Id. at 16. The Franchise Agreements also provide that [Noble Romans] or its designee shall have the right at all reasonable times to review, audit, examine and copy the books and records of [Hattenhauer] as [Noble Romans] may require at the Noble Romans Pizza [location]. Id. at 17.
Pursuant to the Franchise Agreements, [i]f any required royalty payments to [Noble Romans] are delinquent, or if an inspection should reveal that such payments have been understated in any report to [Noble Romans], then [Hattenhauer] shall immediately pay to [Noble Romans] the amount overdue or understated upon demand with interest determined in accordance with the provisions of Section IV.B.(3). Id. That section, in turn, provides:
All unpaid obligations under this Agreement shall bear interest from the date due until paid at the lesser of the highest rate allowed by law or a rate that is five (5) percentage points per annum higher than the prime rate then currently established by the largest bank (determined by total bank assets) headquartered in the state in which the [Noble Romans and/or Tuscanos] Location is situated.
Id. at 5.
B. Facts Relating to Use of Non-Conforming Pizza Cheese
Pursuant to its agreements with Noble Romans, Hattenhauer was required to use ingredients approved by Noble Romans in its franchises. This included Noble Romans proprietary pizza cheese, which is a blend of mozzarella and Muenster cheese and dry oregano. Noble Romans Food Preparation and Product Specifications states that Noble Romans Pizza Cheese is a custom blend and cut of real Mozzarella and real Muenster cheese with dry oregano added. All items used must be Noble Romans Inc. approved . Dkt. No. 159-2 at 2 (emphasis in original).
In 2010, Noble Romans changed its approved distributer for Hattenhauers locations to McDonald Wholesale Company (McDonald). Between August 2010 and approximately August 2014, Hattenhauer did not purchase Noble Romans proprietary cheese for its Oregon location, although it continued to purchase Noble Romans proprietary cheese from McDonald for its Washington location. For its Oregon location, Hattenhauer purchased other types of pizza cheese from McDonald during this time period, including Golden California brand pizza cheese. McDonald sent Noble Romans monthly reports of the sales it made to Noble Romans franchisees; the reports indicated that Hattenhauers Oregon location was purchasing Golden California cheese and was not purchasing Noble Romans proprietary cheese.
On August 23, 2012, Noble Romans sent Greg McPeters, one of its franchise managers, to Hattenhauers locations for training. Noble Romans did not create an inspection report for these visits. McPeters did not tell Hattenhauer to stop using cheese other than Noble Romans propriety cheese. No Noble Romans representative has conducted training at or inspected Hattenhauers franchise locations since 2012.
In 2014, Noble Romans conducted an audit of Hattenhauers locations. The audit revealed that the Oregon Location had not purchased Noble Romans specified cheese since as early as 2010 and was instead purchasing non-conforming cheese during that time.
C. Facts Relating to Inspections and Audits by Noble Romans
From time to time, Noble Romans visited Hattenhauers Locations and completed checklists titled Unit Evaluations or Opportunities Assessments (Inspection Reports) to monitor Hattenhauers compliance with the Franchise Agreements. Specifically, Inspection Reports were completed for the Oregon location only on September 6, 2006; for the Washington location only on July 12, 2010, and for both locations on July 14, 2007, January 16, 2009, and October 8, 2009. The Inspection Reports state that Hattenhauer reported its sales and royalties accurately. Several of the Inspection Reports noted Hattenhauers discount pricing and value meals. The September 6, 2006, Inspection Report for the Oregon location noted that Hattenhauer was [e]xperiencing serious distributor problems and was [c]onstantly out of sauce, pizza crust and pastas. Dkt. No. 162-4 at 4.
In 2009, Noble Romans conducted an audit of each of Hattenhauers locations and created Sales & Purchases Comparison reports (SPCs). Noble Romans determined that Hattenhauer had underreported its sales by 32.9% at the Oregon Location and by 34.7% at the Washington location. Noble Romans did not tell Hattenhauer that it had conducted audits for its locations in 2009. The first time Hattenhauer learned about the 2009 audits and resulting SPCs was during discovery in this lawsuit.
In 2014, Noble Romans decided to conduct audits of its non-traditional franchisees who paid a royalty fee based on reported sales. This included both of Hattenhauers locations.
Noble Romans audits relied on a review of the records of Hattenhauers purchases from the approved distributor, McDonald. Noble Romans describes the process as follows:
In the audit, Noble Romans reviewed Hattenhauers purchases, from the distributors records, of the pizza crusts and other key ingredients, made an allowance for reasonable waste of products, and calculated the amount of sales that would be generated from those purchases. Noble Romans based its calculations on its operating standards and specifications and decades of experience in the pizza business, then comparing that to the reported sales.
Dkt. No. 159-1 ¶ 15. Noble Romans did not review the books and records maintained by Hattenhauer or attempt to verify the accuracy of the information contained in the distributors reports on which it relied. Noble Romans methodology calculates an amount of sales that Hattenhauers locations would be expected to make; in other words, it is an estimate.
In Noble Romans opinion, using this methodology is both appropriate and necessary because of the nature of non-traditional franchises:
In convenience stores, products are periodically assembled and baked throughout the day and placed in a multi-tiered warmer surrounded by a Noble Romans warmer wrap that identifies the brand for a grab-n-go service style. Customers take the pizza and other items that they want to purchase from the warmer, along with anything else in the store they want to buy, to the counter where the sales of all of their purchases are rung up in the same cash register. By the very nature of this system, and location inside a convenience store that sells numerous items, there are a lot of opportunities for errors in tracking sales by specific items. If the items do not all get rung up there are no records of un-rung item sales to audit. Moreover, pizza could be mistakenly rung up as grocery items instead of a Noble Romans product purchase. Since no records, such as sales tickets or invoices are kept, no records exist to audit for this problem. For these reasons and others, Noble Romans had to use alternative methods to audit the reported sales for accuracy in locations such as Hattenhauers.
Dkt. No. 159 at 4-5.
The methodology used by Noble Romans does not take into account ingredients that were purchased by Hattenhauer but never used because they were damaged in shipping, handling, or preparation. For example, McDonalds reports reflected credits to Hattenhauer, at least one of which was not accounted for in the audit. Noble Romans methodology also used a standard sales mix, which is the percentage of various types of products sold (e.g. 60% of pizzas sold have one topping). The sales mix used by Noble Romans in its audits was not the actual sales mix in Hattenhauers locations; rather, Noble Romans used the same sales mix for its audits of all of its non-traditional franchise locations. Similarly, Noble Romans used waste allowances of 2%, 3%, or 5% for its audits; it did not attempt to determine what Hattenhauers actual waste was, as Hattenhauer was not required to-and did not-include that information in the weekly sales reports it sent to Noble Romans. Hattenhauers locations had a larger amount of waste than the allowances used by Noble Romans because it kept its warmers stocked with product, as instructed by Noble Romans, and had to discard product that was not sold after the applicable holding times. The audits did not take into account the inventory Hattenhauer had at the end of the audit period; that is, Noble Romans calculated how much Hattenhauer should have sold based upon the ingredients purchased by Hattenhauer, but did not consider whether Hattenhauer could have used some of the purchased ingredients for products sold after the audit period. Noble Romans auditor did not have a complete list of Hattenhauers menu prices and estimated some of the prices he used for his calculations. Hattenhauer also changed its menu prices over time and sold products for less than full price due to value meals, coupons, frequency cards, specials, and other promotions.
Noble Romans methodology assumed a constant menu price for each item. Noble Romans also considered only one menu item for each core ingredient. For example, its methodology assumed that each Par 7 Dough purchased by Hattenhauer was used for a small pizza. However, Hattenhauer also used the pizza dough to make Cinnamon Rounds, which were sold for less than small pizzas. Similarly, tortillas were used for both breakfast burritos and chicken wraps, but Noble Romans methodology assumed that each tortilla purchased was used for a chicken wrap, which had a higher menu price than a breakfast burrito.
Hattenhauers cash registers automatically create daily records of sales of Noble Romans products, called Z tapes and/or register tapes. Hattenhauer creates and maintains records of its sales, including its sales of Noble Romans products. It also maintains boxes of years of daily station reports, including manual daily reports, manual shift reports, points of sale shift close reports, and other miscellaneous reports by day. Indeed, as set forth above, the Franchise Agreements require Hattenhauer to maintain extensive records, and there is no allegation that it failed to do so.
D. Facts Relating to Electronic Withdrawals
Based upon its audits, Noble Romans concluded that Hattenhauers Oregon location had underpaid royalties between January 2011 and February 2014. On April 1, 2014, without giving prior notice to Hattenhauer, Noble Romans attempted to electronically withdraw $8,573.79 from Hattenhauers bank account to cover the unpaid royalties it had calculated. This attempted transfer was rejected by Hattenhauers bank.
On April 3, 2014, Noble Romans informed Hattenhauer by telephone that it had audited the Oregon location and determined that Hattenhauer had underreported its sales from January 2011 to February 2014. On April 4, 2014, Noble Romans again attempted to electronically withdraw funds for the Oregon location; this time $8,623.79, which was the original amount plus $50. Noble Romans added the $50 based on a provision in the Franchise Agreements that provided:
Franchisee shall report its Gross Sales by facsimile transmission or, if not reasonably available, by telephone or by such other method as Franchisor may reasonably direct, by noon on Monday (Eastern Standard Time) ("Due Date) after the end of each week or at such other times as are established by Franchisor in its sole discretion. Franchisor will then deposit or transfer the reported amounts due into its own account, using the Franchisees pre-authorized check agreement. If any draft, electronic or otherwise, is unpaid because of insufficient funds or otherwise, then Franchisee shall pay the resulting bank fees imposed on Franchisor plus a $25 administrative fee.
Dkt. No. 1-4 at 5. Hattenhauer and Hattenhauers bank rejected this second attempted transfer.
On April 11, 2014, Noble Romans sent Hattenhauer an email that stated that Noble Romans had conducted an audit of Hattenhauers Washington location for January 2011 to February 2014, and concluded that Hattenhauer owed Noble Romans $14,125.93 in unpaid royalties. Noble Romans stated that it had initiated a draft from Hattenhauers account for that amount. That same day, Hattenhauer informed Noble Romans by email that it would not allow any funds to be withdrawn from its account without authorization from Hattenhauer. On April 14, 2014, Hattenhauer and its bank rejected Noble Romans attempted transfer of $14,125.93. On April 16, 2014, Noble Romans attempted to withdraw the $14,125.93 amount again, plus an additional $50, for a total of $14,175.93. Hattenhauer again rejected this attempted withdrawal.
On May 21, 2014, Hattenhauer sent Noble Romans an email objecting to Noble Romans audit. Hattenhauer noted its belief that the audit was based on potential sales, not actual sales; that it did not properly account for Hattenhauers pricing discounts and waste (that is, product that was prepared but not sold quickly enough and therefore had to be discarded); and that the attempted withdrawals from its bank account were unethical at best. Dkt. No. 162-22. On June 20, 2014, Noble Romans sent Hattenhauer a letter stating: Since you have refused to pay the royalty from the initial audit, we have extended the audit period to encompass your Noble Romans activity from the time each Noble Romans location opened through May 2014. The letter also stated that Hattenhauer owed Noble Romans $62,551.29 in unpaid royalties ($41,022.85 for the Washington location and $21,528.44 for the Oregon location). Hattenhauer again objected, responding in an email that it had reported its sales each week as required and paid royalties accordingly, that the locations had considerable waste, and that Noble Romans had not provided Hattenhauer with any documentation to support Noble Romans calculations. Hattenhauer also denied the validity of Noble Romans audit methodology and stated that it did not consent to any electronic funds transfers based on the audits. On July 17, 2014, Noble Romans sent an email with the report pages of the SPCs created as a result of the new audit.
On September 23, 2014, Hattenhauer received notice that Noble Romans had successfully withdrawn $100.09 from Hattenhauers bank account by electronic funds transfer. Noble Romans did not give Hattenhauer notice prior to this transfer. Hattenhauer again objected.
On September 24, 2014, Noble Romans informed Hattenhauer that it had conducted another audit of the Hattenhauer locations for the time period from June 2014 through August 2014, and concluded that Hattenhauer owed an additional $639.26 in unpaid royalties.
On September 29, 2014, Noble Romans attempted to obtain $539.17 via electronic funds transfer, without notifying Hattenhauer of such transfer, but this attempted transfer was rejected by Hattenhauers bank.
E. Facts Relating to Hattenhauers Discrimination Claim
In 2014, Noble Romans decided to bill franchisees for royalties with a difference of more than 20% between its estimate, as determined by audit, of a franchisees sales and a franchisees reported sales. When a franchisee operated multiple units, Noble Romans applied the 20% parameter to the average sales difference of the multiple units. The 20% number was an arbitrary number chosen by Noble Romans. Noble Romans did not give Hattenhauer a credit for 20% of the sales differences it calculated with its audits; rather, it attempted to collect the entire amount of the difference from Hattenhauer.
Noble Romans inadvertently failed to bill one of the locations operated by franchisee Village Pantry, LLC, even though its SPCs had a sales difference greater than 20%. Noble Romans did bill the other two locations operated by the same franchisee.
In 2014, Noble Romans conducted an audit of franchisee Pic N Save and used a lower menu price for the 14 pizza dough because the franchisee demonstrated that it ran specials on 14 pizzas. The audit calculated a sales difference less than 20%, but the sales difference would have been greater than 20% if Noble Romans did not take the special pricing into account.
Noble Romans did not extend the time frame of the audit for most of the franchisees that it audited in 2014.
III. DISCUSSION
In its Amended Complaint, Noble Romans asserts a breach of contract claim against Hattenhauer. In response, Hattenhauer asserts counterclaims for breach of contract, violations of the Washington Franchise Investment Protection Act and the Washington Consumer Protection Act, and a claim under the Indiana Crime Victims Relief Act. Both parties move for summary judgment on each of the counterclaims; Hattenhauer seeks summary judgment on Noble Romans breach of contract claim, and Noble Romans seeks partial summary judgment as to that claim. Each claim is addressed, in turn, below.
A. Noble Romans Breach of Contract Claim
Noble Romans alleges that Hattenhauer knowingly breached the Franchise Agreements by: (1) underreporting Gross Sales; (2) refusing to pay the royalty fees that are directly related to the underreported Gross Sales; and (3) failing to use Noble Romans brand pizza cheese for its Noble Romans pizzas at the Oregon Location. Dkt. No. 10-1 at 10. Under Indiana law, which the parties agree applies in this case,
[t]he construction of the terms of a written contract is a pure question of law....When construing the meaning of a contract, our primary task is to determine and effectuate the intent of the parties. First, we must determine whether the language of the contract is ambiguous. The unambiguous language of a contract is conclusive upon the parties to the contract and upon the courts. If the language of the instrument is unambiguous, the parties intent will be determined from the four corners of the contract. If, on the other hand, a contract is ambiguous, its meaning must be determined by examining extrinsic evidence and its construction is a matter for the fact finder. When interpreting a written contract, we attempt to determine the intent of the parties at the time the contract was made. We do this by examining the language used in the instrument to express their rights and duties. We read the contract as a whole and will attempt to construe the contractual language so as not to render any words, phrases, or terms ineffective or meaningless. We must accept an interpretation of the contract that harmonizes its provisions, rather than one that places the provisions in conflict.
Whitaker v. Brunner , 814 N.E.2d 288, 293-94 (Ind. Ct. App. 2004). Thus, the first step in applying a contract provision is determining whether the provision in question is ambiguous. A word or phrase is ambiguous if reasonable people could differ as to its meaning. Broadbent v. Fifth Third Bank , 59 N.E.3d 305, 311 (Ind. Ct. App. 2016). A term is not ambiguous solely because the parties disagree about its meaning. Id. We will not bend the language of a contract to create an ambiguity when none exists, but neither will we follow a literal interpretation when [to do so] would lead to an unreasonable or absurd result. In re Airadigm Commcns, Inc. , 616 F.3d 642, 664 (7th Cir. 2010) (quoting Chicago Bd. of Options Exch. v. Conn. Gen. Life Ins. Co. , 713 F.2d 254, 258 (7th Cir. 1983) ).
Hattenhauer argues that it is entitled to summary judgment on Noble Romans breach of contract claims related to underpayment of royalty payments because the method used by Noble Romans to calculate the amount of underpayment was not permitted under the Franchise Agreements. The Court agrees.
Noble Romans argues that its audit methodology was permitted under the Franchise Agreements because
The Franchise Agreements require Hattenhauer to preserve its books, records and accounts, including, but not limited to, daily sales records, sales slips, coupons, purchase orders, etc. The Franchise Agreements also provide that Noble Romans may audit Hattenhauers books and records. Finally, the Franchise Agreements provide that if an inspection should reveal that such payments have been understated in any report to [Noble Romans], then [Hattenhauer] shall immediately pay to [Noble Romans] the amount overdue.
Combined, these provisions: (1) require Hattenhauer to retain as part of its books and records its purchase orders; (2) provide that Noble Romans may audit those records; (3) recognize that Noble Romans may discover an understatement of sales; and (4) create an obligation in the franchisee to immediately pay the amount due. Under these provisions, Noble Romans could use the purchase records to determine whether Hattenhauer had understated its Gross Sales, and therefore, its royalty payments. Hattenhauers contention that the audit must be of, and only of, the reported Gross Sales misses this point; indeed, under Hattenhauers theory, the contractual requirement that it preserve its books, records, and accounts, which include purchase orders, would serve no purpose. That is, Hattenhauer would be required to maintain certain records, including purchase orders, but Noble Romans could not rely on those records to verify the accuracy of Hattenhauers reported sales. This interpretation must be avoided.
Dkt. No. 159 at 20-21 (citations omitted). This argument ignores the plain language of the Franchise Agreements in several ways. First, as the language quoted above makes clear, the Franchise Agreement provided that Noble Romans could review Hattenhauers records to determine whether royalty payments had been properly made. But Noble Romans did not base its calculations on Hattenhauers records, but rather on the distributors records. Further, Noble Romans argument that if Noble Romans could not rely on Hattenhauers purchase orders to calculate Hattenhauers Gross Sales the contractual requirement that it preserve its books, records, and accounts, which include purchase orders, would serve no purpose is belied by the contractual language that Noble Romans elides with its use of etc. in the passage quoted above. Hattenhauer also was required to maintain other records, such as payroll records and sales tax returns, that would not have been of any assistance to Noble Romans in assessing Hattenhauers Gross Sales of Noble Romans products. See Dkt. No. 159 at 22 (explaining why sales tax returns could not be used to audit non-traditional franchisees like Hattenhauer). Therefore, the inclusion of purchase orders among the records that Hattenhauer was obligated to maintain and allow Noble Romans to inspect does not support the conclusion that purchase orders were an acceptable means of determining Gross Sales.
More fundamentally, however, Noble Romans argument ignores the fact that the Franchise Agreements obligated Hattenhauer to pay royalties on its Gross Sales as that term is defined in the agreements-the total selling price of all Noble Romans food items sold by Hattenhauer. Whatever records were reviewed and whatever methodology was used, the end goal should have been to determine the actual amount of Noble Romans products sold by Hattenhauer. However, in Noble Romans own words, its audit method was designed to determine how many products [Hattenhauer] likely sold based on [Hattenhauers] purchases [of ingredients], Dkt. No. 159 at 23; an amount of sales that Noble Romans, based on its decades of experience in the pizza business, expected to see based on [its] analysis, id. ; the amount of sales that the stores should have been able to achieve had they been operating their franchises in accordance with Noble Romans specified standards that were authorized by the Franchise Agreements, id. at 3. See also Dkt. No. 186 (Hattenhauers two franchise locations should have reported greater sales, per the Franchise Agreements, had they been in accordance with Noble Romans specified standards.). In other words, Noble Romans position is that Hattenhauer is obligated to pay royalties on Noble Romans estimate of its Gross Sales. Noble Romans explains at length why it believes that [f]or non-traditional locations, such as Hattenhauers franchise locations, the only feasible way to audit sales after the fact for accurate reporting is by using the record of ingredients purchased, and how its audit method is consistence with Internal Revenue Service guidelines. See id. at 22-24. Taking those facts as true for purposes of this ruling, presumably Noble Romans was aware of that when it drafted the Franchise Agreements and could have defined Gross Sales to mean an estimate based on purchase records from the Noble Romans approved distributor. But it did not. The purchase order unambiguously requires royalties to be paid on Hattenhauers actual Gross Sales, not an estimate of those Gross Sales. By agreeing to this arrangement, Noble Romans accepted the risk that Gross Sales might be difficult to track with precision in a non-traditional sales environment; presumably it took that into account when it chose the royalty percentages for its non-traditional franchisees. Because the method used by Noble Romans to determine that Hattenhauer underreported (and therefore underpaid) its royalties was not permitted by the Franchise Agreements, Hattenhauer is entitled to summary judgment on Noble Romans breach of contract claim based on those alleged underpayments.
Hattenhauer also seeks summary judgment on Noble Romans claim that Hattenhauer breached the Franchise Agreements by using non-conforming pizza cheese at its Oregon location. As both parties note, under Indiana law, [t]o prevail on a claim for breach of contract, the plaintiff must prove the existence of a contract, the defendants breach of that contract, and damages resulting from the breach. Haegert v. Univ. of Evansville , 977 N.E.2d 924, 937 (Ind. 2012). Hattenhauer argues that Noble Romans cannot establish damages for Hattenhauers use of the substituted cheese because Hattenhauer paid royalties on all its gross sales, including its sales of Noble Romans pizzas. Dkt. No. 161 at 34. Noble Romans responds:
The amount of damages inflicted upon Noble Romans due to Hattenhauers breach will be determined at trial. Moreover, the Franchise Agreement provides for additional contractual damages related to this breach including all damages, costs and expenses, including reasonable attorneys fees, incurred by [Noble Romans] in connection with obtaining any remedy available to [Noble Romans] for any violation of this Agreement.
Dkt. No. 177 at 20. This argument is insufficient. Hattenhauer specifically argued that it is entitled to summary judgment because Noble Romans did not suffer any damages as a result of Hattenhauers use of non-conforming cheese. Because damages is an element of Noble Romans breach of contract claim, Noble Romans was then required to demonstrate that there is a genuine issue of fact regarding whether it did, in fact, suffer damages. It did not even attempt to do so.
In support of its own motion for partial summary judgment, Noble Romans argues that the Court can clearly rule on the first two elements of the breach of contract claim but allow a jury to determine the damages element at trial. Dkt. No. 159 at 13. This is, of course, true with regard to Noble Romans own motion, but not helpful in the face of Hattenhauers motion for summary judgment. Indeed, this is recognized in one of the cases cited by Noble Romans, Norwood Promotional Products, LLC v. KustomKoozies, LLC , 835 F.Supp.2d 685, 697 (S.D. Ind. 2011), in which the Court specifically noted that the defendant in that case did not seek summary judgment on the absence of damages element. In this case, Hattenhauer did, which obligated Noble Romans to point to evidence from which a reasonable jury could find that it suffered damages as a result of Hattenhauers breach. See, e.g. , Goodman v. National Sec. Agency, Inc. , 621 F.3d 651, 654 (7th Cir. 2010) (We often call summary judgment the put up or shut up moment in litigation, by which we mean that the non-moving party is required to marshal and present the court with the evidence she contends will prove her case. And by evidence, we mean evidence on which a reasonable jury could rely.) (citations omitted). Because Noble Romans failed to do so, Hattenhauer is entitled to summary judgment on that claim as well. Accordingly, summary judgment is GRANTED in favor of Hattenhauer on Noble Romans breach of contract claim.
B. Hattenhauers Breach of Contract Counterclaim
Hattenhauer alleges that Noble Romans breached the Franchise Agreements by using an audit method not permitted under the Franchise Agreements to calculate Hattenhauers Gross Sales and underpaid royalties. Noble Romans argues that it is entitled to summary judgment on that issue because its methodology was authorized by the Franchise Agreement. As discussed above, the Court finds, as a matter of law, that the Franchise Agreements did not permit Noble Romans to calculate Gross Sales in the manner in which it did. As Noble Romans only argument with regard to Hattenhauers motion for summary judgment on this issue is that the audits it performed were authorized by the Franchise Agreements, the Court finds that Hattenhauer is entitled to summary judgment on this issue.
Hattenhauer also alleges that Noble Romans successful and unsuccessful attempts to collect what it determined to be unpaid royalties by means of electronic withdrawals from Hattenhauers bank account constituted a breach of the Franchise Agreements. Noble Romans again argues that it is entitled to summary judgment on this claim because its actions were authorized by the Franchise Agreement. The Court disagrees, both for the reasons set forth above-that is, the royalties Noble Romans sought to collect were not properly calculated and therefore were not owed to Noble Romans-and for a separate reason. Hattenhauer argues, and the Court agrees, that nothing in the Franchise Agreement gave Noble Romans the right to collect unpaid royalties calculated as a result of an audit by means of electronic withdrawals made without Hattenhauers consent.
As Noble Romans correctly notes:
Section XI of the Franchise Agreements provide that [i]f any required royalty payments to [Noble Romans] are delinquent, or if an inspection should reveal that such payments have been understated in any report to [Noble Romans], then [Hattenhauer] shall immediately pay to [Noble Romans] the amount overdue or understated upon demand with interest determined in accordance with the provisions of Section IV.B.(3). Section IV of the Franchise Agreements states that [a]ll unpaid obligations under this Agreement shall bear interest from the date due until paid at the lesser of the highest rate allowed by law or a rate that is five (5) percentage points per annum higher than the prime rate then currently established by the largest bank (determined by total bank assets) headquartered in the state in which the [Noble Romans and/or Tuscanos] Location is situated.
Dkt. No. 159 at 27 (quoting, inter alia , Dkt. No. 1-1 at 17). Noble Romans acknowledges, as it must, that the Franchise Agreement required Hattenhauer to pay Noble Romans any understated royalties on demand. It then argues that it demanded the payment through initiating an ACH withdraw from Hattenhauers bank account. Id. The Court finds that it is simply not reasonable to interpret the relevant provisions of the Franchise Agreements to permit this unilateral action by Noble Romans. Section XI of the Franchise Agreements is written in the active voice; it provides that Hattenhauer shall immediately pay to [Noble Romans] the amount overdue or understated upon demand with interest.... Dkt. No. 1-1 at 16. By contract, Section IV(B), the provision of the Franchise Agreements that relates to automatic withdrawals is, appropriately, written in the passive voice: it provides that royalty fees shall be due and payable each week based on the Gross Sales for the preceding week...and shall be paid electronically (draft on Franchisees bank account by electronic withdrawal) so that it is received by Franchisor on or before Tuesday of each week from a direct draw account set up by Franchisee for purposes of payment of the Royalty Fee. Dkt. No. 1-1 at 4. This distinction makes complete sense. The royalty payments to be paid passively from Hattenhauers account are those that are calculated from Hattenhauers own reports of Gross Sales sent to Noble Romans each week. Hattenhauer thus would know exactly how much would be withdrawn by Noble Romans and would be able to ensure sufficient funds were available in its account. Hattenhauer would be denied the ability to control its own bank account balance if amounts unilaterally calculated by Noble Romans based on an audit that Hattenhauer was unaware of could simply be withdrawn by Noble Romans. Noble Romans attempt to collect alleged unpaid royalties from Hattenhauers bank account without any action on Hattenhauers part-that is, without making a demand to Hattenhauer and then allowing Hattenhauer to make a payment-was not authorized under the Franchise Agreements and constituted a breach of contract. There is no question that Hattenhauer suffered damages as a result of this breach; at a minimum, Hattenhauer was injured by the fact that Noble Romans successfully withdrew $100.09 from its bank account in violation of the Franchise Agreements.
Hattenhauer also asserts in its Amended Counterclaim that Noble Romans breached the Franchise Agreements by fail[ing] to provide assistance or support to Hattenhauer in its operation of the Washington and Oregon Locations in violation of Section V(7) of the Franchise Agreements. Dkt. No. 142 at 11-12. In two of the Franchise Agreements, Section V(7) reads as follows:
During the operation of the franchised business, [Noble Romans will provide] such additional assistance as is reasonably necessary, in the sole discretion of [Noble Romans], to assist [Hattenhauer] in meeting Noble Romans quality control standards.
Dkt. No. 1-1 at 6 (applying to pizza franchise at Washington location); Dkt. No. 1-4 at 6 (applying to Oregon location beginning March 21, 2011). In a third Franchise Agreement, Section V(7) is as quoted above except that it omits the word sole. Dkt. No. 1-2 at 6 (applying to Tuscanos franchise at Washington location). In a fourth Franchise Agreement, which applied to the Oregon location from April 2005 to April 2010, Section V(7) reads:
During the operation of the franchised business, [Noble Romans will provide] such additional assistance as is reasonably necessary to assist [Hattenhauer] in meeting [Noble Romans] quality control standards.
Dkt. No. 1-3 at 6.
Noble Romans moves for summary judgment on this issue, pointing to the language in three of the Franchise Agreements that give Noble Romans the discretion to determine what assistance is reasonably necessary. Hattenhauer argues that granting Noble Romans such discretion creates an illusory promise, and also notes that the discretion language is not present in one of the Franchise Agreements.
The Court need not resolve these issues. Under the plain language of all of the Franchise Agreements, to the extent that the Franchise Agreements required Noble Romans to provide any assistance, that assistance was to relate to Hattenhauers ability to comply with Noble Romans quality control standards. The only such assistance that Hattenhauer identifies as lacking relates to its use of non-conforming pizza cheese. See Dkt. No. 178 at 33-34 (discussing Noble Romans alleged fail[ure] to provide particularized assistance to [Hattenhauer] to help it meet [Noble Romans] quality control standards.). Even assuming that Noble Romans failed to provide such assistance in violation of the Franchise Agreements, the only way that failure could have damaged Hattenhauer would have been if it were held liable to Noble Romans for its use of the non-conforming cheese. In light of the fact that the Court has ruled in favor of Hattenhauer on the breach of contract and Lanham Act claims relating to the use of non-conforming cheese, the Court finds that Hattenhauer has no viable breach of contract claim relating to Section V(7), and therefore Noble Romans is entitled to summary judgment on that issue.
In summary, Hattenhauers motion for summary judgment is GRANTED with regard to liability on its breach of contract claim relating to Noble Romans calculation of unpaid royalties and Noble Romans use and attempted use of electronic withdrawals to collect them. Noble Romans motion for summary judgment is GRANTED as to Hattenhauers breach of contract claim relating to Noble Romans alleged failure to provide assistance pursuant to Section V(7) of the Franchise Agreements.
B. Hattenhauers Counterclaim under the Indiana Crime Victims Relief Act
Hattenhauer asserts a counterclaim pursuant to the Indiana Crime Victims Relief Act (ICVRA), which creates a civil cause of action pursuant to which a person who suffers a pecuniary loss as a result of a violation of certain Indiana criminal statutes may recover treble damages, attorney fees, and costs. Hattenhauer alleges that Noble Romans violated three of the criminal statutes referenced in the ICVRA. First, it alleges that Noble Romans committed the crime of deception, which is defined, in relevant part, as knowingly or intentionally mak[ing] a false or misleading written statement with intent to obtain property. Ind. Code § 35-43-5-3(a)(2). The written statements pointed to by Hattenhauer are as follow:
a. Noble Romans conducted an audit of Hattenhauers franchise locations;
b. Hattenhauer underreported its sales to Noble Romans in the amount of $207,799.06 from January 2011 to February 2014;
c. Hattenhauer owed royalty payments of $14,125.93 for its Washington Location to Noble Romans for January 2011 to February 2014;
d. Noble Romans conducted an audit of Hattenhauers franchise locations for the years 2005 or 2006 through May 2014;
e. Hattenhauer underreported its sales to Noble Romans in the amount of $585,040.65 for the Washington Location for the years 2005 or 2006 to 2014;
f. Hattenhauer underreported its sales to Noble Romans in the amount of $307,549.16 for the Oregon location for the years 2005 or 2006 to 2014; and
g. Hattenhauer owed royalty payments in the amount of $62,551.29 to Noble Romans for the years 2005 or 2006 to 2014.
Assuming that these statements satisfy the definition of deception, Hattenhauer has wholly failed to articulate how it suffered pecuniary loss as a result of those statements, stating only that Noble Romans relied on those statements when it successfully withdrew money from Hattenhauers account. Dkt. No. 161 at 48. There is no allegation that Noble Romans made those statements to Hattenhauers bank in order to induce it to release funds to Noble Romans, and Hattenhauer certainly was not misled by the statements into authorizing the release of funds to Noble Romans. Deception cannot be the basis for a claim under the ICVRA in this case for the simple reason that Hattenhauer was not deceived by any of Noble Romans statements.
Hattenhauer also alleges that Noble Romans committed conversion and criminal trespass when it successfully withdrew funds from Hattenhauers bank account. Indiana Code § 35-43-2-2(b)(4) provides that a person who knowingly or intentionally interferes with the possession or use of the property of another person without the persons consent commits criminal trespass. Criminal conversion is defined as knowingly or intentionally exert[ing] unauthorized control over property of another person. Ind. Code § 35-43-4-3(a). Both of those crimes are referenced in the ICVRA.
Noble Romans does not address conversion in its motion for summary judgment or in its response to Hattenhauers motion for summary judgment, even though Hattenhauer addresses it. See, e.g. , Dkt. No. 161 at 46-47 (Noble Romans committed the crimes of deception, criminal trespass, and criminal conversion against Hattenhauer, causing Hattenhauers pecuniary loss.). Noble Romans also does not address Indiana Code § 35-43-2-2(b)(4), but instead inexplicably discusses Indiana Code § 35-43-2-2(b)(2), which expressly applies only to trespass on real property. Noble Romans argues that Hattenhauer cannot prove the mens rea required to support their allegation of an Indiana CVRA violation because [r]elying upon the Franchise Agreements, Noble Romans believed that the amount of unpaid royalty fees discovered in the audits was immediately due and owing. Dkt. No. 159 at 33-34. However, as Noble Romans acknowledges in its brief, the belief that one is authorized to possess the property at issue must have a fair and reasonable foundation in order to defeat the mens rea requirement of the criminal trespass statute. Id. at 34 (quoting Larsen v. Fort Wayne Police Dept , 825 F.Supp.2d 965, 978 (N.D. Ind. 2010) (citing Taylor v. State of Indiana, 836 N.E.2d 1024, 1028 (Ind. Ct. App. 2006) ) and citing Olsen v. State, 663 N.E.2d 1194, 1196 (Ind. Ct. App. 1996) ). As discussed at length above, there is simply no provision in the Franchise Agreements that reasonably can be said to authorize Noble Romans to make the electronic withdrawal that it made-that is, that it had the right to exercise control over Hattenhauers money, rather than to pursue legal action to recover what it believed it was owed by Hattenhauer. In other words, the Court has determined as a matter of law that the contract cannot reasonably be interpreted to provide authorization for Noble Romans electronic withdrawal of funds from Hattenhauers account based on the result of its audits. This is especially true in light of the fact that by the time Noble Romans made its successful withdrawal, Hattenhauer had made it abundantly clear that it did not consent to the withdrawals and disputed Noble Romans audit process.
The Court finds that Hattenhauer has established as a matter of law that Noble Romans withdrawal of $100.09 from Hattenhauers bank account constituted conversion as defined by Ind. Code § 35-43-4-3(a). Accordingly, Hattenhauer is entitled to summary judgment as to liability on its claim under the ICVRA.
C. Hattenhauers Counterclaim under the Washington Consumer Protection Act
In its Amended Counterclaim, Hattenhauer asserts separate claims pursuant to the Washington Franchise Investment Protection Act (WFIPA), Wash. Rev. Code Ann. 19.100.190(3), and the Washington Consumer Protection Act (WCPA), Wash. Rev. Code Ann. 19.86.090. In its summary judgment briefing, however, Hattenhauer argues that Noble Romans breached its duty of good faith and fair dealing, which is imposed on all franchise agreements pursuant to Wash. Rev. Code Ann. § 19.100.180, by (1) calculating royalties in the way that it did; (2) withdrawing funds from Hattenhauers bank account; (3) failing to give Hattenhauer a credit for a 20% variance between the Gross Sales calculated by Noble Romans and the Gross Sales reported by Hattenhauer; (4) extending the timeframe covered by the audits when Hattenhauer refused to pay; and (5) failing to provide training and updated manuals in a timely manner. Hattenhauer then argues that [w]hen a franchisor commits any of the acts prohibited by Section 19.100.180, including discrimination between franchisees and bad faith conduct, the franchisor commits an unfair or deceptive act or practice under the Consumer Protection Act. Wash. Rev. Code Ann. § 19.100.180 ; Wash. Rev. Code Ann. 19.100.190(1). Dkt. No. 161 at 49. It therefore seeks to recover damages under the WCPA.
As it relates to Hattenhauers allegations of bad faith, this argument is without merit. Section 19.100.190(1) provides that [t]he commission of any unfair or deceptive acts or practices or unfair methods of competition prohibited by RCW 19.100.180 as now or hereafter amended shall constitute an unfair or deceptive act or practice under the provisions of [the WCPA]. As Noble Romans points out, Section 19.100.180 provides a list of things that are an unfair or deceptive act or practice or an unfair method of competition. Acting in bad faith-or, more precisely, violating the duty of good faith-is not one of them. Even assuming that the actions pointed to by Hattenhauer constitute bad faith, they do not violate the WCPA by operation of Wash. Rev. Code Ann. 19.100.190(1). While perhaps Hattenhauer could demonstrate that the actions taken by Noble Romans constitute an unfair or deceptive act under the WCPA, it has not done so in its briefs, and [i]t is not this courts responsibility to research and construct the parties arguments. Draper v. Martin , 664 F.3d 1110, 1114 (7th Cir. 2011).
Hattenhauer also alleges the Noble Romans treated it differently than its other non-traditional franchisees by: (1) arbitrarily determin[ing] that if there was a difference of more than 20% between its inaccurate estimates for potential sales and a franchisees reported sales, then the franchisee must be underreporting; (2) inconsistently applying the 20% parameter; (3) extending the time frame of its audit of Hattenhauer but not most of its other franchisees; and (4) failing to take Hattenhauers discounts and specials into account, while doing so for Pic N Save. Dkt. No. 161 at 50-51. Discrimination between franchisees is a listed unfair or deceptive act under the WFIPA and therefore under the WCPA. See Wash. Rev. Code Ann. 19.100.180(2)(c). That fact alone is not sufficient to establish a violation of the WCPA, however. To succeed on a CPA claim, a plaintiff must establish (1) an unfair or deceptive act (2) in trade or commerce (3) that affects the public interest, (4) injury to the plaintiff in his or her business or property, and (5) a causal link between the unfair or deceptive act complained of and the injury suffered. Trujillo v. Nw. Tr. Servs., Inc. , 183 Wash.2d 820, 834-35, 355 P.3d 1100 (2015). Noble Romans argues that Hattenhauer cannot demonstrate the requisite effect on the public interest. The Court agrees.
In a case under the WCPA, a plaintiff can establish that the lawsuit would serve the public interest by showing a likelihood that other plaintiffs have been or will be injured in the same fashion. Id. Hattenhauer alleges that this element is satisfied in this case because Noble Romans has applied its unauthorized audit method to its many franchisees and taken many of the other actions that form the basis of Hattenhauers bad faith claim against other franchisees. Hattenhauer does not explain how the acts of discrimination it alleges satisfy this element, however. Hattenhauer has not provided any evidence that Noble Romans has or is likely to discriminate against other franchisees in the manner in which it allegedly discriminated against Hattenhauer. Indeed, Hattenhauers discrimination claim is based on Hattenhauers allegation that Noble Romans treated it differently than it treated its other franchisees. Accordingly, Noble Romans is entitled to summary judgment on Hattenhauers claims under the WCPA and the WFIPA.
IV. CONCLUSION
For the reasons set forth above, Noble Romans motion for partial summary judgment (Dkt. No. 158) is GRANTED as to Hattenhauers counterclaims under the WCPA and the WFIPA and as to Hattenhauers counterclaim relating to Section V(7) of the Franchise Agreements. It is DENIED in all other respects. Hattenhauers motion for summary judgment (Dkt. No. 160) is GRANTED as to all of Noble Romans claims and GRANTED as to liability as to all of Hattenhauers counterclaims except its claims under the WCPA and the WFIPA and its claims relating to Section V(7) of the Franchise Agreements, on which it is DENIED .
The parties shall confer and file a notice setting forth how they wish to proceed in this case-specifically, whether a trial is necessary on the issue of Hattenhauers damages-within 28 days of the date of this Entry. The Court encourages the parties to contact the Magistrate Judge to request a settlement conference in this case if they believe it would be useful.
SO ORDERED: 3/30/18
Noble Romans takes umbrage at Hattenhauers use of the term Substitute Cheese for the other types of pizza cheese it purchased, calling its use of the term a misleading and false characterization. Dkt. No. 177 at 4. The Court frankly is not sure why Noble Romans finds the term objectionable. Hattenhauer did, in fact, substitute the other types of pizza cheese for Noble Romans proprietary cheese blend, so the term seems to be accurate. The Court does not read Substitute Cheese as implying that Noble Romans approved of the substitution or as implying that the different cheeses were fungible.
Noble Romans asserts that these facts are in dispute. See Dkt. No. 177 at 4 (The facts are not established as to whether or not Hattenhauer received information concerning the audit that Noble Romans performed on Hattenhauers franchises in 2009...[or] whether the 2009 audits were first discovered by Hattenhauer during discovery in this lawsuit.). However, Hattenhauer has submitted a declaration supporting them, and the only evidence Noble Romans points to as disputing them is the deposition testimony of Mitchell Grunat, in which Grunat makes it very clear that he has no recollection of whether he spoke to anyone at Hattenhauer regarding the 2009 audits. This testimony clearly is not sufficient to create an issue of fact regarding whether Hattenhauer had knowledge of the 2009 audits prior to this lawsuit in the face of its declaration that it did not.
The record does not indicate the extent of Noble Romans experience with non- traditional franchise locations.
The factual assertions made by Noble Romans relating to the appropriateness of Noble Romans audit methodology and the necessity of using it are supported by Mobleys declaration. Hattenhauer is correct that these assertions are expert opinions, as they are based on Mobleys specialized knowledge. See Fed. R. Evid. 701, 702 (defining difference between expert and lay opinion testimony); Dkt. No. 186 at 3 (Noble Romans explaining that Last, as a Certified Public Accountant and experienced auditor, Mr. Mobley has personal knowledge about the generally accepted ways of auditing for accurate reporting of sales.). However, the Court need not consider Hattenhauers argument whether these assertions should therefore be stricken, because they are not material to the Courts ruling. The Court includes them herein because they are necessary to an understanding of Noble Romans arguments.
Hattenhauer states the following in its statement of undisputed facts (and in a supporting declaration): In 2014, Hattenhauer sent Noble Romans weekly reports regarding the amount of waste incurred at its franchises. Dkt. No. 161 ¶ 59; Dkt. No. 162-1 ¶ 23. Hattenhauer does not provide any additional information regarding these reports, so it is unknown whether they were prepared and sent each week of 2014 regarding the waste for that week, prepared in previous years and simply provided to Noble Romans in 2014, or created in 2014 but applied to a broader time period. In other words, the Court cannot discern from the record the amount of data regarding waste that Hattenhauer provided to Noble Romans or how Hattenhauer acquired the data.
In response to this assertion of fact by Hattenhauer, Noble Romans asserts that Noble Romans gave all franchisees the opportunity to have their audits adjusted based on documented facts. Dkt. No. 177 ¶ 16. The evidence cited for that assertion does not support it. There is no evidence that any franchisee was given the opportunity to provide documentation to challenge the factual assumptions made by the auditors. Rather, the deposition testimony cited states that the pictures [Noble Romans] had on hand showed that they [Pic N Save] were doing that, and so that was documented as part of the menu price that we took off of the pictures we had, plus what the unit said their prices were. Dkt. No. 177-4 at 6. In fact, Noble Romans attempted to collect the underpaid royalties it calculated without asking for any input from Hattenhauer, so it is difficult to see how Hattenhauer was given the opportunity to provide documentation to support adjustments to its audits.
Even if the contract were ambiguous on that point, it would be construed against the drafter, which was Noble Romans. Buskirk v. Buskirk , 86 N.E.3d 217, 224 (Ind. Ct. App. 2017) (Generally, an ambiguous contract will be construed against its drafter.) (citing Fresh Cut, Inc. v. Fazli , 650 N.E.2d 1126, 1132 (Ind. 1995) ).
Noble Romans recognizes that the lack of damages is an appropriate issue on which to seek summary judgment in a breach of contract case, as it seeks summary judgment against Hattenhauer on Hattenhauers breach of contract claim in part because, it argues, Hattenhauer cannot...prove any damages stemming from their alleged breach. Dkt. No. 159 at 26.
Hattenhauer argues that Noble Romans breached its obligation to provide assistance under Section V(7) by failing to inform Hattenhauer in 2009 that it had conducted an audit and determined that Hattenhauer had underreported its Gross Sales. See Dkt. No. 187 at 7. Hattenhauer fails to explain how the contractual term at issue-assist Franchisee in meeting Franchisors quality control standards-reasonably can be read to encompass an obligation to inform Hattenhauer of the results of a financial audit. The Court finds that it cannot.
In light of this finding, the Court need not determine whether the withdrawal also constituted criminal trespass.
Noble Romans also argues that the Court should consider the fact that Hattenhauer raised these claims with the State of Washington, Department of Financial Institutions, Securities Division (Department) and that the Department concluded that there was no Franchise Act violation by Noble Romans. Dkt. No. 177 at 28. This is not an accurate statement of the Departments findings; it actually stated that Based on the fact that there is insufficient information to establish a Franchise Act violation and that the complainant currently is involved in litigation regarding the subject matter of the complaint, I am closing the file at this time. Dkt. No. 159-5. Hattenhauers argument that the Court cannot consider Dkt. No. 159-5 because it is inadmissible hearsay misses the mark. Dkt. No. 178 at 43. For summary judgment purposes, hearsay is not a sufficient objection; rather, the objection must be that the fact at issue cannot be presented in a form that would be admissible in evidence. Federal Rule of Civil Procedure 56(c)(2). Hattenhauer does not suggest that Dkt. No. 159-5 does not accurately reflect the Departments action with regard to its complaint; therefore, there is no reason to believe that its conclusion could not be presented in an admissible form, i.e. , pursuant to the business records exception or by testimony from the Department. The more appropriate objection is that the Departments determination is simply not relevant, which Hattenhauer also argues. The Departments conclusion clearly was based on the information it had before it, and therefore that conclusion simply is not relevant to the Courts inquiry, which must be based on the evidence of record in this case. Noble Romans suggestion that this statement is entitled to Chevron deference is wholly without merit. See generally Arobelidze v. Holder , 653 F.3d 513 (7th Cir. 2011) (illustrating the limited application of Chevron ).
The Court also notes that Hattenhauer has not demonstrated that it suffered injury as a result of the alleged acts of discrimination. The only injury articulated by Hattenhauer is Noble Romans unauthorized withdrawal of funds from its bank account. See Dkt. No. 161 at 54 (Hattenhauer suffered an injury sufficient to maintain its CPA claim because Noble Romans unlawfully retained possession of funds to which Hattenhauer is entitled.). But this is not related to any act of discrimination between franchisees; Hattenhauer would have suffered this injury even if Noble Romans treated all of its franchisees in the same manner as it treated Hattenhauer.