United States District Court, N.D. Illinois, Eastern Division
SEARS HOME APPLIANCE SHOWROOMS, LLC and SEARS OUTLET STORES, LLC, Plaintiffs/Counter-Defendants,
CHARLOTTE OUTLET STORE, LLC, et al., Defendants/Counter-Plaintiffs.
MEMORANDUM OPINION AND ORDER
B. Kim United States Magistrate Judge
diversity action stems from the breakdown of the parties'
franchise relationship. Sears Home Appliance Showrooms, LLC
(“SHAS”) and Sears Outlet Stores, LLC
(“Sears Outlet”) have sued Charlotte Outlet
Store, LLC, Concord Outlet Store, LLC, Greenville Outlet
Store, LLC, Raleigh Outlet Store, LLC (collectively,
“Defendant LLCs”), Vadim Shlangman, and
Aliaksandr Ivannikau alleging that they breached franchise
agreements allowing Defendants to operate four Sears Outlet
Stores in North Carolina and South Carolina. Defendants filed
11 counterclaims alleging breach of contract and various
forms of fraud. Before the court are Plaintiffs' Motion
to Dismiss and to Strike Portions of Counterclaims, (R. 35),
and Defendants' Motion to Amend Counterclaims Instanter,
(R. 58). For the following reasons, Plaintiffs'
motion is granted and Defendants' motion is denied
following facts are gleaned from Defendants'
counterclaims and are taken as true for purposes of the
current motion to dismiss. See Berger v. NCAA, 843
F.3d 285, 289-90 (7th Cir. 2016). On January 22, 2015,
Defendant LLCs entered into Franchise Agreements and First
Amendments to the Franchise Agreements with SHAS to take over
preexisting franchise stores in Concord, Charlotte, and
Raleigh, North Carolina and in Greenville, South Carolina.
(R. 30, Counterclaims ¶¶ 1, 4.) Under the
agreements, Defendants were to use the franchised locations
to sell home appliances, hardware, tools, and lawn and garden
equipment to be supplied exclusively by Plaintiffs.
(Id. ¶ 5.) Shlangman and Ivannikau signed a
Guaranty and Assumption of Franchisee's Obligations for
each of the four franchise agreements. (Id. ¶
2.) Defendants took possession of the four Sears Outlet
franchise stores on February 15, 2015, at which time they
retained most of the employees who had been operating those
stores before the parties signed the Franchise Agreements.
(Id. ¶ 4.)
than two weeks after Defendants took possession of the
franchises, Plaintiffs sent an outside auditor to perform a
biannual inventory scan, which led to a finding that a
significant amount of inventory was missing from the Raleigh
store. (Id. ¶ 6.) Defendants discovered that
the inventory had been stolen by some of the employees they
had retained when Defendant took over the franchise.
(Id. ¶ 7.) Plaintiffs knew about the employee
theft problem at the Raleigh location but did not disclose
that information to Defendants before they executed the
franchise agreement for the Raleigh store. (Id.
¶¶ 8, 10.)
Amended Franchise Agreements state that Plaintiffs will
provide Defendants with the consigned items necessary to
maintain adequate inventory levels in the ordinary course of
business, but according to the counterclaims, beginning in
2016 Plaintiffs regularly failed to provide sufficient
inventory. (Id. ¶¶ 11, 13.) Specifically,
the inventory deliveries did not meet Defendants' needs
or requests, and often included off-season merchandise that
was in an unsellable condition. (Id. ¶¶
14-16.) Because of the deficient inventory deliveries,
Defendants were unable to maintain store floor plans or meet
customer demands and had difficulty meeting company and
consumer standards. (Id. ¶¶ 18, 23.)
their shipments to franchise-owned stores were deficient,
Plaintiffs supplied their own company-owned and operated
stores above and beyond their franchisees' stores.
(Id. ¶ 20.) Plaintiffs prioritized inventory
deliveries to company-owned stores without disclosing this
preferential treatment to Defendants. (Id. ¶
notified Plaintiffs about their concerns regarding the
insufficient inventory shipments on an on-going basis
beginning in late 2016. (Id. ¶ 24.) Sears
Outlet often responded by blaming SHAS for the inadequate
deliveries and by promising that SHAS would fix the problems.
(Id. ¶ 25.) After Defendants attempted several
times to raise their concerns, Plaintiffs sent a notice of
default to Defendants on June 14, 2017. (Id.
¶¶ 38-39.) After unsuccessful attempts at mediation
and negotiation, on November 12, 2017, Defendants announced
that they were terminating all four Franchise Agreements and
returning all assets to Plaintiffs. (Id.
¶¶ 41-43.) Three days later, Plaintiffs issued
notices of default and termination of Franchise Agreements
for all four franchise locations. (Id. ¶ 44.)
Plaintiffs filed this lawsuit shortly thereafter and on
January 15, 2018, Defendants filed the current counterclaims.
Motion to Dismiss Counterclaims
reviewing a motion to dismiss the court takes all of the
well-pleaded facts as true and views them in the light most
favorable to the pleading party. See Berger, 843
F.3d at 289-90. To survive a motion to dismiss under Rule
12(b)(6), the claims-or in this case,
counterclaims-“must contain sufficient factual matter,
accepted as true, to state a claim to relief that is
plausible on its face.” See Id. at 290
(quotations and citations omitted). Although “detailed
factual allegations” are not required, the pleading
party must do more than rest on “labels and
conclusions” or a “formulaic recitation of the
elements of a cause of action.” Bell Atl. Corp. v.
Twombly, 550 U.S. 544, 555 (2007). That standard is
higher with respect to fraud claims, which demand
“pleading with particularity the circumstances
constituting fraud, ” see Fed. R. Civ. P.
9(b), meaning the allegations “must describe the who,
what, when, where, and how of the fraud, ” United
States ex rel. Presser v. Acacia Mental Health Clinic,
LLC, 836 F.3d 770, 776 (7th Cir. 2016) (quotation and
citation omitted). That heightened standard is designed to
require a plaintiff to engage in a careful pretrial
investigation, to prevent irresponsible allegations of fraud
from being lodged simply to cast blame after suffering a
loss, and to allow a defendant to respond quickly to
groundless claims of fraud that might cause reputational harm
during the litigation process. See Id. On the other
side of that pleading coin, a party may plead itself out of
court by alleging facts demonstrating that it has no legal
claim. See Atkins v. City of Chi., 631 F.3d 823, 832
(7th Cir. 2011).
general rule the court is limited at the motion to dismiss
stage to considering the four corners of the complaint, but
an exception exists for “documents that are critical to
the complaint and referred to in it.” Geinosky v.
City of Chi., 675 F.3d 743, 745 n.1 (7th Cir. 2012).
Here the Franchise Agreements are referred to throughout
Defendants' counterclaims and were filed under seal by
Plaintiffs after a protective order was put in
place. (R. 66.) Because they are central to the
counterclaims, the court may consider the Franchise
Agreements without converting the motion to dismiss into a
motion for summary judgment. See id.; Williamson
v. Curran, 714 F.3d 432, 435-36 (7th Cir. 2013).
Breach of Contract Claims (Counts I-IV)
seek to dismiss counterclaims one through four, which allege
that Plaintiffs breached each of the Franchise Agreements by
failing to satisfy inventory orders or to “provide
sellable inventory or supply inventory in a manner that
allowed Defendants to maintain adequate inventory
levels.” (R. 30, Counterclaims ¶¶ 51, 58, 65,
72.) Plaintiffs argue that all four counterclaims should be
dismissed with respect to Sears Outlet and the individual
Defendants because none of them are parties to the Franchise
Agreements. They further argue that the Franchise
Agreements' contractual one-year limitations period
precludes any claims based on alleged breaches that took
place before January 15, 2017, one year before the date on
which Defendants filed their counterclaims.
response to the motion to dismiss, Defendants concede that
Shlangman and Ivannikau are not proper counterplaintiffs with
respect to the breach of contract claims, but argue that
Sears Outlet is a proper defendant despite not being a party
to the Franchise Agreements. (R. 43, Defs.' Resp. at 1
n.1, 6.) In support of that argument, they point to the
doctrine of apparent authority. Under Illinois law-which the
parties agree governs the breach of contract claims under the
Franchise Agreements' choice-of-law provisions-an agent
may bind its principal where “(1) the principal
consents to or knowingly acquiesces in the agent's
conduct, (2) the third party has a reasonable belief that the
agent possesses authority to act on the principal's
behalf, and (3) the third party relied to his detriment on
the agent's apparent authority.” Bethany
Pharmacal Co., Inc. v. QVC, Inc., 241 F.3d 854, 859 (7th
Cir. 2001). According to Defendants, Sears Outlet is liable
for breach of contract as an agent of SHAS because the
Franchise Agreements' amendments state that:
we [SHAS] or our affiliates shall provide you with all
necessary amounts of Consigned Items so that your store is
fully stocked on the day you take over control of the Store
and open for business. Thereafter, we shall provide you with
Consigned Items as necessary for you to maintain adequate
inventory levels of all Consigned Items in the ordinary
course of business.
(R. 66, Ex. A, Franchise Agreement (“F.A.”)
§ 5.C.5.) In other words, Defendants argue that because
the Franchise Agreements' amendments reference SHAS's
“affiliates, ” Sears Outlet is liable for breach
of contract based on failure to provide adequate inventory.
argument fails for several reasons. First, the fact that the
Franchise Agreements reference SHAS affiliates in connection
with inventory obligations does not make those affiliates
parties to the agreements. See Northbund Grp.,
Inc. v. Norvax, Inc., 795 F.3d 647, 650 (7th Cir. 2015)
(“The core principle of corporate law is that a
corporation is a distinct legal entity, separate from its
… affiliated corporations, so that the obligations of
a corporation are not shared by affiliates.”). Second,
it is “a basic principle of contract law” that a
contract is not binding upon a non-party to the agreement.
Carter v. SSC Odin Operating Co., LLC, 2012
IL 113204 ¶ 30. Third, Defendants' agency theory
gets things backwards. Under Illinois's agency doctrine,
an apparent agent can enter into an agreement that is binding
on its principal where the principal creates the appearance
of authority in the agent. Sphere Drake Ins. Ltd. v. Am.
Gen. Life Ins. Co., 376 F.3d 664, 673 (7th Cir. 2004).
But here, SHAS entered into the Franchise Agreements on its
own behalf, not on behalf of Sears Outlet, and Defendants
point to no language suggesting that the agreements are
binding on any of SHAS's affiliates simply because a
provision of the amendments to those agreements references
unnamed affiliates. Nor have they alleged that SHAS was
authorized or apparently authorized to bind any of its
affiliates in contracting with Defendants. See Bethany
Pharmacal, 241 F.3d at 859. For all of these reasons,
neither the individual Defendants nor Sears Outlet is a
proper party to the breach of contract counterclaims.
to the contractual limitations period, the Franchise
Agreements specify that:
You [the Franchisee] agree that no cause of action arising
out of or under this Agreement may be maintained by you
against us unless brought before the expiration of one year
after the act, transaction or occurrence upon which such
action is based or the expiration of one year after you
become aware of the facts or circumstances reasonably
indicating that you may have a claim against [SHAS]
hereunder, whichever occurs sooner, and that any action not
brought within this period shall be barred as a claim,
counterclaim, defense, or set-off.
(R. 66, Ex. A, F.A. § 19.H.) According to Plaintiffs,
this limitations provision bars any breach of contract claim
based on occurrences that took place before January 15, 2017,
which is one year before Defendants filed their
counterclaims. In response, Defendants argue that this
limitations provision is unenforceable as a matter of law
because, according to them, a contractual provision that
shortens an otherwise statutory limitations period of 10
years under Illinois law to only 1 year “is per
se unreasonable.” (R. 43, Defs.' Resp. at 7.)
In support Defendants point to a Massachusetts decision
asserting that an agreement to shorten a limitations period
is impermissible under Massachusetts law “unless
‘the agreed upon limitations period is subject to
negotiation by the parties.'” (Id. at 8
(emphasis omitted) (quoting Creative Playthings
Franchising Corp. v. Reiser, 978 N.E.2d 765, 766 (Mass
2012)).) Although Defendants assert that “[t]here is no
reason to believe courts in Illinois would diverge from the
Massachusetts ruling, ” they cite no Illinois cases
discussing the negotiation requirement and develop no
argument as to why they believe Illinois would follow
fact, under Illinois law, “[t]he parties to a contract
may agree to a shortened contractual limitation period to
replace a statute of limitations, so long as it is
reasonable.” Country Preferred Ins. Co. v.
Whitehead, 2012 IL 113365, ¶ 29. Courts applying
Illinois law have enforced one-year contractual limitations
periods. See, e.g., Sweiss v. Founders Ins. Co.,
2017 IL App (1st) 163157, ¶¶ 59, 62; Stephan v.
Goldinger, 325 F.3d 874, 877 (7th Cir. 2003) (“One
year . . . is not an unreasonably short time for bringing a
suit.”); Medrano v. Production Eng'g Co.,
774 N.E.2d 371, 375-76 (Ill.App.Ct. 2002); Taylor v. W.
& S. Life Ins. Co., 966 F.2d 1188, 1206 (7th Cir.
1992) (finding six-month contractual limitations period
enforceable under Illinois law); Vill. of Lake in the
Hills v. Ill. Emcasco Ins. Co., 506 N.E.2d 681, 684
(Ill.App.Ct. 1987); Florsheim v. Travelers Indem. Co. of
Ill., 393 ...