Bird Hotel Corporation v. Super 8 Motels, Inc. et al

Filing 123

MEMORANDUM OPINION AND ORDER granting in part and denying in part 99 Motion for Summary Judgment; denying 107 Motion for Summary Judgment. The jury trial previously scheduled to commence on April 13, 2010, is continued to Tuesday, June 1, 2010, with counsel to be present for motions in limine at 9:00 a.m. and with the jury to report at 9:30 a.m. See order for further rulings. Signed by U. S. District Judge Lawrence L. Piersol on 2/16/10. (DJP)

F~ILED
UNITED STATES DISTRICT C O U R T D I S T R I C T OF S O U T H D A K O T A S O U T H E R N DIVISION

FEB 1 6 2010

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BIRD HOTEL C O R P O R A n O N , and all others s i m i l a r l y s i t u a t e d , Plaintiff, -vsS U P E R 8 MOTELS, INC., Defendant.

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P l a i n t i f f B i r d H o t e l C o r p o r a t i o n ( " B i r d H o t e l " ) has b r o u g h t a c l a s s a c t i o n l a w s u i t a g a i n s t Super 8 Motels, Inc. ("Super 8/1) for breach o f the franchise agreement entered into between the parties. Currently pending before the Court are motions for summary j u d g m e n t filed by both parties in this case. The motions have been fully briefed and a motion hearing was held before the C o u r t on Thursday, February 4, 2010. For the reasons set forth below, Bird H o t e l ' s Motion for Summary Judgment will be granted in part and denied in p a r t and Super 8's Motion for S u m m a r y J u d g m e n t will be denied.
BACKGROUND AND RELATED FACTS

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CIV 0 6 - 4 0 7 3

M E M O R A N D U M OPINION AND ORDER

F r a n c h i s e A g r e e m e n t and VIP P r o g r a m In approximately 1984, S u p e r 8 began offering the standard Super 8 Motels Franchise Agreement ("Agreement") at issue in this class action to its franchisees in the United States and Canada. Super 8 continued to offer this standard agreement to its franchisees until at least 1991. The agreements were for a fixed duration o f 20 years.

On February 5, 1986, Bird Hotel and Super 8 entered into this Agreement for the operation o f a Super 8 Motel franchise in Winnipeg, Manitoba in Canada. All o f the class members entered into the same 20-year standard agreement between the years o f 1984 to 1991. The agreement was drafted by Super 8 and presented to all prospective franchisees on the same tenns.

T h e Agreement entered into by the parties provided franchisees with the right to use, among other things, the Super 8 name and marks, methods o f operation, national advertising service, and Superline reservation system i f Bird Hotel paid fees and abided by the covenants delineated in the Agreement. O n e c o v e n a n t e n t i t l e d " S t a n d a r d s o f O p e r a t i o n " r e q u i r e s f r a n c h i s e e s : (A) To maintain a high moral and ethical standard and atmosphere at F R A N C H I S E E ' S motel; to comply with all local, state and federal laws, ordinances, rules and regulations relating to said premises or to any restaurant, cocktail lounge or other improvements thereon; to maintain its premises and accommodations in a clean, attractive, safe and orderly manner, and to provide efficient, courteous and high quality service to the public, to abide by the rules o f operation, however denominated, as are from time to time adopted by F R A N C H I S O R , and to furnish motel accommodations, services and c o n v e n i e n c e s o f the same high quality and distinguishing characteristics as provided at Super 8 Motels in and around the United States and elsewhere so that the motel operated by F R A N C H I S E E hereunder shall help to create and maintain goodwill among the public for the System as a whole and so that FRANCHISOR, FRANCHISEE, and each member o f said System shall be benefited and the public assured o f u n i f o n n , efficient, courteous, and high quality service on a standardized national basis within the System. F R A N C H I S E E agrees to operate its motel at all times in strict compliance with the System, amendments thereto adopted by F R A N C H I S O R and the provisions set forth herein. It is the intent o f the parties hereto that regardless o f who occupies the motel either as owner, lessee, or otherwise, the same shall be operated under the t e n n s o f the Agreement; FRANCHISEE acknowledges that the System as operated by F R A N C H I S O R and its franchisees represents itself to the public as a budget and/or economy motel chain with room rates generally below the going rate in that community and F R A N C H I S E E agrees to operate motels subject to this Franchise Agreement in such a manner as to not d a m a g e s u c h r e p u t a t i o n ; The " S y s t e m " that is referenced in the Agreement includes, but is not limited to, the following distinguishing characteristics: (1) . . . " W o r d Marks," either along or in combination or association with the 2

(2) (3)

(4)

(5)

(6) (7)

color s c h e m e o r pattern, b u i l d i n g d e s i g n , insignia, s l o g a n s , signs, e m b l e m s , trade names, t r a d e m a r k s , service m a r k s , c e r t i f i c a t i o n m a r k s , o r w i t h t h e motel service . . . ; A d i s t i n c t i v e and r e a d i l y r e c o g n i z a b l e d e s i g n and c o n s t r u c t i o n . . . ; T h e appearance, c o l o r s c h e m e , p a t t e r n and design, and t h e c o l o r c o m b i n a t i o n s o f the e x t e r i o r s and o f t h e i n t e r i o r s o f s a i d structures, a n d o n c e r t a i n o f t h e furnishings therein; T h e W o r d M a r k s , t r a d e m a r k s , trade names, service m a r k s , c e r t i f i c a t i o n m a r k s , i n s i g n i a , e m b l e m s , s i g n s , d e s i g n s , c o l o r , a n d p a t t e r n s , and any o t h e r d i s t i n c t i v e features as n o w o r h e r e a f t e r in u s e a t S u p e r 8 M o t e l s . . . ; Style, c o l o r and o t h e r d i s t i n g u i s h i n g c h a r a c t e r i s t i c s o f e q u i p m e n t , f u r n i s h i n g s a n d a p p l i a n c e s u s e d in a n d a b o u t t h e m o t e l s , a n d t h e e q u i p m e n t a n d s u p p l i e s b e a r i n g any o f t h e W o r d M a r k s , a n d a n y o t h e r d i s t i n g u i s h i n g c h a r a c t e r i s t i c s ; M e t h o d s o f operation, local a d v e r t i s i n g service, national a d v e r t i s i n g s e r v i c e , Superline reservation service, and publicity; A s t a n d a r d i z e d , u r I i f o n n m o t e l s e r v i c e i d e n t i f i e d w i t h any o f t h e W o r d M a r k s and w i t h t h e o t h e r d i s t i n g u i s h i n g f e a t u r e s , t r a d e m a r k s a n d s e r v i c e m a r k s o f t h e S y s t e m , for p r o v i d i n g l o d g i n g , f o o d a n d o t h e r a c c o m m o d a t i o n s a n d c o n v e n i e n c e s , p a r k i n g for a u t o m o b i l e s , a n d for p r o v i d i n g s u c h m o t e l s e r v i c e o f a d i s t i n c t i v e n a t u r e in a c c o r d a n c e w i t h h i g h s t a n d a r d s , e f f i c i e n c y , c o u r t e s y and cleanliness; . . .

S e c t i o n F i v e o f t h e A g r e e m e n t p r o v i d e s t h a t " F R A N C H I S O R e x p r e s s l y r e s e r v e s t h e r i g h t to r e v i s e , amend, and to c h a n g e from t i m e to t i m e its said S y s t e m , o r any p a r t t h e r e o f . "

P e r t h e t e n n s o f t h e A g r e e m e n t , f r a n c h i s e e s w e r e a l s o r e q u i r e d to a b i d e by t h e R u l e s o f O p e r a t i o n that w e r e in p l a c e a t the t i m e t h e p a r t i e s e n t e r e d into the A g r e e m e n t as well a s any revisions to s u c h rules as a d o p t e d by S u p e r 8 from t i m e to time. S p e c i f i c a l l y , t h e A g r e e m e n t r e q u i r e s franchisees to:

T o c o m p l y w i t h t h e rules o f o p e r a t i o n as n o w e s t a b l i s h e d by F R A N C H I S O R in t h e S u p e r 8 M o t e l Rules o f Operation, Quality A s s u r a n c e P r o g r a m , T r a d e m a r k Identity M a n u a l o r s i m i l a r m a n u a l s o r r u l e s o f o p e r a t i o n , c o p i e s o f w h i c h h a v e o r w i l l be furnished to F R A N C H I S E E , o r as r e v i s e d o r a m e n d e d by F R A N C H I S O R from t i m e to t i m e h e r e a f t e r , t h e r i g h t o f r e v i s i o n a n d a m e n d m e n t b e i n g r e s e r v e d by F R A N C H I S O R . F R A N C H I S O R and F R A N C H I S E E r e c o g n i z e that t h e w i s d o m a n d practicality o f all rules for the o p e r a t i o n o f t h e S y s t e m m a y r e q u i r e a m e n d m e n t from t i m e t o t i m e as a r e s u l t o f e x p e r i e n c e , a n d t h e y t h e r e f o r e a g r e e t h a t F R A N C H I S O R m a y , f r o m t i m e t o t i m e , m a k e r e v i s i o n s in o r a m e n d m e n t s t o s u c h r u l e s o f o p e r a t i o n

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which F R A N C H I S O R shall apply u n i f o n u l y to all S u p e r 8 Motels, including those owned and operated by F R A N C H I S O R , and F R A N C H I S E E agrees to comply w i t h all such revisions and a m e n d m e n t s . " The Agreement also contains a section entitled "Consideration; Royalty and Advertising fees," which provides for the payment o f the following fees: (1) an initial franchise fee o f $ 2 0 , 0 0 0 , plus an additional $ 1 0 0 per room in excess o f 120 rentable guest units; (2) an ongoing monthly "franchise fee" o f 4 percent o f all gross room sales; (3) a n additional monthly " A d v e r t i s i n g and Reservation Fund" fee o f 2 percent o f all gross room sales; and (4) an "additional franchise fee" e q u a l to any excise, sales, or privilege tax imposed upon the defendant as a result o f the franchise agreement. As provided in the Agreement, the 2 percent fee o n gross rooms sales is payable to " S u p e r 8 Advertising and R e s e r v a t i o n F u n d " and (b) shall be under the exclusive control o f F R A N C H I S O R , and shall be used by F R A N C H I S O R solely for the publication and distribution o f directories, pamphlets and other advertising matter, for radio, television, magazine, newspaper and other f o n u s o f advertising media, for technical and professional advice and service in c o n n e c t i o n t h e r e w i t h , for e m p l o y m e n t o f p e r s o n n e l a n d o f f i c e e x p e n s e s a n d attributable to the administration o f the advertising fund, for advertising agency commissions, and for any other advertising, promotional o r related purposes and for advertising and p r o m o t i n g S u p e r 8 Motels on a local, regional, national and/or international basis, and to fund and administer the S u p e r 8 Motel Reservation System, however denominated, and the operation o f the V.J.P. Club u n d e r the provisions and procedures set forth in the operating manual from time to time.

As part o f the Agreement, all franchisees were required to participate in the V.J.P. C l u b customer loyalty program. The covenant in the Agreement entitled " C r e d i t Card System" specifically provided that franchisees are required " [ t ] o participate in any S u p e r 8 credit card system which may hereafter be adopted by FRANCHISOR, and to further participate in a V.J.P. C l u b established by F R A N C H I S O R and to accept any other credit cards approved by the F R A N C H I S O R as set forth from time to time in the rules o f operation." Super 8's Policy and Rules regarding the V.J.P. C l u b provides that " [ e ] a c h Super 8 Motel must participate in the V.J.P. Club." ( D e f s . ' Ex. 1.) T h e policy statement further provides that " [ a ] t the time o f enrollment at the motel front desk, the guest will receive a 10% discount on the first n i g h t ' s stay," "will be charged a $2.50 one time p r o c e s s i n g fee," and will be

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issued a temporary card. (Defs.' Ex. 1.) T h e benefits o f a n individual V.J.P. membership include the following: (a) 10% discount at Super 8 Motels; (b) Guaranteed reservations; (c) Ability to c a s h one check for up to $50.00 for cash for each night stayed at the motel; (d) S u p e r C h e c k Express Check In; (e) Discount on car rental. ( D e f s . ' Ex. 1.) The policy also states that " [ t ] h e V.J.P. discount must be given on all rates and room types each day o f the year." ( D e f s . ' Ex. 1.)

Section 20 o f the Agreement contains an integration clause w h i c h provides that:

This Franchise Agreement contains the entire agreement o f the parties, and there are no representations, warranties, covenants, inducements, promises, agreements, o r u n d e r t a k i n g s , oral o r w r i t t e n , e x p r e s s e d o r i m p l i e d b e t w e e n the p a r t i e s h e r e t o o t h e r t h a n t h o s e e x p r e s s l y s e t f o r t h h e r e i n . N o a g r e e m e n t o f any k i n d o r m o d i f i c a t i o n o r waiver o f any o f the terms, covenants, o r c o n d i t i o n s o f this A g r e e m e n t shall be b i n d i n g u p o n e i t h e r p a r t y u n l e s s t h e s a m e h a s b e e n m a d e in w r i t i n g a n d d u l y e x e c u t e d by both parties. TripRewards Program In 1993, S u p e r 8 was acquired by H F S , which then merged with Cendant Corporation, h e a d q u a r t e r e d in P a r s i p p a n y , N e w J e r s e y . C e n d a n t l a t e r s p l i t into m u l t i p l e o p e r a t i n g c o m p a n i e s under the Wyndham name. Super 8 Motels, Inc. is n o w a wholly-owned subsidiary o f Wyndham Hotel G r o u p , o n e o f t h e three p r i n c i p a l c o m p o n e n t s o f W y n d h a m W o r l d w i d e C o r p o r a t i o n , e n c o m p a s s i n g n e a r l y 7 , 0 0 0 h o t e l s r e p r e s e n t i n g m o r e t h a n 5 8 8 , 0 0 0 r o o m s i n 66 c o u n t r i e s o n s i x continents under the Wyndham, Ramada, Days Inn, S u p e r 8, Wingate by Wyndham, B a y m o n t Inn & Suites, Microtel Inns and Suites, Hawthorn Suites, Howard Johnson, Travelodge, and Knights Inn brands.

I n D e c e m b e r 2 0 0 3 , C e n d a n t C o r p o r a t i o n l a u n c h e d t h e T r i p R e w a r d s P r o g r a m for c u s t o m e r s

o f all o f its numerous hotel and motel franchises,' including Super 8. T r i p R e w a r d s is a points-based,

IThe Wyndham brand was excepted from implementing T r i p R e w a r d s and was allowed to retain its loyalty program, " W y n d h a m B y R e q u e s t , " long after the implementation o f TripRewards.
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multi-brand loyalty program intended to encourage customers to stay at all o f the hotels and motels a f f i l i a t e d w i t h the p a r e n t c o r p o r a t i o n ' s v a r i o u s f r a n c h i s e d l o d g i n g brands. T r i p R e w a r d s m e m b e r s earn " p o i n t s " for staying at all m e m b e r hotels, i n c l u d i n g S u p e r 8 franchisees. A c c u m u l a t e d points can then be redeemed for " R e w a r d s , " s u c h as magazine subscriptions, t h e m e park tickets, gift c e r t i f i c a t e s , g a s o l i n e c a r d s , o r a free n i g h t ' s s t a y a t a n y o f t h e p a r e n t c o r p o r a t i o n ' s l o d g i n g f r a n c h i s e s , including S u p e r 8.

TripRewards is a mandatory mar ke ting pr ogr a m and immediately replaced the o t h e r c u s t o m e r loyalty programs o f its franchisees such as S u p e r 8's V.J.P. Club. All active V.J.P. m e m b e r s who t r a n s a c t e d business with S u p e r 8 in the 18 m o n t h s p r i o r to the c o n v e r s i o n were automatically converted into T r i p R e w a r d s members. ( Z u s m a n Dep. 59: 12-25.) In addition, any c u s t o m e r thereafter reserving a room on the Internet with S u p e r 8 or a n y o f W y n d h a m ' s e l e v e n lodging brands is automatically enrolled in T r i p R e w a r d s unless he o r s h e affirmatively " o p t s o u t . "

In addition to implementing and p r o m o t i n g the n e w T r i p R e w a r d s program, franchisees were required to pay a 5 percent fee on the gross r o o m rate for their participation in the program. T h i s n e w fee was used to " f u n d the issuance o f P r o g r a m rewards, advertising o f the P r o g r a m and the administration o f the program." ( D e f s . ' Ex. 8.)

In S e p t e m b e r 2003, Bird Hotel, through its o w n e r Paul Kostas, wrote to S u p e r 8 to raise
several objections to TripRewards, including his c o n t e n t i o n that his A g r e e m e n t did not require his participation in t h e new program. In particular, Mr. K o s t a s believed the 5 percent fee on gross room sales to T r i p R e w a r d s m e m b e r s violated the terms o f the A g r e e m e n t . Subsequently through his Canadian legal counsel, Mr. Kostas requested t h a t S u p e r 8 identify the contractual basis for the TripRewards program in his Agreement. S u p e r 8's legal counsel responded w i t h a letter citing the following r e l e v a n t p r o v i s i o n s o f t h e A g r e e m e n t a n d f u r t h e r e x p l a i n i n g t h e p r o g r a m :

S u p e r 8 Motel, U n i t No. 3393 ( A g r e e m e n t dated February 5, 1986)

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1.

Sections 3(A), (1) and 5 - R e q u i r e s the franchisee to c o m p l y w i t h t h e r u l e s o f o p e r a t i o n s a s r e v i s e d f r o m t i m e to t i m e by S u p e r 8 M o t e l s a t its d i s c r e t i o n . Section 3(B)(2) - G r a n t s S u p e r 8 M o t e l s broad d i s c r e t i o n in e s t a b l i s h i n g a d v e r t i s i n g , m a r k e t i n g p r o m o t i o n a l and s i m i l a r p r o g r a m for t h e S u p e r 8 s y s t e m . Section 3 ( H ) - R e q u i r e s t h e franchisee to participate in the S u p e r 8 VIP p r o g r a m a n d a n y o t h e r c r e d i t card s y s t e m s as S u p e r 8 M o t e l s m a y require from time to time.

2.

3.

U n d e r TripRewards, franchisees pay 5 % o f room revenues only o n qualified stays by T r i p R e w a r d s m e m b e r s . In c o m p a r i s o n , u n d e r the S u p e r 8 VIP p r o g r a m , f r a n c h i s e e s w e r e r e q u i r e d to o f f e r all m e m b e r s a 1 0 % d i s c o u n t o f f the standard room rate. T h e T r i p R e w a r d s fees are u s e d to fund the issuance o f P r o g r a m rewards, a d v e r t i s i n g o f t h e P r o g r a m and the a d m i n i s t r a t i o n o f t h e p r o g r a m . . . . T h e net c o s t o f the p r o g r a m s h o u l d be no m o r e t h a n t h e VIP program. ( D e f s . ' Ex. 8.) Procedural History Bird Hotel filed a c o m p l a i n t initiating t h i s m a t t e r o n F e b r u a r y 2 4 , 2 0 0 6 , in S o u t h D a k o t a state court. S u p e r 8 s u b s e q u e n t l y r e m o v e d t h e a c t i o n t o t h e U n i t e d S t a t e s D i s t r i c t C o u r t for t h e D i s t r i c t o f S o u t h D a k o t a S o u t h e r n D i v i s i o n . In i t s C o m p l a i n t , P l a i n t i f f a l l e g e s t h a t t h e T r i p R e w a r d s 5 p e r c e n t charge is a n additional fee, the i m p o s i t i o n o f w h i c h v i o l a t e s the p r o v i s i o n s o f the A g r e e m e n t p r o v i d i n g for p a y m e n t o f " C o n s i d e r a t i o n ; R o y a l t y a n d A d v e r t i s i n g f e e s . "

O n O c t o b e r 3 0 , 2 0 0 6 , S u p e r 8 filed a m o t i o n for J u d g m e n t o n the P l e a d i n g s a r g u i n g that it w a s p e r m i t t e d u n d e r t h e e x p r e s s l a n g u a g e o f t h e A g r e e m e n t t o m a k e c h a n g e s t o o p e r a t i o n s a n d t h u s t o its c u s t o m e r loyalty p r o g r a m d e t a i l e d t h e r e i n . O n S e p t e m b e r 1 9 , 2 0 0 7 , the C o u r t i s s u e d a m e m o r a n d u m o p i n i o n a n d o r d e r d e n y i n g S u p e r 8 's M o t i o n for J u d g m e n t o n t h e P l e a d i n g s .

O n O c t o b e r 1 6 , 2 0 0 7 , t h e C o u r t granted c l a s s c e r t i f i c a t i o n p u r s u a n t to F e d e r a l R u l e o f Civil

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Procedure 23(b )(3). (Doc. 51.) The Order certified a class o f 226 franchisees that are o r have been parties to the standard Agreement at issue in this case and were subject to S u p e r 8's requirement instituted in December 2003 that franchisees must pay an additional 5 percent fee o n all gross room sales to customers enrolled in its TripRewards program. (Doc. 51.)

O n September 2 5 , 2 0 0 8 , the Court entered its order approving the process for providing notice and the opportunity to opt out o f the class. (Doc. 75.) Bird Hotel provided notice according to the prescribed procedure and 28 franchisees opted o u t o f the class. (Docs. 78, 81). O n July 1 3 , 2 0 0 9 , the parties filed a j o i n t motion in which they requested that ten additional franchisees should also be removed on the basis that they are owned by entities that had opted out. T h a t same day, the parties filed a j o i n t motion to redefine the class to exclude those who had previously executed releases o f all potential claims against the defendant. (Doc. 92). O n A u g u s t 27, 2009, the C o u r t entered its order granting the motions. (Doc. 97). As a result, the final composition o f the class consists o f 160 members.

Currently pending before the Court are motions for summary j u d g m e n t filed by both parties in this case. The parties dispute whether the terms o f the Agreement allow for Super 8 to charge a 5 percent fee on gross room sales to customers participating in the T r i p R e w a r d s Program.

LEGAL S T A N D A R D

Rule 56(c) o f t h e Federal Rules o f Civil Procedure provides that summary j u d g m e n t shall be entered " i f the pleadings, depositions, answers to interrogatories, and admissions on file, together with affidavits, i f any, s h o w that there is no genuine issue as to any material fact and that the m o v i n g party is entitled to a j u d g m e n t as a matter o f l a w . " Fed. R. Civ. P. 56(c). In ruling o n a motion for summary j u d g m e n t , the Court is required to view the facts in the light m o s t favorable to the nonmoving party and must give that party the benefit o f all reasonable inferences to be drawn from the underlying facts. AgriStor Leasing v. Farrow, 826 F.2d 732, 734 (8th Cir. 1987). The moving party bears the burden o f showing both the absence o f a genuine issue o f material fact and its entitlement
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to j u d g m e n t as a matter o f l a w . Fed. R. Civ. P. 56(c); Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 2 5 7 , 1 0 6 S.Ct. 2 5 0 5 , 2 5 1 1 , 9 1 L.Ed.2d 202 (1986). Once the moving party has met its burden, the non-moving party may not rest o n the allegations o f its pleadings but must set forth specific facts, by affidavit or other evidence, showing that a genuine issue o f material fact exists. Fed. R. Civ. P. 56(e);

Anderson, 477 U.S. at 257; C i t y o f M t . Pleasantv. AssociatedElec. Coop., Inc., 838 F.2d 2 6 8 , 2 7 3 - 7 4
(8th Cir. 1988). DISCUSSION The question before the Court in these summary j u d g m e n t motions is whether or not Super 8 breached the t e n n s o f the Agreement w h e n it imposed a 5 percent fee o n room sales to customers registered with the TripRewards Program. The Agreement provides that the laws o f South Dakota will be applied to disputes arising therefrom.

I.

Franchise agreements are construed and enforced according to basic contract law, see Bores

v. D o m i n o ' s Pizza, LLC, 530 F.3d 671, 674-76 (8th Cir. 2008) (construing franchise agreement
according to state contract law principles), and under the laws o f South Dakota, " [ t ] h e interpretation o f a contract is a question o f l a w . " Pauley v. Simonson, 720 N.W.2d 665, 667 (S.D. 2006). When detennining the meaning o f a contract, "effect will be given to the plain meaning o f its words." In

re Dissolution o f Midnight Star Enterprises, L.P., 724 N.W.2d 334, 337 (S.D. 2006) (additional
citations omitted). A court must look " t o the language that the parties used in the contract to d e t e n n i n e their intention." Pauley, 720 N.W.2d at 667-68 (citation omitted). In doing so, a court must "give effect to the language o f the entire contract and particular words and phrases are not interpreted in isolation." Midnight Star, 724 N.W.2d at 337 (citation omitted). I f the parties' intention is made clear by the language o f the contract " i t is the duty o f this [C]ourt to declare and enforce it." Pauley, 720 N.W.2d at 668. "However, i f the contract is uncertain or ambiguous, parol and extrinsic evidence may be used for clarification." Id. (internal quotations and citation omitted). " A contract is ambiguous only when it is capable o f more than one meaning w h e n viewed objectively

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by a reasonably intelligent person w h o has e x a m i n e d the c o n t e x t o f the entire integrated agreement."

Pauley, 720 N.W.2d at 668 (citation omitted).

In its motion for s u m m a r y j u d g m e n t , Bird Hotel does not dispute t h a t S u p e r 8 has authority to change its c u s t o m e r loyalty program, but argues t h a t it m a y not do so by i m p o s i n g a 5 percent fee on gross room sales to T r i p R e w a r d s members. Bird Hotel c o n t e n d s t h a t the p l a i n language o f the A g r e e m e n t o n l y a u t h o r i z e s t h e i m p o s i t i o n o f f o u r fees d u r i n g t h e c o u r s e o f t h e c o n t r a c t a n d t h a t t h e new 5 percent fee on gross room s al e s to T r i p R e w a r d s m e m b e r s has been imposed u p o n class members in violation o f the terms o f the Agreement. T h e class seeks r e i m b u r s e m e n t o f the sum o f fees paid as a result o f the alleged breach o f the A g r e e m e n t s as well as p r e j u d g m e n t interest.

S u p e r 8, however, argues that n o w h e r e in the A g r e e m e n t is any language stating that the fees are exclusive to those specifically delineated in section c o n c e r n i n g " C o n s i d e r a t i o n ; Royalty and Advertising fees" and that Bird H o t e l ' s narrow focus on this fee p r o v i s i o n ignores the n u m e r o u s other provisions which permit Super 8 to i m p o s e a d d i t i o n a l e x p e n s e s upon franchisees and to make revisions to its franchise operations. P r o v i s i o n s highlighted by S u p e r 8 t h a t entail additional

expenditures by franchisees include: ( l ) Section 3 ( W ) , " F R A N C H I S E E shall p u r c h a s e and maintain at F R A N C H I S E E ' s sole expense such e q u i p m e n t as is from t i m e to t i m e designated by F R A N C H I S O R to connect F R A N C H I S E E ' S motel to F R A N C H I S O R ' S national reservation system, however denominated"; (2) Section 3(N), Franchisee " a g r e e s to p u r c h a s e from F R A N C H I S O R " or other approved vendors 25 individually identified items o f hotel r o o m property; (3) Section 3(K), franchisee " a g r e e s to maintain and keep in force" n u m e r o u s types o f insurance for the benefit o f franchisor; (4) Section 3 ( 0 ) , franchisee agrees to travel to a n d attend certain meetings. S u p e r 8 argues further that the 10 percent discount associated with the V .I.P. P r o g r a m was not delineated in t h e A g r e e m e n t , but r a t h e r in t h e R u l e s o f O p e r a t i o n w h i c h , u n d e r t h e t e r m s o f t h e A g r e e m e n t , S u p e r 8 may revise at its discretion. Specifically, S u p e r 8 notes Section 3(1) w h i c h p r o v i d e s that:

F R A N C H I S O R and F R A N C H I S E E recognize that the w i s d o m and practicality o f all rules for the operation o f the System m a y require a m e n d m e n t form time to time as a result o f experience, and they therefore agree t h a t F R A N C H I S O R may, from time to 10

time, make reVISIOns in or amendments to such rules o f operation which FRANCHISOR shall apply uniformly to all Super 8 Motels, including those owned and operated by FRANCHISOR, and F R A N C H I S E E agrees to comply with all such revisions and amendments. Super 8 argues further that Section 3(H) o f the Agreement specifically anticipates the potential for changes to the customer loyalty program as it requires franchisees:

To participate in any Super 8 credit card system which may hereafter be adopted by FRANCHISOR, and to further participate in a V.J.P. Club established by FRANCHISOR and to accept any other credit cards approved by the F R A N C H I S O R as set forth from time to time in the rules o f operation; In the event that the Court finds that the contract is ambiguous, both parties reference parol and extrinsic evidence to aid the Court in its interpretation o f the p a r t i e s ' intentions.

The Court concludes in this case that it need not refer to parol and extrinsic evidence because the Court finds in examining the entire context o f the Agreement, that its terms clearly do not permit Super 8 to impose upon its franchisees an additional 5 percent fee o n gross room sales to TripRewards members for their participation in the customer loyalty program. The Agreement provides that franchisees will be charged a 2 percent, not a 7 percent fee 2 for a f r a n c h i s e e ' s participation in the c u s t o m e r loyalty p r o g r a m . S e c t i o n 3 ( B ) ( 2 ) o f t h e A g r e e m e n t s p e c i f i c a l l y s t a t e s t h a t " [ a ] s u m e q u a l to two percent (2%) o f gross room sales" . . . "shall be by check payable to ' S u p e r 8 Advertising and Reservation F u n d ' and . . . shall be used by F R A N C H I S O R solely for" the advertising and promotion o f S u p e r 8 M o t e l s , the a d m i n i s t r a t i o n o f t h e S u p e r 8 M o t e l R e s e r v a t i o n S y s t e m , a n d " t h e o p e r a t i o n o f the V.J.P. Club under the provisions and procedures set forth in the operating manual from time to time." Even i f Super 8 has retained the right in the Agreement to change its system standards and rules o f operation and its customer loyalty program detailed therein, it may not unilaterally impose a fee for the operation o f that program greater than what is provided for in the language o f the

2Franchisees were charged this new 5 percent o f gross room sales fee in addition to the 2 percent o f gross room sales fee which it had been paying pursuant to the original terms o f the Agreement.
11

Agreement. U n d e r the terms o f the Agreement, franchisees were required to pay S u p e r 8 a fee equal to 2 percent o f gross room sales for their participation in the c u s t o m e r loyalty p r o g r a m and to give customers who participated in the program an additional 10 percent discount o f f the room rate. U n d e r the TripRewards Program, the benefit to c u s t o m e r s participating in the loyalty pr ogr a m is not a 10 percent discount on room rates, but rather an o p p o r t u n i t y to redeem p o i n t s earned for staying at hotels and motels participating in the program for certain rewards s u c h as magazine subscriptions, theme park tickets, gift certificates, gasoline cards, o r a free n i g h t ' s stay. I t does not a p p e a r that Bird Hotel takes issue with Super 8 revising in this m a n n e r the benefits customers receive by participating in the customer loyalty program, but contends that S u p e r 8 may not increase the fee that franchisees must pay S u p e r 8 for its participation in the program o v e r that which is explicitly provided for in the contract. T h e C o u r t agrees with Bird Hotel and finds that doing so a m o u n t s to a unilateral revision o f the terms o f the contract and not, as argued by S u p e r 8, to a revision o f the system standards and rules o f operation. 3 T h e C o u r t therefore finds inapposite the cases cited by S u p e r 8 in w h i c h courts have upheld a f r a n c h i s o r ' s contractual right to i m p l e m e n t systems or operations changes.

In sum, the C o u r t concludes that S u p e r 8 breached the Agreement w h e n it required franchisees to pay a total fee equal to 7 percent o f gross room sales for their participation in the T r i p R e w a r d s program. The A g r e e m e n t provided that franchisees would only be charged 2 p e r c e n t o f gross room sales for their participation in the c u s t o m e r loyalty pr ogr a m and nowhere in the A g r e e m e n t did S u p e r 8 reserve the right to unilaterally revise these terms. 4

3 W h e t h e r there are any limits o n S u p e r 8's d i s c r e t i o n to revise t h e s y s t e m s t a n d a r d s and rules o f operation and the extent o f t h o s e limits is not a question that is presently before the C o u r t and will not be addressed in this opinion.

4Even though the C o u r t concludes that the terms o f the A g r e e m e n t are c l e a r and unambiguous, the C o u r t notes that the parol and extrinsic evidence provided by P l a i n t i f f Bird Hotel would further persuade the C o u r t that the contested fee was imposed upon franchisees in breach o f the Agreement. Franchisors are required under federal law to disclose to prospective franchisees in detail all the fees that a franchisee m u s t pay to the franchisor and its affiliates as well as the formula used to co m p u t e the fees. T h e regulations specifically p r o v i d e that " [ i ] f f e e s m a y increase, d i s c l o s e the f o r m u l a t h a t d e t e r m i n e s the i n c r e a s e o r t h e m a x i m u m a m o u n t o f the increase. F o r example, a percentage o f gross sales is acceptable i f the franchisor defines the term
12

II.

"In an action for breach o f contract, the p l a i n t i f f is entitled to recover all his detriment proximately caused by the breach, not exceeding the amount he would have gained by full performance." B a d Wound v. Lakota, 603 N . W . 2 d 723 (S.D. 1999) (citation omitted). To recover damages for breach o f contract, the loss must be clearly ascertainable in both its nature and origin. SDCL 21-2-1. Damages also must be reasonably certain. McKie v. Huntley, 620 N . W . 2 d 599, 603 (S.D. 2000). "Reasonable certainty requires p r o o f o f a rational basis for measuring loss, without allowing a j u r y to speculate." Id. at 604 (citation omitted). " W h e t h e r the fact o f a loss has been proven to a reasonable certainty is ordinarily a question for the trier o f fact." Keegan v. First B a n k o / S i o u x Falls, 470 N.W.2d 6 2 1 , 6 2 4 (S.D. 1991).

B i r d H o t e l a r g u e s t h a t " [ i ] f the c l a s s m e m b e r s p r e v a i l o n t h e i r b r e a c h o f c o n t r a c t c l a i m , the damages are simply the mandatory TripRewards fees that each class member has been required to remit to the defendant since the program was launched in December o f 2 0 0 3 . " ( P i s . ' Br. in Supp. o f Mot. for Summ. J. at 27.) Bird Hotel states that through the end o f June 2009, the TripRewards fees paid by the class members amounted to $3,418,112.34 and requests summary j u d g m e n t in that amount plus any additional TripRewards fees paid by the class members between June 2009 and the date that the j u d g m e n t is entered, as well as pre-judgment interest on the entire amount.

The Court concludes that the sum o f unauthorized fees paid by class members since the launch

' g r o s s sales.'" I n accordance with these regulations, Super 8 represented to class members and to the Federal Trade Conunission that "Recurring fees are limited to a royalty o f 4 % o f gross room revenue, payable to Super 8 Motels, Inc. and 2 % o f the gross room revenue payable to the Super 8 Advertising and Reservation Fund. There are no other royalties or fees." It is the C o u r t ' s view that Super 8's disclosure pursuant to these regulations indicates that the parties did not anticipate that Super 8 would be permitted under the terms o f the Agreement to impose an additional recurring fee equal to 5 percent o f gross room sales to TripRewards members. The drafter for Super 8 o f the Agreement has now stated that he intended that Super 8 would be able to impose this fee. Nothing in this footnote is relied upon by the Court in reaching its conclusion in this case. 13

of the T r i p R e w a r d s P r o g r a m c o n s t i t u t e s a r e a s o n a b l e b a s i s f o r c a l c u l a t i n g d a m a g e s p r o x i m a t e l y c a u s e d b y S u p e r 8 's b r e a c h . H o w e v e r , the C o u r t f i n d s t h a t q u e s t i o n s o f m a t e r i a l f a c t e x i s t as to w h e t h e r this s u m e x c e e d s t h e a m o u n t c l a s s m e m b e r s w o u l d h a v e g a i n e d h a d S u p e r 8 f u l l y p e r f o r m e d the contract. S u p e r 8 a r g u e s t h a t a w a r d i n g c l a s s m e m b e r s the full a m o u n t o f fees p a i d in b r e a c h o f t h e A g r e e m e n t , $ 3 , 4 1 8 , 1 1 2 . 3 4 t h r o u g h t h e e n d o f J u n e 2 0 0 9 , w i l l r e s u l t in a w i n d f a l l t o c l a s s m e m b e r s . S p e c i f i c a l l y , S u p e r 8 s t a t e s t h a t this d a m a g e s f i g u r e d o e s n o t a c c o u n t for t h e a m o u n t c l a s s m e m b e r s a l l e g e d l y s a v e d as a r e s u l t o f n o t b e i n g r e q u i r e d to g i v e c u s t o m e r s p a r t i c i p a t i n g in the o l d c u s t o m e r l o y a l t y p r o g r a m , the V J . P . P r o g r a m , a 10 p e r c e n t d i s c o u n t o n r o o m rates a n d i g n o r e s the i n c o m e r e c e i v e d f r o m r o o m s a l e s to c u s t o m e r s s e e k i n g to t a k e a d v a n t a g e o f t h e b e n e f i t s p r o v i d e d b y the T r i p R e w a r d s P r o g r a m . In fact, S u p e r 8 a r g u e s t h a t c l a s s m e m b e r s h a v e s u f f e r e d no d a m a g e s at all as a r e s u l t o f t h e s e o f f s e t s . T h e C o u r t finds t h a t t h e q u e s t i o n o f w h e t h e r a n y b e n e f i t s a c c r u e d to c l a s s m e m b e r s as a r e s u l t o f S u p e r 8 's b r e a c h o f the A g r e e m e n t a n d t h e m o n e t a r y v a l u e o f t h o s e a l l e g e d b e n e f i t s a r e q u e s t i o n s to b e d e t e r m i n e d b y a j u r y . See First A m e r i c a n B a n k & Trust, N.A. v.

Farmers State B a n k o f Canton, 7 5 6 N . W . 2 d 1 9 , 3 3 (S.D. 2 0 0 8 ) ( " P r o x i m a t e c a u s e is a q u e s t i o n for
the j u r y e x c e p t in the r a r e s t o f c a s e s . " ) ; R o t h v. Farner-Bocken Co., 6 6 7 N . W . 2 d 6 5 1 , 6 6 2 (S.D. 2 0 0 3 ) ( s t a t i n g t h a t the a m o u n t o f d a m a g e s to b e a w a r d e d is j u r y q u e s t i o n ) . T h e p a r t i e s will b e a b l e to p r e s e n t t h e i r r e s p e c t i v e n o n - s p e c u l a t i v e d a m a g e s p o s i t i o n s to t h e j u r y . F o r the f o r e g o i n g r e a s o n s , it is h e r e b y O R D E R E D that: 1. B i r d H o t e l ' s M o t i o n for S u m m a r y J u d g m e n t ( D o c . 9 9 ) is G R A N T E D I N P A R T A N D D E N I E D I N P A R T a n d S u p e r 8 's M o t i o n for S u m m a r y J u d g m e n t ( D o c . 107) is D E N I E D . T h e s c o p e o f t h e j u r y trial will b e l i m i t e d to the a m o u n t o f d a m a g e s , i f any, to be awarded class members. All m o t i o n s in l i m i n e , w i t h s u p p o r t i n g a u t h o r i t y , s h a l l b e in w r i t i n g a n d filed, t o g e t h e r with p r o p o s e d instructions, with s u p p o r t i n g a u t h o r i t y , with the C o u r t t e n ( 1 0 ) w o r k i n g d a y s b e f o r e trial. T h a t the trial p r e v i o u s l y s c h e d u l e d to c o m m e n c e o n A p r i l 13, 2 0 1 0 , is c o n t i n u e d to T u e s d a y , J u n e 1 , 2 0 1 0 , w i t h c o u n s e l to b e p r e s e n t f o r m o t i o n s in l i m i n e a t 9 : 0 0 A . M . , a n d w i t h t h e j u r y to r e p o r t a t 9 : 3 0 A . M .

2.

3.

4.

14

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D a t e d this l f d - ; " ' d a y o f F e b r u a r y , 2 0 1 0 .
B Y THE C O U R T :

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w r e n c e L. Piersol United States District Judge

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15