Fantastic Sams Salons Corporation v. PSTEVO, LLC et al

Filing 68

OPINION AND ORDER. Signed by the Honorable Sara L. Ellis on 3/22/2017. Mailed notice(rj, )

UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF ILLINOIS
EASTERN DIVISION
FANTASTIC SAMS FRANCHISE CORP.,
Plaintiff,
v.
PSTEVO, LLC and JEREMY BAKER,
Defendants.

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No. 15 C 3008
Judge Sara L. Ellis

OPINION AND ORDER
Plaintiff Fantastic Sams Franchise Corp. (“FSF”)1 brings this breach of contract action
against Defendants PSTEVO, LLC (“PSTEVO”) and Jeremy Baker (collectively, “Defendants”),
seeking damages for PSTEVO’s breach of two Salon License Agreements (“SLAs”) with FSF
and Baker’s failure to honor his obligation to guarantee PSTEVO’s debts to FSF. FSF moves for
summary judgment [60] on these claims and on Defendants’ counterclaims against FSF for
breach of contract and unjust enrichment. Because FSF has established that it is entitled to
summary judgment on all claims and counterclaims, and because Defendants have not filed any
response to the motion for summary judgment, the Court grants FSF’s motion for summary
judgment.

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At the time the parties entered into the agreements at issue, FSF structured its franchise system in three
tiers. FSF was the master franchisor and offered regional licenses to subfranchisors who in turn offered
subfranchises to individual franchisees. In 2012, the subfranchisor for the Chicagoland area was Fantastic
Sams Salons Corp (“Salons Corp”). In 2015, after this case was filed, Salons Corp and FSF merged, with
FSF being the surviving entity and successor to Salons Corp. For simplicity, the Court uses FSF
throughout this opinion, even though Salons Corp was the actual contracting entity at the time of the
SLAs.

BACKGROUND2
FSF is a franchisor of the Fantastic Sams Salons brand of haircare salons. FSF enters
into SLAs with franchisees. In 2012 FSF entered into a Multi-Unit Development Agreement
(“MUDA”) and SLA with PSTEVO that granted PSTEVO a franchise to operate a Fantastic
Sams Salon in Elgin, Illinois for a ten-year term. The SLA granted PSTEVO the right to use
FSF’s proprietary systems and marks in connection with the operation of the salon. In late 2013,
FSF and PSTEVO entered into a second SLA, granting PSTEVO a franchise to open a salon in
Algonquin, Illinois for a ten-year period.
Pursuant to both agreements, PSTEVO agreed to make weekly payments to FSF for
licensing fees (“WLF”) and national advertising fees (“NAF”). PSTEVO also agreed to
purchase FSF branded products as well as other products FSF has established purchasing
arrangements for. Baker personally guaranteed PSTEVO’s obligations under both SLAs. At the
time the parties entered into the SLAs, they agreed to abate all but $100 of the WLF for a term
that was ultimately extended, through subsequent agreements, through January 26, 2017. Under
the terms of the abatements, FSF continued to accrue the full WLF amount owed by PSTEVO,
but agreed to ultimately waive collection of that amount if PSTEVO continued to comply with
all terms of the SLAs.
At the end of January 2015, PSTEVO stopped paying its NAF. On February 20, 2015,
FSF notified PSTEVO that its failure to pay the NAF is an act of default and afforded PSTEVO

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The facts in this section are taken from FSF’s statement of material facts. Doc. 61. PSTEVO and Baker
did not participate in the Court’s summary judgment procedures, nor have they filed a statement admitting
or disputing any of FSF’s facts, as required by Local Rule 56.1(b)(3). The Court therefore treats FSF’s
facts as undisputed for the purposes of resolving this motion. N.D. Ill. L.R. 56.1(b)(3)(C) (“All material
facts set forth in the statement required of the moving party will be deemed to be admitted unless
controverted by the statement of the opposing party.”); Stevo v. Frasor, 662 F.3d 880, 887 (7th Cir. 2011)
(“[D]istrict judges are entitled to insist on strict compliance with local rules designed to promote the
clarity of summary judgment filings.”).

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thirty days to cure their failure to pay. PSTEVO and Baker refused to cure the default. On April
10, 2015, Defendants closed the Algonquin, Illinois salon, and on April 18, 2015 they closed the
Elgin, Illinois salon. FSF notified Defendants on May 1, 2015 that their abandonment of the
salons terminated the SLAs. At the time Defendants closed the salons, FSF had abated $25,115
in WLF and Defendants had not paid $3,436 in NAF. Between the closing of the salons and the
filing of FSF’s summary judgment motion, an additional $72,223.78 in unpaid fees accrued.
Furthermore, between the filing of the motion and the contractual end date of the SLAs, which
were set to end on December 26, 2022 and October 30, 2023, Defendants would have to pay a
total of $369,658.87. This figure is calculated using the average Consumer Price Index increase
over the last ten years and reduces the total to their net present value using a discount rate of 3%.
FSF seeks to recover all $470,433.65 of these unpaid fees as damages.
The agreements also state that if either party institutes a legal action to enforce its rights
under the agreements, the prevailing party is entitled to recover its attorneys’ fees, court costs,
and other litigation expenses from the other party.
LEGAL STANDARD
Summary judgment obviates the need for a trial where there is no genuine issue as to any
material fact and the moving party is entitled to judgment as a matter of law. Fed. R. Civ. P. 56.
To determine whether a genuine issue of fact exists, the Court must pierce the pleadings and
assess the proof as presented in depositions, answers to interrogatories, admissions, and
affidavits, if any, that are part of the record. Fed. R. Civ. P. 56 & advisory committee’s notes.
The party seeking summary judgment bears the initial burden of proving that no genuine issue of
material fact exists. Celotex Corp. v. Catrett, 477 U.S. 317, 323, 106 S. Ct. 2548, 91 L. Ed. 2d
265 (1986). In response, the non-moving party cannot rest on mere pleadings alone but must use

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the evidentiary tools listed above to identify specific material facts that demonstrate a genuine
issue for trial. Id. at 324; Insolia v. Philip Morris Inc., 216 F.3d 596, 598 (7th Cir. 2000).
Although a bare contention that an issue of fact exists is insufficient to create a factual dispute,
Bellaver v. Quanex Corp., 200 F.3d 485, 492 (7th Cir. 2000), the Court must construe all facts in
a light most favorable to the non-moving party and draw all reasonable inferences in that party’s
favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255, 106 S. Ct. 2505, 91 L. Ed. 2d 202
(1986).
Where a party does not respond to a motion for summary judgment, their failure to do so
does not automatically entitle the moving party to judgment on its claims, as the Court must still
ensure that the moving party is entitled to judgment as a matter of law. Keeton v. Morningstar,
Inc., 667 F.3d 877, 884 (7th Cir. 2012).
ANALYSIS
I.

Breach of Contract Claims
FSF moves for summary judgment on its breach of contract claims against PSTEVO and

Baker. To succeed on a breach of contract claim in Illinois, a plaintiff must establish “(1) offer
and acceptance, (2) consideration, (3) definite and certain terms, (4) performance by the plaintiff
of all required conditions, (5) breach, and (6) damages.” Ass’n Benefit Servs., Inc. v. Caremark
Rx, Inc., 493 F.3d 841, 849 (7th Cir. 2007) (citations omitted).
A.

Breach of Contract Claim Against PSTEVO

The elements of FSF’s breach of contract claim against PSTEVO are undisputed. FSF
and PSTEVO entered into a series of valid and enforceable contracts, specifically the SLAs
granting PSTEVO franchising rights for the Algonquin and Elgin salons. These agreements
were supported by valid consideration and contained definite and certain terms. Under the SLAs

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PSTEVO was required to pay the WLF and NAF to FSF for the duration of the agreements. The
agreements lasted for ten years from the opening of each franchise or eleven years from the date
of the contract, whichever was earlier. The agreements also required, in the event of premature
closure of the sale, PSTEVO to pay all weekly fees past due and to be due in the future during
the full term of the SLA. In exchange, FSF granted PSTEVO the right to use FSF’s mark and
system. FSF also provided training, marketing and other business support. FSF provided these
services and therefore satisfied its side of the bargain.
PSTEVO breached the contract when it stopped paying the NAF in February 2015. FSF
provided PSTEVO with an opportunity to cure this deficiency, which PSTEVO did not take.
FSF then further breached the agreement by closing both the Elgin and Algonquin salons.
Finally, as a result of PSTEVO’s breach, FSF incurred damages in the form of the lost
NAF and WLF. FSF’s damages total $470,433.65 in unpaid fees. This total is the sum of
$25,115 in WLF that FSF abated between the signing of the agreements and January 26, 2015,
$3,436 in NAF that PSTEVO did not pay between February 2015 and April 2015, $72,223.78 in
unpaid fees accrued between the closing of the salons and the filing of FSF’s summary judgment
motion, and $369,658.87 in fees to become due between the filing of the motion and contractual
end date of the SLAs, which were set to end on December 26, 2022 and October 30, 2023. The
fees to become due are adjusted to their present value using the average Consumer Price Index
increase over the last ten years and reduced to their net present value using a discount rate of 3%.
“The discount rate [in determining the net present value of damages consisting of a lost future
stream of income] should be based on the rate of interest that would be earned on the best and
safest investments.” Jones & Laughlin Steel Corp. v. Pfeifer, 462 U.S. 523, 537, 103 S. Ct. 2541,
76 L. Ed. 2d 768 (1983) (internal quotation marks omitted). The term remaining on the SLAs as

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of the filing of the motion for summary judgment was approximately six and seven years,
respectively. Ten-year government notes sold 2.250% at a recent auction, see Treasury Auction
Results, https://www.treasurydirect.gov/instit/annceresult/press/preanre/2017/R_20170208_1.pdf
(last visited Mar. 8, 2017), so the 3% discount rate FSF used to calculate net present value is not
too low for six and seven year streams of future income, and in fact it may be high. See Nunn v.
Witherell, No. 12 C 3384, 2012 WL 4338889, at *3 (N.D. Ill. Sept. 20, 2012) (using interest rate
for thirty-year treasury bonds to calculate discount rate for twenty-two-year future income
stream). Therefore, the Court will use the 3% rate requested by FSF.
Under Illinois law, contractual damages should place the non-breaching party in the same
position he or she would have been in but for the breach, and should not provide the nonbreaching party with a windfall recovery. Jones v. Hryn Dev., Inc., 778 N.E.2d 245, 249, 334 Ill.
App. 3d 413, 268 Ill. Dec. 259 (2002). Here, it is undisputed that FSF would have received the
NAF and WLF for the duration of the agreement were it not for PSTEVO’s breach.
Furthermore, there is no evidence that FSF is saving any money by not having PSTEVO
continuing to operate its salons. Therefore, the Court does not have any basis to offset the
damages against any cost savings FSF may be experiencing. Without a response to this motion
from PSTEVO, the Court accepts as true that the asserted damages to FSF are not a windfall.
Therefore, the Court grants FSF’s motion for summary judgment on its claim against PSTEVO.
B.

Breach of Guaranty Claim Against Baker

At the same time FSF entered into the SLAs with PSTEVO, Baker personally
guaranteed, in writing, all of PSTEVO’s obligations under the SLAs. As discussed above, FSF
has fully performed under the agreement and PSTEVO owes the entirety of the NAF and WLF
due under the agreements. PSTEVO has to date failed to make payments on its obligations to

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FSF, therefore Baker is obligated to satisfy PSTEVO’s debts under the agreements to FSF.
These debts now stand at $470,433.65. The Court therefore grants FSF’s motion for summary
judgment on its claim against Baker.
C.

Attorneys’ Fees

The SLAs provide that if either party institutes a legal action to enforce its rights under
the agreements, the prevailing party is entitled to recover its attorneys’ fees, court costs and other
litigation expenses from the other party. Because FSF is the prevailing party in this matter, it is
entitled to reasonable costs and attorneys’ fees under the agreement. FSF should submit a
motion for these fees.
II.

Counter claims
A.

Breach of Contract Claim

Defendants allege that FSF breached the SLAs by preventing PSTEVO from conducting
its own local advertising and that FSF prevented PSTEVO from using its weekly NAF to
conduct local advertising in violation of the SLAs. Neither of these claims is supported by the
record. First, the record shows that FSF did not prevent PSTEVO from conducting additional
local advertising, and in fact encouraged it. This alone defeats the first claim.
Second, there is no provision in the agreements that would allow or require FSF to
exempt PSTEVO from paying its NAF and allow it to instead direct that money at its own, local
advertising. Without a duty imposed by the agreements, there can be no breach. See W.W.
Vincent & Co. v. First Colony Life Ins. Co., 814 N.E.2d 960, 967, 351 Ill. App. 3d 752, 286 Ill.
Dec. 734 (2004) (“Only a duty imposed by the terms of a contract can give rise to a breach.”).
Furthermore, to the extent PSTEVO bases its claim on the language of the NAF policy
statement, that allows the NAF Board to approve individual franchise owners to spend the NAF

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on local media where that franchise owner is the only one operating in the designated market
area, this claim also fails. That NAF Policy Statement is not part of the agreements and
furthermore, PSTEVO was not the only FSF salon operator in its designated marketing area.
Even if the NAF Policy Statement was binding, this provision would be inapplicable here.
Defendants also allege that FSF breached the SLA because it failed “(e) to maintain and
enhance the reputation and trade demand of the Fantastic Sams System; (f) to preserve and
increase the goodwill inherent in the Marks; and (h) to seek enforcement of all covenants, terms
and conditions of the license agreements of all Licensees,” Doc. 24 ¶18, in violation of Section 6
of the SLA. Even if these vague commitments to maintain and enhance the brand were
enforceable, there is no evidence in the record to show that FSF failed to do so. Without a
response from PSTEVO, the Court takes as true FSF’s assertions that it complied with these
vague statements, and grants summary judgment in FSF’s favor on the breach of contract claim.
B.

Unjust Enrichment

Defendants also bring a claim for unjust enrichment. However, because the relationship
between the parties is governed by the SLAs and the dispute arises out of those agreements,
PSTEVO cannot seek redress under an unjust enrichment theory. Omnicare, Inc. v.
UnitedHealth Grp., Inc., 594 F. Supp. 2d 945, 980 (N.D. Ill. 2009), aff’d, 629 F.3d 697 (7th Cir.
2011) (“‘[W]here there is a specific contract that governs the relationship of the parties,’ a
plaintiff cannot assert a claim for unjust enrichment.” (quoting Stathis v. Geldermann, Inc., 692
N.E.2d 798, 812, 295 Ill. App. 3d 844, 229 Ill. Dec. 809 (1998)). Therefore, the Court grants
FSF’s motion for summary judgment on the unjust enrichment claim.

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CONCLUSION
For the foregoing reasons the Court grants FSF’s motion for summary judgment [60].
The Court enters judgment in FSF’s favor on it breach of contract claims against PSTEVO and
Baker. The Defendants are jointly and severally liable to FSF for the full amount of
$470,433.65. Additionally, FSF, as the prevailing party, may file a motion seeking reasonable
costs and attorneys’ fees.
The Court also grants summary judgment in favor of FSF as counterclaim-defendant and
enters judgment in FSF’s favor on Defendants’ breach of contract and unjust enrichment claims.

Dated: March 22, 2017

______________________
SARA L. ELLIS
United States District Judge

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