Dunkin' Donuts Franchising LLC et al v. SAI Food & Hospitality, LLC et al
MEMORANDUM AND ORDER IT IS HEREBY ORDERED that Plaintiffs' motion for partial dismissal of Defendants' third amended counterclaim is DENIED as to Counts V, VI, and VII, and GRANTED as to Counts VIII and IX. (Doc. No. 98.) IT IS FURTHER ORDERED that Counterclaim Defendants Dunkin' Brands Group Inc. and Dunkin' Brands Inc. are dismissed from the action. Signed by District Judge Audrey G. Fleissig on 4/18/2013. (NCL)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MISSOURI
DUNKIN’ DONUTS FRANCHISING
LLC; DD IP HOLDER LLC; BASKINROBBINS FRANCHISING LLC; and BR
IP HOLDER LLC,
Plaintiffs / Counterclaim Defendants, )
SAI FOOD HOSPITALITY, LLC,
JAYANT PATEL, and ULKA PATEL,
Defendants / Counterclaim Plaintiffs, )
DUNKIN’ BRANDS GROUP INC. and
DUNKIN’ BRANDS INC.,
Case No. 4:11CV01484 AGF
MEMORANDUM AND ORDER
This case is before the Court on the motion (Doc. No. 98) filed by Plaintiffs /
Counterclaim Defendants Dunkin’ Donuts Franchising, LLC, et al. (referred to herein as
“Plaintiffs”)1 to dismiss Counts V through IX of Defendants’ nine-count third amended
counterclaim. The Court heard oral argument on the motion on March 12, 2013. For the
reasons set forth below, the motion to dismiss shall be granted with respect to Defendants’
The Court granted Defendants leave to add Dunkin’ Brands Group Inc. (“DBGI”) and
Dunkin’ Brands Inc. (“DBI”), as Counterclaim Defendants. According to the third
amended counterclaim, DBI is “the franchisor of the Dunkin’ system,” and DBGI is the
parent corporation of DBI and two Plaintiffs. DBGI and DBI move to dismiss Counts
VIII and IX, the only counts in which they are named.
antitrust counterclaims (Counts VIII and IX) and denied with respect to Defendants state
tort law counterclaims.2
For purposes of the motions before this Court, Plaintiffs are collectively the
franchisor of the Dunkin’ Donuts system, 3 which involves production, merchandising, and
sale of donuts and other products using special equipment and management programs, and
proprietary marks belonging to Plaintiffs. On February 5, 2009, Defendants Jayant Patel
and his wife Ulka Patel signed a Store Development Agreement (“SDA”) (Doc. No. 92-5),
giving them the exclusive right and obligation to develop and open ten Dunkin’ Donuts
stores in the St. Louis, Missouri, area, pursuant to a specified schedule, with the last store
to open in January 2017, and each store to have a 20 year franchise.
Under the SDA, Jayant Patel and Ulka Patel agreed to pay a nonrefundable initial
franchise fee of $40,000 for each store, for a total of $400,000, of which $133,330 was to
be paid upon execution of the SDA, and additional payments of that amount due 12 and 24
months thereafter. They also agreed to sign a franchise agreement prior to
commencement of construction of each store. Each store was required to be constructed
and equipped to Plaintiffs’ standards and specifications. The SDA provided for a
continuing franchise fee for each store, based upon a percentage of gross sales. Plaintiffs
retained the right to pursue franchises in certain places in the area, such as airports, with
Plaintiffs’ separate motion (Doc. No. 91) for summary judgment on all counterclaims
will be addressed by separate Memorandum and Order.
The system includes the related Baskin Robbins brand.
Jayant Patel and Ulka Patel to be offered the first right of refusal as to those franchises.
On June 30, 2010, the SDA was amended to adjust the store openings schedule and the
dates for payment of the remaining $266,670 initial franchise fee. (Doc. No. 92-6.)
On July 31, 2010, Defendant Sai Food & Hospitality, LLC (“SFH”) was formed
with ownership percentages as follows: 30 percent, the Jayant S. Patel and Ulkaben Patel
Irrevocable Trust; 40 percent, Kamlesh Patel; and 30 percent, Jigar Patel. The parties
dispute what Plaintiffs knew about the ownership interests of Kamlesh and Jigar Patel, and
whether they were authorized to be franchisees. On November 19, 2010, the SDA was
amended to provide for nine rather than ten stores in the St. Louis store development area.
Also on November 19, 2010, Plaintiffs entered into a franchise agreement with SFH as
franchisee for a Dunkin’ Donuts store in Washington, Missouri. The agreement was
signed on behalf of SFH by Jayant Patel and Ulka Patel, as members.
As part of the process for securing the Washington store franchise, Jayant Patel and
Ulka Patel submitted to Plaintiffs a Certificate of Authority and Incumbency that identified
them as the owners of SFH, each owning a 50 percent share of the company; and a copy of
an IRS Form 2553 (Election for a Small Business Corporation) for SFH on which was
stated that they were the owners of the company, with each owning a 50 percent share.
According to Defendants, when they signed the Washington store agreement, they paid
Plaintiffs a franchise fee of $224,000, including $120,000 for equipment. The
Washington store opened on December 6, 2010.
On April 1, 2011, a sublease agreement for property in Florissant, Missouri, for a
Dunkin’ Donuts store was entered into by Plaintiffs and SFH, with Ulka and Jayant Patel
signing on SFH’s behalf. On July 18, 2011, Plaintiffs asked for and were paid $1,000 to
add Kamlesh Patel as a franchisee. On August 5, 2011, a franchise agreement for the
Florissant store was signed by Plaintiffs and Jayant Patel, Ulka Patel, and Kamlesh Patel.
Both franchise agreements provided that one of the conditions of default by the franchisee
was the commission of a fraud or violation of a law relating to a business franchised by
Plaintiffs, with no cure period for such a default. (Doc. No. 92-3, ¶¶ 14.0.4, 14.2.) The
SDA and both franchise agreements contained an express mutual waiver of a jury trial,
punitive damages, and lost profits, in the event of a dispute. They also provided that
Plaintiffs had “the right to specify all equipment to be used in connection with store
operations” (Doc. 92-5 at 11), and that the agreements were to be interpreted in accordance
with Massachusetts law.
Meanwhile, beginning in May 2011, Plaintiffs’ Loss Prevention Department had
been discussing with Defendants a civil lawsuit brought by the United States involving
approximately $222,000 dollars in confiscated cash and cigarettes, in which Jayant Patel,
Jigar Patel, and Sai Enterprises Limited (not SFH) were identified as parties with an
interest in the confiscated property.4
On August 24, 2011 (three days before the opening of the Florissant store),
Plaintiffs sent Defendants a Notice of Default and Termination, terminating the two
franchise agreements, the sublease, and the SDA immediately upon Defendants’ receipt of
The suit was filed on February 18, 2011.
the Notice. (Doc. No. 92-35.) The stated grounds for termination was fraud and
violation of the law in falsely representing that only Jayant and Ulka Patel owned Sai when
the two additional owners, Kamlesh Patel and Jigar Patel, together held the majority
interest in the company; and making the same false statement to the government on the
Form 2553. The Notice demanded that Defendants immediately quit the premises subject
to the sublease and deliver possession of the premises to Plaintiffs. The Notice stated that
if Defendants contested termination, Plaintiffs would pursue the matter in court, and that
during the litigation, Plaintiffs would honor their contractual obligations, but that any
further investment in the franchises, including the Florissant Shop which was scheduled to
open (and subsequently did open) on August 29, 2011, was at Defendants’ own risk.
Plaintiffs commenced the present action on August 25, 2011, asserting that had they
been aware of the true ownership of SFH, they would not have entered into the Washington
Franchise Agreement or approved Defendants to become franchisees for the Florissant
store. Plaintiffs claim that Defendants’ conduct constituted a breach of the franchise
agreements, breach of the sublease for the Florissant franchise, and breach of the SDA by
Jayant and Ulka Patel (Counts I, II, and III, respectively). Plaintiffs also assert claims for
trademark infringement, trade dress infringement, and unfair competition (Counts IV, V,
and VI respectively), due to Defendants’ continued use of Plaintiffs’ trademarks after
Plaintiffs terminated the above-noted agreements. For relief, Plaintiffs seek a declaration
that they had a right to terminate the agreements in question, damages “in an amount as yet
to be determined,” statutory damages and attorney’s fees, and injunctive relief directing
Defendants to, among other things, take all necessary steps to transfer their leasehold
interests in the store(s) to Plaintiffs or their designee(s).
In their third amended counterclaim (Doc. No. 82 at 14-48), Defendants allege that
changes to SFH’s operating agreement and ownership interests were all made at the behest
of, and with the knowledge and approval of, Plaintiffs. They allege that approximately
one year after signing the SDA they were told that Plaintiffs would only approve store
locations that met certain site and demographic requirements. They further allege that by
August 5, 2011, they had invested approximately $590,000 (including the $40,000 initial
franchise fee and approximately $175,000 for new equipment)5 to open the Florissant
store, and that contrary to the termination letter, they did not commit fraud, violate any
laws, or engage in any deceptive practices in connection with their relationship with
In Counts I, II, III, and IV of their counterclaim, Defendants claim, respectively,
wrongful termination of the franchise agreements under Missouri’s Merchandising
Practices Act (“MMPA”), Mo. Rev. Stat. § 407.405, which requires 90-days’ notice prior
to termination; breach of the SDA by opening franchises in the airport without giving
Jayant Patel and Ulka Patel the first right of refusal, and by changing the terms of the SDA
so as to impose new requirements for store locations; breach of the Washington store
franchise agreement; and breach of the Florissant store franchise agreement.
It is not entirely clear whether the $175,000 was alleged to be part of, or in addition to,
Defendants also bring claims for promissory estoppel related to the Florissant store
franchise agreement, asserting that Plaintiffs terminated that agreement without legal
justification or notice and should be estopped from doing so, or alternatively, pay
Defendants their resulting damages (Count V); willful termination -- prima facie tort
related to the termination of the franchises (Count VI); and misrepresentations to
Defendants to change SFH’s business structure, upon which Defendants relied, resulting in
the unlawful terminations (Count VII). In addition, Defendants assert claims against
Plaintiffs and against DBGI and DBI for violation of the Sherman Act and Clayton Act
(Count VIII) and state anti-trust law (Count IX) due to unlawful tying of the sale of donut
franchises / quick-serve donut-coffee restaurant franchises (the tying product) to the
purchase of the equipment needed to operate the franchised stores. With respect to the
anti-trust counts, Defendants allege that Plaintiffs and DBGI and DBI exercised market
control over the tying product.
As relief, Defendants seek “actual damages” in Counts I through IV (including
recoupment of investment, lost profits, damage to business reputation); “damages” in
Count V; “actual damages in tort” in Counts VI and VII; statutory damages trebled,
including damages for lost profits in Count VIII; and statutory damages trebled in Count
On June 1, 2012, Plaintiffs advised Defendants that they could terminate the
Washington store franchise and Defendants did so on June 15, 2012. Defendants are still
operating the Florissant store.
ARGUMENTS OF THE PARTIES
Plaintiffs argue that Counts V, VI, and VII should be dismissed because they simply
“repackage” Defendants’ contract claims as tort claims. More specifically, Plaintiffs
argue that Defendants cannot recover on a promissory estoppel theory because a valid
contract exists between the parties; Defendants cannot pursue a claim of prima facie tort
because they have other adequate remedies available to them; and Defendants have failed
to state a claim of misrepresentation because they have not alleged that they relied on false
information from Plaintiffs.
For dismissal of Counts VIII and IX, Plaintiffs argue that “donut franchises” is not a
viable market for purposes of establishing an illegal tying arrangement under the Sherman
Act or state antitrust law, and that Defendants confuse their obligation to comply with their
contractual obligations with the illegal exercise of market power by Plaintiffs. Plaintiffs
maintain that the relevant section of the Clayton Act does not apply to franchises, and that
DBGI and DBI were not parties to the contracts or negotiations at issue, and constitute
separate legal entities from the franchisor of the Dunkin’ system. Thus, according to
Plaintiffs, Defendants have no basis to bring any claims against DBGI and DBI.
Defendants argue that the state law tort claims present alternative theories of
liability fully supported by the alleged facts. They assert that following the signing of the
Washington store franchise agreement, they invested over $500,000 to develop a new store
location, reasonably believing, based upon representations by Plaintiffs, that they would be
awarded a second franchise. They assert that DBGI and DBI were joined as Defendants to
ensure full and complete relief and that the extent to which DBGI and DBI control
expansion of the Dunkin’ Donuts franchise remains to be determined in discovery.
With respect to the antitrust counterclaims, Defendants argue that “donut
franchises” is a relevant market for tying purposes, as there is no reasonably
interchangeable substitute for a donut, and that they sufficiently pled that Plaintiffs
(including DBGI and DBI) had the market power in this market to enable Plaintiffs to
restrain trade in the related equipment market.
To survive Plaintiffs’ motion to dismiss, Defendants’ counterclaim must contain
sufficient factual matter, accepted as true, to “‘state a claim to relief that is plausible on its
face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly,
550 U.S. 544, 570 (2007)). Although a complaint or counterclaim need not contain
“detailed factual allegations,” it must contain facts with enough specificity “to raise a right
to relief above the speculative level.” Twombly, 550 U.S. at 555. “Threadbare recitals of
the elements of a cause of action, supported by mere conclusory statements,” will not pass
muster; in sum, this standard “calls for enough facts to raise a reasonable expectation that
discovery will reveal evidence of [the claim].” Id. at 556.
State Tort Counterclaims
Whether Defendants have stated claims for promissory estoppel, willful
termination, and/or misrepresentation is governed by Missouri law. See Prudential Ins.
Co. of Am. v. Kamrath, 475 F.3d 920, 924 (8th Cir. 2007) (stating that a district court sitting
in diversity applies the law of the state in which it sits). The Court concludes that
Defendants’ counterclaim alleges sufficient facts as to the state tort counts to raise a right to
relief above the speculative level. Plaintiffs’ motion to dismiss challenges, to a large
extent, the factual basis for Plaintiffs’ claims. Such challenges are more appropriate in a
motion for summary judgment. See St. Louis Motorsports, LLC v. Ferrari N. Am., Inc.,
No. 4:11CV01346 RWS, 2012 WL 1745579, at *1 (E.D. Mo. May 16, 2012) (denying a
motion to dismiss the plaintiffs’ claims for promissory estoppel, unjust
enrichment/recoupment, and misrepresentation that the plaintiffs asserted in addition to
breach of contract, where the plaintiffs alleged that the defendant promised to grant them a
dealership agreement in exchange for meeting certain conditions, and then refused to grant
the dealership after the plaintiff met the conditions and purchased property for a
showroom); see also Midwest Energy, Inc. v. Orion Food Sys., Inc. , 14 S.W.3d 154, 161
(Mo. Ct. App. 2000).
The Court agrees with Plaintiffs that Defendants’ antitrust counterclaims are subject
to dismissal. Section 1 of the Sherman Act provides that “[e]very contract . . . in restraint
of trade or commerce among the several States . . . is declared to be illegal.” 15 U.S.C. § 1.
A tying arrangement is a device used by a seller with market power in one product
market to extend its market power to a distinct product market. To accomplish this
objective, the seller conditions the sale of one product (the tying product) on the
buyer’s purchase of a second product (the tied product). Tying arrangements are
forbidden on the theory that, if the seller has market power over the tying product,
the seller can leverage this market power through tying arrangements to exclude
other sellers of the tied product.
Rick-Mik Enters., Inc. v. Equilon Enters., LLC, 532 F.3d 963, 971 (9th Cir. 2008) (citations
In Illinois Tool Works, Inc. v. Independent Ink, Inc., 547 U.S. 28 (2006), the
Supreme Court explained that “the essential characteristic of an invalid tying arrangement
lies in the seller’s exploitation of its control over the tying product to force the buyer into
the purchase of a tied product that the buyer . . . might have preferred to purchase elsewhere
on different terms.” Id. at 34-35 (citation omitted). The Court concluded that many
“tying arrangements . . . are fully consistent with a free, competitive market.” Id. at 45.
While tying arrangements that “are the product of a true monopoly” are still unlawful, “that
conclusion must be supported by proof of power in the relevant market rather than by a
mere presumption thereof.” Id. at 42-43 (citation omitted).
The claimant has the burden of defining a relevant market in which the defendant’s
power can be assessed. Se. Mo. Hosp. v. C.R. Bard, Inc., 642 F.3d 608, 613 (8th Cir.
2011). As noted above, Defendants claim that Plaintiffs unlawfully tied the sale of donut
franchises/fast-breakfast food restaurant franchises to the purchase of new equipment for
franchised stores. Courts generally reject antitrust claims based on such a purported
relevant market. See Rick-Mik Enters., Inc, 532 F.3d at 972-73 (holding that conclusory
allegation that gasoline station franchisor’s intellectual property rights conferred market
power was insufficient to allege market power in the relevant tying product market,
gasoline franchises, as required to state a claim for antitrust violation based on the
franchisor’s alleged conditioning franchise purchase on the purchase of credit-card
processing services); Martrano v. Quizno’s Franchise Co., No. 08-0932, 2009 WL
1704469, at *11-12 (W.D. Pa. June 15, 2009) (dismissing a franchisee’s tying antitrust
claim that the defendant illegally tied the sale of its franchises to the subsequent sale of
supplies and services, where the plaintiff posited as the relevant market quick service
toasted sandwich restaurant franchises); see also United Farmers Agents Ass’n. v. Farmers
Ins. Exch., 89 F.3d 233, 236-37 (5th Cir.1996) (affirming dismissal of Sherman Act and
Clayton Act tying antitrust claims brought by franchisee; “Economic power derived from
contractual agreements such as franchises . . . has nothing to do with market power,
ultimate consumers’ welfare, or antitrust.”) (citation omitted).
Upon review of Defendants’ third amended counterclaim, the Court concludes that
Defendants have failed to state antitrust claims that are plausible on their face.6 As DBGI
and DBI are mentioned in the counterclaim only with respect to the antitrust counts, these
entities are dismissed from the action.
IT IS HEREBY ORDERED that Plaintiffs’ motion for partial dismissal of
Defendants’ third amended counterclaim is DENIED as to Counts V, VI, and VII, and
GRANTED as to Counts VIII and IX. (Doc. No. 98.)
As indicated earlier, also pending before the Court is Plaintiffs’ motion for summary
judgment on all counterclaims (Doc. No. 91). The Court will rule on that motion as an
alternative to the motion to dismiss with respect to the antitrust counterclaims.
IT IS FURTHER ORDERED that Counterclaim Defendants Dunkin’ Brands
Group Inc. and Dunkin’ Brands Inc. are dismissed from the action.
AUDREY G. FLEISSIG
UNITED STATES DISTRICT JUDGE
Dated this 18th day of April, 2013.
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