United States District Court, Central District of Illinois
February 23, 1993
FLYNN BEVERAGE INC., AN ILLINOIS CORPORATION, PLAINTIFF,
JOSEPH E. SEAGRAM & SONS, INC., AN INDIANA CORPORATION; THE HOUSE OF SEAGRAM, A DIVISION OF JOSEPH E. SEAGRAM & SONS, INC., AN INDIANA CORPORATION, DEFENDANT.
The opinion of the court was delivered by: McDADE, District Judge.
Before the Court is a Report and Recommendation that
Defendants' Motion to Dismiss Plaintiff's Amended Complaint be
Denied. Defendant has filed an objection to the Recommendation;
therefore, pursuant to 28 U.S.C. § 636(b)(1), the Court will
conduct a de novo review of those portions of the
recommendation to which objections were made.
To sustain a dismissal of allegations under Fed.R.Civ.P.
12(b)(6), the Court must take all well-pleaded allegations as
true and construe the Complaint in the light most favorable to
the Plaintiff to determine whether Plaintiff is entitled to
relief. Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99,
101-02, 2 L.Ed.2d 80 (1957). "The issue is not whether
Plaintiff will prevail but whether the [Plaintiff] is entitled
to offer evidence to support the claim." Scheuer v. Rhodes,
416 U.S. 232, 236, 94 S.Ct. 1683, 1686, 40 L.Ed.2d 90 (1974).
Plaintiff is an Illinois corporation with its principal place
of business in Rock Island, Illinois. Plaintiff promotes,
sells, and distributes spirits, beer, and wine to taverns,
restaurants, and retail liquor outlets throughout western
Illinois. Defendant is an Indiana corporation with its
principal place of business in New York. Defendant imports and
produces spirits and wines for distribution and sale throughout
the United States. (Amended Complaint, p. 1). The Court has
jurisdiction over this case pursuant to 28 U.S.C. § 1332
because the parties are of diverse citizenship, and the amount
in controversy is alleged to exceed $50,000.00. Venue is proper
in this district and division because a substantial part of the
events giving rise to the claim are alleged to have occurred in
this district and division.
Since 1965, Plaintiff has distributed Defendant's products,
earning substantial income and profits from its efforts on
Defendant's behalf. The relationship between the parties has
been governed by a series of oral and written agreements
pursuant to which Plaintiff was granted distribution rights for
Defendant's spirits. (Id. at 2).
On February 1, 1988, the parties entered into a written
distribution agreement which provided, in part, as follows:
This Agreement shall expire on January 31, 1989.
If Company does not intend to renew this Agreement
or enter into another agreement with Distributor
upon the expiration hereof, or upon the expiration
of any renewal agreement. Company shall give
Distributor at least thirty (30) days advance
written notice on such intention, and this
Agreement shall expire at the end of said thirty
(30) day notice period. If Company fails to give
said notice, then this Agreement shall continue in
full force and effect on a month-to-month basis
until such time as said notice is given and for
thirty (30) days thereafter, at which time this
Agreement shall expire.
(Amended Complaint, Ex. A, p. 23).
On February 4, 1989, Defendant notified Plaintiff that the
agreement would remain in full force and effect from month to
month until a written notice of termination was given. Notice
would be given at least 30 days prior to termination of the
agreement. (Amended Complaint, Ex. B).
During the following years, Plaintiff operated its business
according to Defendant's policies and requirements. In 1991,
Plaintiff sold Defendant's spirits with a value of more than
$1,100,000.00 wholesale to its customers. The sales constituted
a significant portion of Plaintiff's sales and profits.
(Amended Complaint p. 3).
On January 3, 1992, Defendant notified Plaintiff by letter
that it was terminating Plaintiff's distribution rights 30 days
from receipt of the letter. The letter stated that the action
was taken "in furtherance of [Defendant's] overall
consolidation of its distribution network." (Amended complaint,
C). Following termination, the distributorship was given to
another distributor, and Plaintiff initiated this lawsuit.
Plaintiff's Amended Complaint is in four counts. Counts I and
II allege causes of action under the Illinois Franchise
Disclosure Act, Ill.Rev.Stat., ch. 121 1/2, para. 1701 et seq.
These counts allege unlawful termination of a franchise
agreement. Counts III and IV are Illinois common-law counts
alleging breach of implied covenant of good faith and
intentional interference with business relationships resulting
from the termination of the distribution agreement.
In its Motion to Dismiss, Defendant argued that Counts I and
II fail because the written agreement has not been breached and
that the Illinois Franchise Act does not apply to this case.
Defendant further argued that Counts III and IV fail because
its actions were valid under the agreement.
In objecting to the recommendation, Defendant first argues
that the agreement contains a New York choice of law provision
which must be enforced. Defendant next argues that the amended
Complaint must be dismissed because it fails to state a claim
under New York law.
Paragraph 18 of the agreement states as follows:
This Agreement has been entered into in the
offices of Company in the City of New York. This
Agreement is a New York contract and shall in all
respects be governed by and construed in
accordance with the laws of the State of New York
without regard to choice of law rules.
(Amended Complaint, Ex. A, p. 8).
Generally, "[a]n express choice of law provision contained in
a contract will be given effect subject to certain
limitations." Potomac Leasing Co. v. Chuck's Pub, Inc.,
156 Ill. App.3d 755, 109 Ill.Dec. 90, 92, 509 N.E.2d 751, 753
(1987). The primary limitations involve considerations of
public policy and the relationship among the chosen forum, the
parties, and the transaction. Id. at 753, 754, 109 Ill.Dec. 90,
509 N.E.2d 751.
In the case at bar, Defendant argues that the Court should
apply the reasoning of Nardini v. Thrifty-Rent-A-Car System,
Inc., 1987 WL 12166 (N.D.Ill.). In Nardini, the court
considered a License Agreement between Plaintiffs, the
franchisees, and Defendant, the franchisor. That agreement
contained an Oklahoma choice of law provision. The franchisee
argued that the choice of law provision in the agreement was
contrary to Illinois public policy found at Ill.Rev.Stat. ch.
121 1/2, para. 1704. This paragraph states that: "[a]ny
provision in a franchise agreement which designates
jurisdiction or venue in a forum outside of this State is void
with respect to any cause of action which otherwise is
enforceable in this State. . . ." Id. In considering this
argument, the Nardini court found that the venue provision had
nothing to do with choice of law provisions. Accordingly, the
court reasoned that "[h]ad the Illinois legislature intended to
bar agreements to apply the substantive law of other states to
franchises located in Illinois it could easily have done so. .
. . It did not, and so the court holds that the parties [sic]
agreement to have Oklahoma law govern disputes about the
License Agreement is enforceable." Id. at p. 3. Having found
that the venue provision did not state a public policy against
choice of law provisions, the court did not need to reach the
reasonable relationships test. In making the determination that
the choice of law provision did not contravene Illinois public
policy, the court in Nardini did not discuss the application of
the waiver provision of the Illinois Franchise Act, and for
that reason, it has little precedential value. See
Ill.Rev.Stat. ch. 121 1/2, para. 1741.
The Seventh Circuit, in Wright-Moore Corp. v. Ricoh Corp.,
908 F.2d 128 (7th Cir. 1990), thoroughly discussed both of the
limitations to choice of law provisions when reviewing a choice
of law provision in an agreement involving a New York
franchisor and an Indiana franchisee. The agreement provided
that New York law would govern any disputes, and the court,
upon considering Indiana public policy, found that enforcement
of the choice of law provision would be contrary to that
policy. This policy, which the court gleaned from the Indiana
franchise statute reads:
[A] franchisor, through its superior bargaining
power, should not be permitted to force the
franchisee to waive the legislatively provided
protection, whether directly through waiver
provisions or indirectly through choice of law.
Id., at 132. Thus, the Seventh Circuit held that "[t]his public
policy is sufficient to render the choice to opt out of
Indiana's franchise law one that cannot be made by agreement."
The Wright-Moore court noted that "state public policy
override[s] the contractual choice of law only if the state has
a materially greater interest in the litigation than the
contractually chosen state." Id. at 133. The court then
considered the second limitation to determine which state,
Indiana or New York, had a materially greater interest in the
litigation. Upon analyzing the interest of Indiana versus New
York, the court noted that the franchise was in Indiana, the
witnesses and documents were in Indiana, the contract
negotiations occurred in Indiana, and the contract was at least
partially performed in Indiana. The court then noted that New
York's only connection to the litigation was that the
manufacturer was incorporated in New York. Accordingly, the
court found that "[s]ince Indiana has a materially greater
interest than New York and application of New York law would be
contrary to a fundamental Indiana policy, Indiana franchise law
governs this case." Id.
In the case at bar, this Court also finds that Illinois has
a strong public policy in overriding the choice of law
provision provided for in the agreement. The Court notes that
the purpose of the Franchise Act is to protect Illinois
residents who have suffered substantial losses to franchisors.
See Ill.Rev. Stat. ch. 121 1/2 para. 1702. This purpose can
best be served by broadly construing the provisions of the Act.
Thus, the Act's waiver provision, which provides that "[a]ny
stipulation or provision purporting to bind any person
acquiring any franchise to waive compliance with any provision
of this Act is void," Id. at para. 1741, would override a New
York choice of law provision which would completely waive
compliance with the Illinois Franchise Act.*fn1 Accordingly,
the Court finds that the Illinois waiver provision, while not
as specific as the Indiana waiver provision, may be read to
invalidate choice of law provisions in franchise agreements.
The Court further notes that Illinois has greater interest in
the litigation than does New York. As alleged in the Amended
Complaint, Plaintiff is incorporated in Illinois, has its
headquarters in Illinois, has all of its customers and
territory in Illinois, and was allegedly damaged in Illinois.
New York's sole connection to this lawsuit is that Defendant is
headquartered there and the contract was entered into in New
York. Clearly, Illinois has a materially greater interest than
New York to the action, and application of New York law would
be contrary Illinois policy regarding franchise law.
Defendant argues that the Court should follow Potomac
Leasing, which considered a Michigan choice of law provision in
a case involving the Illinois Consumer Fraud and Deceptive
Business Practices Act, and Mell v. Goodbody & Co., 10 Ill. App.3d 809,
295 N.E.2d 97 (1973), which involved a New York
choice of law provision and an Illinois usury statute. In both
of these cases the courts elected to allow the choice of law
provisions to stand, but that was after determining that the
choice of law provisions violated neither the public policy nor
the reasonable relationship tests.
This Court, however, following the reasoning of
Wright-Moore, finds that both the public policy test and the
reasonable test override the New York choice of law provided
for in the agreement.*fn2 Consequently, Defendant's argument
on this matter does not
present a ground on which to dismiss the Complaint.
Defendant next argues that Plaintiff's claims under the
Illinois Franchise Act must be dismissed because Plaintiff did
not pay any franchise fee for the right to distribute
Defendant's products. The Court notes that the agreement,
attached to the Amended Complaint, states that "no fee of any
kind is being charged by Company for this distribution
agreement. . . ." (Amended complaint, Ex. A. p. 1).
"For a payment to be a franchise fee it must fit precisely
within the statutory definition." P. & W. Supply Co. v. E.I.
DuPont de Nemours & Co., 747 F. Supp. 1262, 1265 (N.D.Ill.
1990). (citations omitted). The Franchise Act defines
"franchise fee" as:
Any fee or charge that a franchisee is required to
pay directly or indirectly for the right to enter
into a business or sell, resell, or distribute
goods, services or franchises under an agreement,
including, but not limited to, any such payments
for goods or services, provided that the
Administrator may by rule define what constitutes
an indirect franchise fee, and provided further
that the following shall not be considered the
payment of a franchise fee: (a) the payment of a
reasonable service charge to the issuer of a credit
card by an establishment accepting or honoring such
credit card; (b) amounts paid to a trading stamp
company by a person issuing trading stamps in
connection with the retail sale of merchandise or
services; (c) the purchase or agreement to purchase
goods for which there is an established market at a
bona fide wholesale price; (d) the payment for
fixtures necessary to operate the business; (e) the
payment of rent which reflects payment for the
economic value of the property; or (f) the purchase
or agreement to purchase goods for which there is
an established market at a bona fide retail price
subject to a bona fide commission or compensation
Ill.Rev.Stat. ch. 121 1/2, para. (14). (emphasis added).
Plaintiff does not dispute that it was not required to pay a
"direct" franchise fee, but argues that it paid an
"indirect" franchise fee, as defined by the Act, through
required purchases of excess inventory. Indeed, the Amended
Complaint alleges that Defendant required Plaintiff:
[T]o purchase quantities of spirits, in excess of
$500.00 in cost, which were so unreasonably large
that they could not be resold within a reasonable
time. Such required purchases included (i) new
brands of Seagram's spirits which had no
established marked and for which there was little
or not consumer demand in Rock Island and adjacent
counties; (ii) expensive spirits, such as high-end
cognacs (including Martell Extra with a cost to
Flynn of as much as $121.33 per bottle), brandies,
whiskeys, aperitifs and after-dinner liquors, for
which there was little or no consumer demand in
Rock Island and adjacent counties; (iv) purchases
to meet required sales quotas set by Seagram for
various brands at various times in excess of
reasonable consumer demand in Rock Island and
(Amended Complaint, p. 7).
The Court finds that Plaintiff's allegations that it was
required to purchase excess inventory establishes, at least for
the purposes of a Motion to Dismiss, that Plaintiff paid a
franchise fee to Defendant. As noted by the Seventh Circuit,
"investments in excess inventory may constitute and indirect
franchise fee." Wright-Moore, 908 F.2d at 136. See P & W Supply
Co., 747 F. Supp. at 1266 ("The Attorney General of Illinois has
promulgated a rule that despite the fact that there is a bona
fide wholesale or retail market for products, their purchase
may constitute an indirect franchise fee if `buyer is required
to purchase a quantity of goods so unreasonably large that such
goods may not be resold within a reasonable time.'" (citation
Defendant next argues that even if the Illinois Franchise Act
applied, it does not prohibit expiration of the contract in
accordance with its own terms. The agreement provides that:
This Agreement shall expire on January 31, 1989.
If Company does not intend to renew this Agreement
or enter into another
agreement with the Distributor upon the expiration
hereof, or upon the expiration of any renewal
agreement, Company shall give Distributor at least
thirty (30) days advance written notice of said
intention, and this Agreement shall expire at the
end of said thirty (30) day notice period.
(Agreement, para. 10). Defendant argues that pursuant to the
agreement, it gave Plaintiff 30 days notice of expiration on
January 3, 1992. (Amended Complaint, para. 11).
The relevant paragraph of the Franchise Act provides that
"[i]t shall be a violation of this Act for a franchisor to
terminate a franchise of a franchised business located in this
State prior to the expiration of its term except for good
cause. . . ." Ill.Rev.Stat. ch. 121 1/2, para. 1719.
The Magistrate Judge reasoned that because the written
agreement may not control the case, the Defendant could not
rely on the written contract to defeat the Plaintiff's claims.
(Report and Recommendation, p. 3). At the Motion to Dismiss
stage, such reasoning may logically defeat Defendant's argument
on this issue.
This Court also notes that implied covenants of good faith
act to limit the power of a franchisor "to terminate a
franchise agreement without good cause where, by its express
terms, the franchise was terminable upon 60 days written notice
to the franchisee." Dayan v. McDonald's Corp., 125 Ill. App.3d 972,
81 Ill.Dec. 156, 170, 466 N.E.2d 958, 972 (1984) citing
Seegmiller v. Western Men, Inc., 20 Utah 2d 352, 437 P.2d 892
(1968) (The Seegmiller court stated that "when parties enter
into a contract of this character, and there is not express
provision that it may be cancelled without cause, it seems fair
and reasonable to assume that both parties entered into the
arrangement in good faith, intending that if the service is
performed in a satisfactory manner it will not be cancelled
arbitrarily." Seegmiller, 20 Utah 2d at 354, 437 P.2d 892).
After a thorough discussion of the problem, the Dayan court
went on to hold that "a franchisor may not terminate a
franchise except where good cause exists." Dayan, 81 Ill.Dec.
at 171, 466 N.E.2d at 973.
In the case at bar, Plaintiff specifically alleges that
Defendant "violated the Act bay terminating [Plaintiff] without
good cause. . . ." (Amended Complaint, p. 10, para. 24).
Accordingly, Defendant's argument that the agreement expired
according to its own terms does not present a ground on which
to dismiss the Amended Complaint.
Finally, Defendant argues that Plaintiff's remaining claims
"are derivative of the principal wrongful termination claim and
must be dismissed because the parties' contract permitted
termination upon notice without cause." (Defendant's brief p.
14). Plaintiff argues in response that the agreement does not
expressly state that the agreement can be terminated without
The Court agrees that the agreement does not state that it
can be terminated without cause. "By allowing termination
without good cause, the terms of the contract are in direct
conflict with the termination provisions of the [Franchise
Act]." P & W Supply, 747 F. Supp. at 1268. Accordingly, the
parties had an implied covenant of good faith and fair dealing.
Id. Bad faith on the part of Defendant amounts to a breach of
public policy and creates an independent cause of action. Id.
Accordingly, the Court cannot, for Motion to Dismiss purposes,
find that Plaintiff will be unable to make a bad faith showing.
Therefore, Defendant's argument on this issue has not presented
a ground on which to dismiss the Complaint.
For the above stated reasons, the Court ADOPTS the Magistrate
Judge's Recommendation, and the Motion to Dismiss the Amended
Complaint is DENIED. Defendant is ORDERED to answer the Amended
Complaint within twenty-one (21) days of the date of this
Order. This matter is referred to the Magistrate Judge for