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DUNKIN' DONUTS INCORPORATED v. N.A.S.T.

April 9, 2003

DUNKIN' DONUTS INCORPORATED, PLAINTIFF,
v.
N.A.S.T., INC., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Milton I. Shadur, Senior United States District Judge

MEMORANDUM OPINION AND ODER

This action began with a Complaint by Dunkin' Donuts Incorporated ("Dunkin'") against four defendants (N.A.S.T., Inc., SK Donuts, Inc., Sunny Cherian and Robert Stambolic), based on their asserted fraud, breach of contract and trademark infringement in connection with the operation of several Dunkin' franchises in Illinois and Wisconsin (federal jurisdiction was properly invoked on diversity of citizenship grounds). Along the way Cherian and N.A.S.T. (purely for convenience collectively referred here to as "Cherian," treated as a personified singular male noun) advanced several counterclaims, including claims stemming from Dunkin's allegedly improper use of the Advertising Fund ("Fund") provided for in the parties' Franchise Agreements ("Agreements").

After Dunkin' filed a motion for partial summary judgment attacking some of those counterclaims, Cherian responded in part by dropping (1) the counterclaims asserting negligence, unjust enrichment and conversion and (2) any possible claims arising from a breach of fiduciary duty (C. Mem. 8 n. 4). That has left for current resolution Cherian's Fund-related counterclaims that charge Dunkin' with breaches of contract and of the covenant of good faith and fair dealing. For the reasons set forth in this memorandum opinion and order, most of Dunkin's effort to obtain a partial summary judgment is successful, although a minor part may have to be deferred pending further discovery.

Rule 56 Principles

Rule 56 principles impose on movant Dunkin' the burden of establishing the lack of a genuine issue of material fact (Celotex Corp. v. Catrett, 477 U.S. 317, 322-23 (1986)). For that purpose this Court must "consider the evidentiary record in the light most favorable to the non-moving party . . . and draw all reasonable inferences in his favor" (Lesch v. Crown Cork & Seal Co., 282 F.3d 619, 625 (7th Cir. 2002) has echoed the teaching of Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986):

A genuine issue of triable fact exists only if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party."
As with any summary judgment motion, this Court accepts nonmovant Cherian's version of any disputed facts, but only so long as it is supported by record evidence. What follows is drawn form the parties' submissions when viewed from that perspective.*fn1

Factural Background

Cherian and Dunkin' entered into the Agreements (Exs. 2B, 2C and 2D to D. Compel Mem.) that set out numerous obligations for both parties. For one thing, all Dunkin' franchisees, (including Cherian) must pay 5% of gross sales into the Fund managed by Dunkin (C. St. ¶ 4). Agreement § 3E (C. St. ¶ 40) obligates Dunkin':

[t]o administer The DUNKIN' DONUTS Franchise Owners Advertising and Sales Promotion Fund (the "Fund") and to direct the development of all advertising and promotional programs. One-fifth of FRANCHISEE's 5% advertising contribution (1% of the GROSS SALES of the SHOP) will be utilized, at the discretion of DUNKIN' DONUTS, to provide for the administrative expenses of the Fund and for programs designed to increase sales and enhance and further develop the public reputation and image of DUNKIN' DONUTS and the DUNKIN' DONUTS SYSTEM. The balance, including any interest earned by the Fund, will be used for advertising and related expenses. Contributions to the Fund in excess of 5% of GROSS SALES shall be used in accordance with the programs to which they relate. The content of all advertising, as well as the media in which the advertising is to be placed and the advertising area, shall be at the discretion of DUNKIN' DONUTS. Upon request, DUNKIN' DONUTS will provide FRANCHISEE a statement of receipts and disbursements of the Fund, prepared by an independent certified public accountant, for each fiscal year of the Fund. . . .
Ernst & Young performs an annual independent audit of the Fund (D. St. ¶ 15) "in accordance with generally accepted accounting principles" (C. Ex. A at 6). According to the audit report for fiscal year 2000, Dunkin' received $116,574,786 from advertising fee contributions from franchisees across the nation (C. Ex. A at 4), of which amount $23,051,432 was allocated to the Indirect Fund used for administrative expenses (C. Ex. A at 13). In 1999 Dunkin' received $107,535,790 from advertising fee contributions (C. Ex. A at 4), of which sum $21,124,139 was allocated to the Indirect Fund.

To return to the 2000 year, Cherian claims that instead of the amount of administrative expenses as identified by Ernst & Young, the total cash outlays for administrative expenses in that year ($24,631,214) should have been the numerator in determining whether the one-fifth limitation on such expenses in Agreement § 3E had been exceeded (C. Mem. 3-4). Moreover, Cherian notes three categories of expenses (Events/Training Expenses, Market Development Expenses and Miscellaneous Expenses) that Ernst & Young categorized as advertising or related expenses, but that Cherian claims should instead be labeled administrative expenses (C. Mem. 4)

Additionally, the Ernst & Young 2000 audit report classified numerous expenditures — including cross-functional employees, rent, accounting services, data processing services and other operating expenses — as being allocated between the Fund and Dunkin' (D. St. ¶ 17). Cherian claims that those were improperly expensed (C. Mem. 6). Cherian also claims that Dunkin' received settlement payments from franchisees but failed to allocate the appropriate portion of those payments to the Fund (C. Mem. 6-7).

Cherian also asserts that Dunkin' improperly failed to return excess payments for field marketing expenses (C. Mem. 5). Ernst & Young's audit partner Larry Davidson ("Davidson") explained how those expenses are calculated (D. Ex. 3 ¶ 7):

In the beginning of each fiscal year, Dunkin' Donuts estimates the amount of administrative expenses that will be spent on the Advertising Fund for the upcoming fiscal year. At the end of each fiscal year, Dunkin' Donuts compares the amount budgeted for the Advertising Fund with the amount of money actually spent. If the amount budgeted for the Advertising Fund exceeds the amount spent, and it is de minimis, it is deemed immaterial in accordance with normal accounting practices. If the amount budgeted for the Advertising Fund exceeds the amount spent, and it is not de minimis, monies are rebated to the Advertising Fund. Ernst & Young verifies these expenditures in its audit of the Advertising Fund.
According to Davidson, even though Dunkin's budget overestimated field marketing expenses by approximately $86,000 in 2000, that amount was "deemed immaterial by accounting standards in light of the total expenditures of the Fund" (D. Ex. 3 ¶ 8). In 1999, when Dunkin' overestimated the same expenditures by an amount that Ernst & Young deemed material, approximately $200,000 was returned to the Fund (id.). In that respect Cherian claims that Dunkin's overestimate came to $500,000, so that it improperly retained $300,000 from the field marketing expenses (C. Mem. 5).

Allied Domecq QSR ("Allied Domecq") is an unincorporated association affiliated with Dunkin' Donuts, Baskin-Robbins and Togo's (C. Mem. 6). Allied Domecq and those three brands entered into a distributorship agreement with Pepsico that provided a $1. million rebate to Togo's Advertising Fund (C. Mem. 6). Dunkin' has a Marketing Operating Philosophy document ("Operating Philosophy") that addresses such supplier rebates (Valas Aff. Ex. B at DDI 2517):

Should any or all of Allied Domecq QSRs brands enter into a contract that provides for a rebate for product/supplies used in all of our Allied Domecq QSR's brands franchised retail stores, the income will be split proportionally among all brands, based on the conditions of the rebate, and will be applied to each brand's respective Advertising Funds.
In this instance no contribution ...

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