Sears Home Appliances Showrooms, LLC v. Appliance Alliance, LLC

328 F.Supp.3d 800

SEARS HOME APPLIANCES SHOWROOMS, LLC and Sears Authorized Hometown Stores, LLC, Plaintiffs/Counter-Defendants,

v.APPLIANCE ALLIANCE, LLC, Brent Turley, and Minena Turley, Defendants/Counter-Plaintiffs,

v.Samantha Wilks, Sears Holding Corporation d/b/a Sears Hometown & Outlet and Sears.com, and Sears, Roebuck & Co., Third-Party Defendants.

15-cv-4414

United States District Court, N.D. Illinois, Eastern Division.

Signed June 29, 2018

Matthew B. Harris, William L. Killion, Faegre Baker Daniels LLP, Minneapolis, MN, Lindsey M. Hogan, Sylvia B. St. Clair, Stacey Lynn Smiricky, Faegre Baker Daniels LLP, Chicago, IL, for Plaintiffs/Counter-Defendants/Third-Party Defendants.

Emil Lippe, Jr., Lippe & Associates, Dallas, TX, Jeffrey E. Crane, Law Office of Jeffrey E. Crane, LLC, Northbrook, IL, William Jeffrey Factor, Factor Law, Chicago, IL, for Defendants/Counter-Plaintiffs.

MEMORANDUM OPINION AND ORDER

John Z. Lee, United States District Judge

Plaintiffs Sears Home Appliances Showrooms, LLC ("SHAS") and Sears Authorized Hometown Stores, LLC ("SAHS") filed suit against Brent and Minena Turley ("the Turleys") and Appliance Alliance, LLC (together, "Defendants") for breaching the parties' franchise agreements. In turn, Defendants brought counterclaims against SHAS and SAHS, as well as Third-Party Defendants Samantha Wilks, Sears, Roebuck & Co. ("Sears Roebuck"), and an entity Defendants named as "Sears Holding Corporation d/b/a Sears Hometown & Outlet and Sears.com"—which Plaintiffs assert are in fact two separate entities: Sears Holding Corporation ("Sears Holding") and Sears Hometown and Outlet, Inc. ("SHO").

Plaintiffs and Third-Party Defendants—whom the Court refers to collectively as Plaintiffs, for simplicity—have filed three separate motions for summary judgment. SHAS, SAHS, and SHO have moved for summary judgment on all counts of Plaintiffs' Complaint and Defendants'¹ Second Amended Counterclaim.² Sears Holding and Sears Roebuck, as well as Wilks, have also moved for summary judgment on all counts of Defendants' Second Amended Counterclaim, asserting the same grounds as SHAS, SAHS, and SHO, as well as additional grounds specific to each moving party.

For the reasons set forth below, SHAS, SAHS, and SHO's motion [105] is granted in part and denied in part, while Wilks' motion [103] and Sears Holding and Sears Roebuck's motion [109] are granted in full.

Background ³

I. Sears Corporate Structure

Sears Holding Corporation ("Sears Holding") was formed in 2004 through the merger of Sears, Roebuck and Co. ("Sears Roebuck") and Kmart Holding Corporation. Sears Holding and Sears Roebuck LR 56.1(a)(3) Stmt. ("Sears Holding LR Stmt.") ¶ 9, ECF No. 111. Sears Holding is now the parent company of Sears Roebuck. Id. ¶ 11.

Sears Hometown and Outlet Stores ("SHO") was formed on October 12, 2012, when Sears Holding split off its "hometown" and "outlet" business segments from the rest of Sears. Id. ¶ 19. SHO sells home appliances, garden equipment, tools, and hardware. Id. ¶ 21. SHO is the sole member and parent company of Sears Authorized Hometown Stores, LLC ("SAHS") and Sears Home Appliance Showrooms, LLC ("SHAS"). Id. ¶¶ 4, 5.

II. Appliance Alliance Franchise Agreements

The Turleys, on behalf of the Appliance Alliance, signed four Franchise Agreements ("Agreements") with SHAS in 2010. SHAS, SAHS, and SHO LR 56.1(a)(3) Stmt. ("SHAS LR Stmt.") ¶ 8, ECF No. 107. The 2010 Agreements granted Appliance Alliance the right to operate four Sears Home Appliance Showrooms in Texas, located in Euless, Ft. Worth, Burleson, and Cedar Hill. See id. ; see also Mazak Decl., Exs. 3–6, Euless, Ft. Worth, Burleson, and Cedar Hill Agreements, ECF No. 116-1. Prior to signing the 2010 Agreements, Defendants hired a franchise attorney, who conducted a comprehensive review of SHAS's Franchise Disclosure Document ("FDD"). SHAS LR Stmt. ¶ 9.

According to Brent Turley, Defendants initially decided to open an SHAS franchise "in reliance upon the representations and assurances in the Franchise Disclosure Document, the verbal statements from the Sears representative that commissions were actually averaging over [12.5] percent, the [117]-year history of Sears, Roebuck and Company, and the ‘instant business’ concept of the franchise in association with the Sears Kenmore brand." Turley Decl. ¶ 2, ECF No. 132. Turley claims that Defendants met twice with Russell Smith, a Sears franchise sales agent, before executing the initial Agreements, and that, in those meetings, Smith misrepresented commission rates, misled Defendants to believe that after two years of operations Defendants would receive a 2% local marketing fee, and failed to disclose the competitive structure in which Defendants would operate. Id. ¶ 8.

Both the FDD and the Agreements included statements that Defendants might face competition from other Sears entities. While the FDD granted Defendants a territory in which SHAS would not license anyone to operate another Sears Home Appliance Showroom, see Mazak Decl., Ex. 22, May 2009 FDD at TUR00401, ECF No. 116-1, it also stated that Defendants "will not receive an exclusive territory to sell Merchandise" and "may face competition from other outlets that our affiliates own or from other channels of distribution or competitive brands that we or our affiliates own." Id. at TUR00402; see also SHAS LR Stmt. ¶ 10. The Agreements included similar language reserving SHAS's rights, on behalf of their agents and dealers, to sell Showroom merchandise online and at stores inside and outside the granted territory. SHAS LR Stmt. ¶ 17; Mazak Decl., Exs. 3–8, Euless, Ft. Worth, Burleson, Cedar Hill, Carrollton, Dallas Franchise Agreements (collectively, "Agreements") § 1.C, ECF No. 116-1.

The Agreements also specified that Defendants would receive a "variable commission rate," calculated in accordance with the Agreement, that could be modified at SHAS's discretion, although "in no event" would the "aggregate commission on the sales of Merchandise for each fiscal year during the Term be less than 9.25% of the total Net Sales of Merchandise." Agreements § 2.B(1); SHAS LR Stmt. ¶ 18. The Agreements further stated that any amounts owed to SHAS, including "payments due under any promissory note issued to our affiliate in connection with your acquisition of the Showroom" would be deducted from commission payments, and that SHAS may "set off, to the fullest extent permitted by law, against any payment that we owe you any amounts that you owe us ... regardless of whether we demanded payment." Agreements § 2.B(6).

In negotiating the 2010 Agreements, Defendants requested that the minimum annual aggregate commission be raised from 9.25% to 15% or 20%, but SHAS did not agree to do so. Id. ¶ 44. Defendants complained repeatedly about the commission rate, requesting in October 2011 that the average rate be raised to 25% and, in January 2013, requesting 19.5%. See id. ¶¶ 45, 46. It is undisputed that Defendants' commissions never fell below 9.25%. Id. ¶ 47.

In 2012, again according to Brent Turley, Defendants were specifically looking for an opportunity to open a Dallas franchise, but Sears refused to grant them the Dallas location without also requiring them to open another store in a "much less desirable location" in Carrollton. Turley Decl. ¶ 3. Ultimately, Defendants signed Agreements in 2012 to operate both the Dallas and Carrollton showrooms. SHAS LR Stmt. ¶¶ 12, 14. The 2012 Agreements, like the 2010 Agreements, included a severability and integration clause specifying that there were no other "oral or other written understandings, representations, or agreements" between SHAS and Defendants "relating to the subject matter of this Agreement." Id. ¶ 27.

In 2012, as in 2010, Defendants were also provided with FDDs before signing. Id. ¶ 15. In addition, Brent Turley signed a Representations and Acknowledgement Statement on behalf of Appliance Alliance that represented, among other things, that Defendants' "decision to purchase the franchise has not been influenced by any oral representations, assurances, warranties, guarantees or promises whatsoever made by the Franchisor or any of its officers, employees or agents ... including as to the likelihood of success of the franchise," and that "[n]either the Franchisor nor any of its officers, employees, or agents ... has made a statement, promise or assurance to me concerning any matter related to the franchise ... that is contrary to, or different from, the information contained in the [FDD]." Id. ¶ 16.

Defendants also signed subleases with SHAS for the Dallas and Carrollton stores. Id. ¶ 35. The subleases provided that, in the event of default, which included termination under § 20(c) of the Agreements, SHAS had "the immediate right to re-enter the Premises and expel" Defendants and, if that happened, Defendants "agree[d] to peacefully and quietly yield-up and surrender the Premises to [SHAS] and to immediately remove [Defendants'] personal property." See Mazak Decl., Ex. 17, Dallas Sublease, § 20(a)–(c), ECF No. 116-1; id. Ex. 18, Carrollton Sublease, § 20(a)–(c), ECF No. 116-1.

All of the Agreements—both those signed in 2010 and in 2012—included a number of additional provisions. Section 7.H required Defendants to "maintain the number of sufficiently qualified and trained staff as necessary for the proper operation of the Showroom" and be "solely responsible for their compensation." It further required that Defendants "pay ... amounts due with respect to all amounts paid or owing to ... [Defendants'] employees, independent contractors, creditors, and others." Section 7.I required that Defendants acquire and maintain, at Defendants' expense, all necessary business equipment, furnishings, and office supplies, SHAS LR Stmt. ¶ 19. Section 11.B granted SHAS access to Defendants' showrooms and records and permitted SHAS to confer with Defendants' employees "for all purposes, including to determine [Defendants'] performance and...