RUSSELL W. ZEIDLER, NANCY ZEIDLER and R.W. HOSPITALITY
CORP., Plaintiffs,
vs.
A&W RESTAURANTS, INC., SIDNEY J. FELTENSTEIN, JACK
HELLRIEGEL, LARRY KOHLER, PAUL NIERZWICKY, and
KATHRYN FELLIN, Defendants.
Case No. 99 C 2591
UNITED STATES DISTRICT COURT FOR THE NORTHERN
DISTRICT OF ILLINOIS, EASTERN DIVISION
2000 U.S. Dist. LEXIS 764
January 24, 2000, Decided
<CASE SUMMARY>
COUNSEL
For RUSSELL W ZEIDLER, NANCY ZEIDLER, R.W. HOSPITALITY CORPORATION,
plaintiffs: Gregory James Ellis, Gregory J. Ellis & Associates, Schaumburg, IL.
For A & W RESTAURANTS, INC., SIDNEY J FELTENSTEIN, JACK HELLRIEGEL,
LARRY KOHLER, PAUL NIERZWICKY, KATHRYN FELLIN, defendants: John Chen, Margaret
Egan Lawler, Piper, Marbury, Rudnick & Wolfe, Chicago, IL.
JUDGES
MATTHEW F. KENNELLY, United States District Judge.
AUTHOR:
KENNELLY
OPINION
MEMORANDUM OPINION AND ORDER
MATTHEW F. KENNELLY, District Judge:
Russell and Nancy Zeidler own R.W. Hospitality Corp., which held a franchise
from A&W Restaurants, Inc. until A&W terminated it in 1998. They allege that in
terminating the franchise, A&W breached their franchise agreement and violated
the Illinois Franchise Disclosure Act. Defendants, A&W and five of its officers,
have moved to dismiss under Fed. R Civ. P. 12(b)(2) and 12(b)(6).
The individual defendants have moved to dismiss for lack of personal
jurisdiction. This Court has jurisdiction over them if an Illinois state court
would have jurisdiction. See Fed. R. Civ. P. 4(k)(1)(A). Illinois‘ long
arm statute stretches to the extent permitted by the due process clauses of the
United States and Illinois Constitutions. 735 ILCS 22-209(c). Under the federal
due process clause, jurisdiction is proper when the defendant has sufficient
contacts with the forum state such that he has “fair warning” that based on his
conduct and connection with that state, he reasonably should anticipate being
sued there. Burger King Corp. v. Rudzewicz, 471 U.S. 462, 472-75, 85 L.
Ed. 2d 528, 105 S. Ct. 2174 (1985). Due process requires that the contacts
“proximately result from actions by the defendant [himself] that create a
’substantial connection‘ with the forum State” Id. at 475.
Though the IFDA permits a franchisee to sue individual officers of a franchisor,
see generally To-Am Equipment Co. v. Mitsubishi Caterpillar Forklift America,
913 F. Supp. 1148, 1151-54 (N.D. Ill. 1995), it is a separate question whether
this Court has personal jurisdiction over any of the individual defendants, none
of whom live or work in Illinois. Neither in plaintiffs’ complaint nor their
response to the motion to dismiss do they identify any contacts that defendants
Feltenstein, Hellriegel, Kohler, or Nierzwicky had with Illinois relating to the
termination of R.W. Hospitality‘s franchise or indeed relating to the plaintiffs
in any way at all. The claims against them are dismissed for lack of personal
jurisdiction.
The sole Illinois contact of defendant Fellin (A&W’s vice president of finance)
that plaintiffs have identified is her signature on a March 25, 1998 letter to
plaintiffs that terminated the franchise. Complaint, Ex. D. This conceivably
might be enough to subject Fellin to jurisdiction here as a matter of federal
due process, but it does not allow plaintiffs to clear the hurdles imposed by
Illinois law. Illinois follows the “fiduciary shield” doctrine, under which a
non-resident‘s contacts with Illinois made pursuant to a fiduciary relationship
(typically on behalf of an employer) do not subject the non-resident to
jurisdiction in Illinois. See Rollins v. Ellwood, 141 Ill. 2d 244, 280,
565 N.E.2d 1302, 1308, 152 Ill. Dec. 384 (1990). Plaintiffs have shown nothing
that suggests that either of the possible exceptions to the fiduciary shield
doctrine applies. See generally Jones v. Sabis Educational Systems, Inc.,
52 F. Supp. 2d 868, 884 (N.D. Ill. 1999). For these reasons, the claim against
Fellin is also dismissed for lack of personal jurisdiction. See Giddens v.
Steak and Ale of Illinois, Inc., 994 F. Supp. 942, 944 (N.D. Ill. 1998)
(dismissing claim against non-resident area manager of restaurant chain pursuant
to fiduciary shield doctrine).
In Count 1, plaintiffs allege that A&W terminated the franchise for false and
trumped-up reasons, mostly involving the cleanliness of plaintiffs’ restaurant.
In its motion, A&W contends that plaintiffs‘ noncompliance with the franchise
agreement’s requirement that they supply liability insurance provided a proper
basis for termination irrespective of the validity of the other reasons cited.
See Agreement §§ 12.0-12.2. We agree with A&W that a breach of the insurance
provision would constitute a default under the franchise agreement, giving A&W
grounds for termination under section 17 of the agreement, which permits
termination for a default in performance of “any” of the franchisee‘s
obligations. Id. § 17. The fact that the agreement entitles A&W to
purchase insurance at the franchisee’s expense when the franchisee fails to do,
see id. § 12.3, does not undermine the agreement‘s clear language making a
breach of the insurance provision proper grounds for termination; plaintiffs
have cited no authority suggesting otherwise. However, plaintiffs allege that
the insurance issue was just one of 47 reasons cited for termination, that the
other 46 reasons were false, and that A&W would not have terminated the
franchise based on the insurance issue alone. Plaintiffs may prove to be wrong
about this, but on a motion to dismiss we are required to take their allegations
as true. The Court therefore denies A&W’s motion to dismiss as to Count 1.
In Count 2, plaintiffs allege that the termination was without “good cause” in
violation of the IFDA. See 815 ILCS 70519(a). The IFDA says that “good
cause” for termination can include the franchisee‘s failure to comply with a
lawful contract provision, 815 ILCS 71510(b); the requirement that the
franchisee supply insurance is a lawful contract provision. Cf. Lulich v.
Sherwin-Williams Co., 799 F. Supp. 64, 69 (N.D. Ill. 1992) (provision in
construction contract requiring contractor to obtain liability insurance is
lawful). However, for the reasons discussed with regard to Count 1, Count 2
states a claim, and the Court must therefore deny A&W’s motion to dismiss as to
that Count.
Count 3 is a different story. Plaintiffs allege that A&W had a contractual
implied duty of good faith which required it to have good cause for termination,
and that A&W relied on pretextual reasons. Under Illinois law, a covenant of
good faith and fair dealing is implied in every contract unless expressly
disavowed (which it was not in this case), requiring that contractual discretion
be exercised reasonably and not arbitrarily or capriciously. McDonald‘s Corp.
v. C.B. Management Co., 13 F. Supp. 2d 705, 711 (N.D. Ill. 1998). However,
the covenant is not an independent source of contractual duties but rather is a
tool for interpreting express contractual terms. Id. In this case, the
terms of the franchise agreement with regard to termination are clear. The
implied covenant of good faith cannot properly be read as imposing additional
limitations on A&W’s ability to terminate beyond those stated in the agreement.
For this reason, we dismiss Count 3 for failure to state a claim.
Count 4 is another claim for breach of contract in which plaintiffs allege that
A&W did not provide them with updated provisions of the operating manual for
franchisees. Though we do not see why this claim needs to be separate from Count
1, A&W‘s argument, which is that correspondence indicates that plaintiffs
actually had the updated manual at some point, is not an argument that the Court
can properly sustain on a Rule 12(b)(6) motion. Plaintiffs have squarely alleged
that they did not get updates to the manual in timely fashion and that this
contributed to the eventual termination. The letters cited by A&W certainly
suggest otherwise, but they do not conclusively prove it. We deny A&W’s motion
to dismiss as to Count 4.
We grant A&W‘s request to strike plaintiffs’ claim for punitive damages.
Punitive damages are not available for breach of contract or under the IFDA.
See Bonfield v. Aamco Transmissions, Inc., 708 F. Supp. 867, 887-88 (N.D.
Ill. 1989). We deny, however, A&W‘s request that we also strike plaintiffs’
claims for compensatory damages consisting of lost profits and amounts that
plaintiffs owe their landlord for the amount that remained due on their lease
when the franchise was terminated. A&W relies on a clause in the franchise
agreement entitled “liquidated damages,” but this is a bit of a misnomer: it is
really a complete denial of damages, for it states that neither party can
recover for “loss of prospective profits, anticipated sales or other losses
or damages of any kind ” caused by termination. Agreement § 19.5 (emphasis
added). If read as A&W claims, this could deny a franchisee any remedy
for a termination in violation of the contract. This clause does not by its
terms control plaintiffs‘ IFDA claim. Unlike in Lefebvre Intergraphics, Inc.
v. Sanden Machine Ltd., 946 F. Supp. 1358, 1372-73 (N.D. Ill. 1996), a
Consumer Fraud Act case relied upon by A&W, the clause in the present agreement
does not appear to be limited to a bar of consequential damages but rather
appears to preclude any recovery of damages at all. To the extent that the
clause is effectively a waiver of a franchisee’s right to recover damages under
the IFDA, it is void under 815 ILCS 70541. The question whether this clause is a
proper limitation on plaintiffs‘ contractual remedies is best left for another
day, when we have a more complete factual backdrop against which to assess the
issue.
CONCLUSION
The motion of defendants Feltenstein, Hellriegel, Kohler, Nierzwicky, and Fellin
to dismiss for lack of personal jurisdiction is granted. The motion of defendant
A&W Restaurants, Inc. to dismiss for failure to state a claim is granted as to
Count 3 but is otherwise denied. Plaintiffs’ punitive damages claims are
stricken. The case is set for status on February 11, 2000 at 9:30 a.m.
MATTHEW F. KENNELLY
United States District Judge
Dated: January 24, 2000
DISPOSITION
Motion of defendants
Feltenstein, Hellriegel, Kohler, Nierzwicky and Fellin to dismiss for lack of
personal jurisdiction granted. Motion of defendant A&W Restaurants, Inc. to
dismiss for failure to state claim granted as to Count 3 but otherwise denied.