Honey Dew Associates, Inc. v. M & K Food Corp., No. 98-175L.

81 F.Supp.2d 352

HONEY DEW ASSOCIATES, INC. and Bowen Investment, Inc., Plaintiffs, v. M & K FOOD CORPORATION, Irwin Kay, and Adele Kay, Defendants.

No. 98-175L.

United States District Court, D. Rhode Island.

January 31, 2000.

Charles D. Wick, Pearlman & Wick, Providence, RI, Scott I. Wolf, Jack Mikels & Associates, Boston, MA, for plaintiffs.

Irving Brodsky, Providence, RI, for defendants.

OPINION AND ORDER

LAGUEUX, Chief Judge.

After having spent nearly two years within the federal judicial system, this case is about to be concluded at last, at this level. This Court is now prepared to render a decision following a bench trial and the filing of post trial briefs by the parties. On April 14 and 15, 1999, this Court heard evidence on the question of damages, after having granted partial summary judgment to plaintiffs on the question of liability for breach of a franchise agreement entered into between plaintiffs, Honey Dew Associates, Inc. ("Honey Dew") and Bowen Investment, Inc. ("Bowen"), and defendants, M & K Food Corporation ("M & K") and Irwin and Adele Kay. Plaintiff Bowen seeks damages and counsel fees pursuant to a damages clause in the aforementioned franchise agreement and both plaintiffs seek a permanent injunction to prevent defendants from using the Honey Dew trademarks and trade dress. For the reasons set forth below, this Court grants plaintiffs' request for a permanent injunction, but refuses to enforce the damages clause in the franchise agreement and, thus, awards only nominal damages to Bowen.

I. Standard for Decision in Bench Trials

Pursuant to Federal Rule of Civil Procedure 52(a), this Court may enter judgment following a trial without a jury. See Fed. R.Civ.P. 52(a). In crafting a decision following a bench trial, the Court "shall find the facts specially and state separately its conclusions of law thereon." Id. It is within the purview of the trial court to weigh the credibility of witnesses for the purpose of making findings of fact. See id. The following findings of fact are based upon the evidence relevant to damages presented during the trial conducted before this Court without a jury.

II. Findings of Fact

On June 9, 1992, plaintiff Bowen (based in Massachusetts), as a sub-franchisor of plaintiff Honey Dew (based in New Hampshire), entered into a Franchise Agreement and a Supplemental Agreement with M & K. Defendants Irwin and Adele Kay signed as guarantors. The Franchise Agreement was for a term of ten years, i.e. until June 8, 2002. Under the terms of the Franchise Agreement, Bowen, as the franchisor, licensed M & K, as the franchisee, to operate a retail donut shop in Providence, Rhode Island, and to use the service marks, trade dress and name of "Honey Dew" in the operation of the donut shop.

M & K entered into a lease with a third-party lessor, for the premises where the donut shop would be operated. That lease, dated November 14, 1991, was for a period of 12 years. Defendants also took out a substantial loan to build a structure according to Honey Dew specifications on the leased premises to house the donut shop. Defendants then proceeded to operate that shop (a mom, pop and son operation) in the Washington Park section of Providence.

Unfortunately, by November 9, 1997, the Kays, as a result of personal financial difficulties (Mr. Kay became seriously ill without adequate health insurance), became seriously delinquent in the payment of the franchise royalties and service fees due to Bowen pursuant to the Franchise Agreement.

On or about February 5, 1998, pursuant to the Franchise Agreement, Bowen forwarded to defendants a Notice of Default, indicating that M & K was in violation of the Franchise Agreement for failing to pay royalties and service fees. Defendants failed to cure the defaults within the time period specified in the Notice of Default. Thereafter, on or about March 2, 1998, pursuant to the Franchise Agreement, Bowen forwarded to defendants a Notice of Termination. The Notice of Termination, among other things, revoked M & K's license to operate a Honey Dew donut shop. The termination provisions of the Franchise Agreement provided that upon termination, M & K had to discontinue the use of Honey Dew trademarks and trade dress, and pay damages to Bowen in the form of all royalty payments which would become due on an accelerated basis plus counsel fees.

After receiving the Notice of Termination, M & K continued to operate the Honey Dew donut shop but failed to make any payments to Bowen for future royalties and service fees. Defendants, however, brought the franchise payments up to date to the time of termination. This lawsuit was filed shortly thereafter.

At the bench trial on damages, plaintiffs presented evidence of M & K's average weekly royalties for 1997. According to the damages clause in the Supplemental Agreement, in the event of default and termination, M & K was obligated to pay to Bowen all future royalties through to the contemplated expiration date of the agreement. The damages clause stipulated that future royalties were to be determined by the average weekly royalties for the year preceding the termination. The average weekly royalties payed to Bowen by M & K in 1997 amounted to $302.19. By using the week ending March 22, 1998 as the termination date, Bowen multiplied the average weekly royalties by the number of weeks remaining in the Franchise Agreement to arrive at $66,742.91 as the claimed amount of damages. In addition, plaintiffs offered pages of evidence and numerous affidavits to establish the amount of attorneys' fees payable for the labors of Massachusetts and local counsel on the case. The resultant figure was $44,414.80. Bowen did not offer any other evidence pertaining to the damages suffered by it as a result of the defendants' breach of the franchise agreement and consequent termination thereof.

III. Travel of the Case

Plaintiffs filed a four count Complaint alleging defendants' breach of the Franchise Agreement in this Court on March 30, 1998. In Count I, plaintiffs sought to enjoin defendants from using any of the Honey Dew trademarks and trade dress. In Count II, plaintiffs prayed for enforcement of certain restrictive covenants in the agreement, including a provision of the Franchise Agreement which provided that upon termination, M & K would not use the franchised premises as a donut shop. In Count III plaintiffs asked for enforcement of a non-competition provision. Finally, in Count IV Bowen claimed damages and counsel fees pursuant to paragraph 2 of the Supplemental Agreement which provided that upon termination of the Franchise Agreement, defendants would pay royalties for the remainder of the specified term of the Franchise Agreement.

After some initial pre-trial jousting, this Court heard testimony at a preliminary injunction hearing on January 28, 1999. At the preliminary injunction hearing, it was established that the defendants expended a sum of over $240,000 in establishing this retail donut shop business, and that the weekly franchise fees owed by M & K to Bowen varied between $300.00 to $325.00.

After several days of testimony at that hearing, this Court found that defendants failed to make timely franchise fee payments as prescribed by the franchise agreement, and, thus, were in breach, which justified the termination. The Court preliminarily enjoined the defendants from using any of the Honey Dew trademarks and trade dress. The Court refused to enforce the non-competition provision of the agreement or to oust defendants from the premises so that plaintiffs could make a new deal with the landlord to operate a Honey Dew shop at that location.

In compliance with the Order as entered by the Court on February 22, 1999, defendants ceased use of the Honey Dew trade marks and trade dress, made peace with the landlord (they were delinquent on rent payments as well) and continued operation of a generic donut shop on the site of the leased premises.

Later, this Court granted the plaintiffs' motion for partial summary judgment as to liability on Counts I and IV of the Complaint. This writer made it clear that the restrictive covenants which plaintiffs sought to enforce in Counts II and III of the Complaint were unconscionable. Thereafter, plaintiffs voluntarily dismissed Counts II and III. There is no dispute that the preliminary injunction entered by this Court on February 22, 1999 should become permanent. Thus, the only issues that are disputed relate to damages. Plaintiff Bowen seeks damages in the form of the future royalties which would have been paid by defendants to the expiration of the franchise agreement plus counsel fees all as provided in the damages clause.

The primary issue which this Court must address in this case is whether the damages clause in the Supplemental Agreement is enforceable.

IV. Conclusions of Law

A. Choice of Law Provision

The Supplemental Agreement signed by the parties contained a choice of law provision. The parties agreed to utilize Massachusetts law when issues arose relating to the Franchise Agreement and the Supplemental Agreement. This choice of law issue was only tangentially addressed by counsel. Rhode Island has not explicitly decided whether contract cases will be governed by a "lex loci contractus" or an "interest-weighing" analysis. See Crellin Technologies v. Equipmentlease Corp., 18 F.3d 1, 5 (1st Cir.1994) (collecting state cases); URI Cogeneration Partners, L.P. v. Board of Governors For Higher Education, 915 F.Supp. 1267, 1279-80 (D.R.I. 1996). It is not necessary for this Court to go through the analysis of these principles in order to uphold the choice of law provision in the agreement.¹

As this Court has stated many times, under the established law of Rhode Island, a choice of law provision in a contract is enforceable where the transaction bears a reasonable relationship both to Rhode Island and another state: "[W]hen a transaction bears a...