at 43:2-17)
Each of the five contracts contained the following language regarding a grant of exclusive territory:
this grant is an exclusive grant with respect to that circular area which is determined by such minimum radius about the location as may be necessary to include either a population of Twenty Thousand (20,000) persons or a radius of one and one-half (1½) miles.
The contracts provided that KFC would "refrain from granting a franchise at any location within the LICENSEE'S franchisee's exclusive territory, except as provided by Paragraph III(a), entitled `Term and Cancellation'". That paragraph enumerated KFC's rights in the event of a franchisee's non-compliance with the terms of the contract, after notice and failure to cure:
LICENSOR franchisor may, at its option, in the event of such failure to cure within Thirty (30) days after notice, terminate ... the geographic exclusivity of this license and franchise....
The contracts all contained clauses providing that "this Contract shall not be altered or amended except in writing executed by the parties." (Franchise Agreements of 9/1/66; 7/1/67; 4/1/68; 3/1/69; 4/15/70, attached as Exhibits 11-15 to DSOF2)
In 1971, KFC was the defendant in a class action alleging certain violations of antitrust laws ("the G & K litigation"). This litigation was settled in 1972. Hill and Western Chance were members of the settling class. (Hill depo at 107:13-18) The settlement required KFC to offer contractual amendments to all franchisee members of the settling class, the effect of which would be to amend their existing franchise contracts ("the Amendment"). Each franchisee was free to accept or reject the Amendment, or to "delete any provisions you do not want." (Letters of 8/10/72; 10/06/72; Cover Letter accompanying Amendment, Exhibits 17, 18 and 19 to DSOF) Western Chance accepted without change the entire Amendment with respect to all of its franchise agreements then in existence. (Hill depo at 106:1-11; 108:4-12)
The Amendment gave franchisees the right of first negotiation for a "new franchised outlet" (the proposed location of which was closer to an existing franchised outlet than any other outlet) before such franchise would be offered to a third party. The Amendment defined "franchised outlet" to mean "an outlet owned or operated by FRANCHISEE or any other franchisee but does not include Operating Company outlets." An "operating company outlet" was defined as "an outlet owned or operated by FRANCHISOR KFC Corporation or one of its subsidiaries e.g., KFC National." (See e.g. 10/31/72 Amendment to Western Chance Franchise Contract of 9/1/66, Exhibit 20 to DSOF)
According to Hill, he did not strike any language in the Amendment prior to signing it because:
at that time we did not think it would apply to us because we thought we had a market, the corporation would not come in and ask to build stores. We thought we had the market of Tucson, Arizona and that that was our market.
The Next Seven Contracts
To continue reading
Request your trial
-
Southwest Pet Products, Inc. v. Koch Industries
...from large companies in superior bargaining positions. See id. at 389, 682 P.2d 388; see also Western Chance # 2, Inc. v. KFC Corp., 734 F.Supp. 1529, 1538-39 (D.Ariz.1990) (Marquez, J.) (declining to extend Darner to standardized contract terms between "sophisticated businessmen"), aff'd i......
-
Western Chance No. 2, Inc. v. KFC Corp.
...of that agreement. The facts are more extensively set forth in the district court's opinion and need not be repeated here. Western Chance I, 734 F.Supp. at 1530-36. JURISDICTION AND STANDARD OF The district court had jurisdiction pursuant to 28 U.S.C. § 1332 and § 1446. 3 We have jurisdicti......