Zeidler, Russell v. A & W Restaurants ( 2002 )

In the
United States Court of Appeals
For the Seventh Circuit
____________
No. 01-1341
RUSSELL W. ZEIDLER, et al.,
Plaintiffs-Appellants,
v.
A & W RESTAURANTS, INC., et al.,
Defendants-Appellees.
____________
Appeal from the United States District Court
for the Northern District of Illinois, Eastern Division.
No. 99 C 2591—Matthew F. Kennelly, Judge.
____________
ARGUED SEPTEMBER 20, 2001—DECIDED AUGUST 21, 2002
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Before RIPPLE, KANNE, and ROVNER, Circuit Judges.
ROVNER, Circuit Judge. Russell and Nancy Zeidler sued
A & W Corporation for alleged breaches of contract and
violations of the Illinois Franchise Disclosure Act (“IFDA”),
815 ILCS 705/1 et seq. The district court granted summary
judgment to A & W, the Zeidlers appeal, and we affirm.
Beginning in 1993, the Zeidlers, through their company
R.W. Hospitality Corp., owned and operated an A & W
restaurant pursuant to a license agreement with A & W
Restaurants, Inc. Unfortunately for the Zeidlers, the busi-
ness venture was not a success. The restaurant lost money
every year of operation, and in 1997 the Zeidler-A & W
2 No. 01-1341
relationship began to sour. By January 1998 A & W
was sending letters threatening to terminate the license
agreement because the Zeidlers had failed to maintain
and run their restaurant according to A & W health
and sanitation standards and because the Zeidlers had
let lapse the liability insurance that the license agreement
required them to carry. These were not hollow threats;
under the license agreement, either charge provided
grounds for termination. And a series of Quality Assur-
ance Reports—prepared for A & W by a corporate rep-
resentative who visited the Zeidlers’ restaurant four
times in three months—detailed the restaurant’s filthy,
disorganized condition and confirmed that the Zeidlers
no longer retained insurance.1 The Zeidlers closed their
restaurant and removed its equipment on March 13,
1999, ostensibly because A & W’s termination threats—
which the Zeidlers claim were groundless and issued in
bad faith—made the business impossible to run. On March
25, after receiving notification of the closure from the
Zeidlers’ restaurant-landlord, A & W sent the Zeidlers a
letter formally terminating the franchise.
1
These Quality Assurance Reports elaborated on the squalid
condition of the Zeidlers’ restaurant. During the representative’s
initial visit, he discovered a kitchen, reach-in freezer, and counter
area in need of cleaning; out-of-uniform employees eating non-
A & W food behind the counter without washing their hands
afterwards; dirty bathrooms; and food stored on the floor of the
walk-in freezer. He asked the Zeidlers to address these problems,
but during a subsequent inspection found dirty dining room walls;
old food encrusting the sandwich make-up board and grills; and
a counter area, kitchen, and freezer that still needed cleaning.
Furthermore, he noted that the Zeidlers’ employees kept ham-
burgers, chicken sandwiches, hot dogs, and french fries unrefrig-
erated much longer than A & W allowed. The employees were
also frying food in shortening that had not been properly filtered
after previous use. Reports from the representative’s last two in-
spections revealed no improvement.
No. 01-1341 3
Thirteen months later, the Zeidlers filed this suit
against A & W and several of its corporate officers, rang-
ing from the president and CEO to vice-presidents of
finance, operations, and contract administration. The
Zeidlers alleged that A & W’s termination breached
their license agreement, violated the IFDA, 815 ILCS
705/1 et seq., and breached an independent state-law duty
of good faith and fair dealing. The district court, sitting
in diversity and applying Illinois law, dismissed part of
the suit on the pleadings, holding that the individual
defendants had insufficient personal contacts with Illi-
nois for the court to exercise personal jurisdiction over
them, and that Illinois law does not allow suit for
breach of the duty of good faith and fair dealing. Then the
court granted summary judgment to the remaining de-
fendant, finding that A & W was justified in terminating
the license agreement based on the Zeidlers’ lapsed insur-
ance, poor sanitation record, and decision to shut down
the restaurant.
On appeal, the Zeidlers take issue with all of the dis-
trict court’s rulings. Their principal difficulty, however, is
mounting any kind of challenge to one of the district court’s
dispositive holdings—namely, that the Zeidlers’ closing
down of their restaurant bars them from establishing
that A & W wrongfully terminated the franchise. This
holding is dispositive because we have said that a franchi-
see who abandons his or her franchise by closing it be-
fore the end of a license agreement’s term may not bring
a wrongful termination action against the franchisor
who later terminates the agreement. See Moro v. Shell Oil
Co., 91 F.3d 872, 875 (7th Cir. 1996). In Moro, franchisees
closed a gas station that had become too expensive to
run after the franchisor demanded that they pay for
gasoline up-front rather than on a credit basis. They
sued the franchisor under the Petroleum Marketing Prac-
tices Act, 15 U.S.C. § 2801 et seq., which required them to
4 No. 01-1341
prove that it was the franchisor—and not the franchisees
themselves—who actually terminated the franchise. Id.
at 875. The franchisees could not carry this burden, we
held, because they had abandoned their gas station be-
fore the franchisor terminated the franchise agreement. Id.Like the franchisees in Moro, the Zeidlers must
prove that A & W wrongfully terminated their franchise
in order to show that A & W breached the license agree-
ment and violated the IFDA. In attempting to do so, they
point to A & W’s March 25 termination letter. But by
March 25 the Zeidlers had already abandoned their res-
taurant and their relationship with A & W; that abandon-
ment justifies A & W’s subsequent termination and there-
fore prevents the Zeidlers from establishing their breach
of contract claim. The abandonment also dooms their
IFDA claim because the statute recognizes voluntary
abandonment of a franchise as “good cause” for a fran-
chisor to terminate a license agreement. See 815 ILCS
705/19(c)(2).
The Zeidlers attempt to forestall summary judgment
on the basis of their abandonment by arguing that A & W
forced them to close. The Zeidlers say that A & W accom-
plished this forced closure by sending the repeated ter-
mination threats. According to the Zeidlers, these threats
were unfounded and motivated by a desire to drive them
out of business so that A & W could sell their franchise
to another franchisee. A business “cannot operate under
the risk of termination,” claim the Zeidlers, so they had
to close their restaurant. The Zeidlers thus assert that
we should ignore their abandonment of the restaurant
because A & W’s unjustified termination threats brought
it about.
Although the Zeidlers do not cite cases supporting their
argument, they seem to charge A & W with operating in
“bad faith.” “Bad faith” is a term of art in contract law; it
No. 01-1341 5
refers to one party’s manipulation of contractual terms
in order to take commercial advantage of another party.
See, e.g., Interim Health Care of N. Ill., Inc. v. Interim
Health Care, Inc., 225 F.3d 876, 885-86 (7th Cir. 2001); The
Original Great American Chocolate Chip Cookie Co.
v. River Valley Cookies, Ltd., 970 F.2d 273, 280 (7th Cir.
1992). If a party is found to have acted in bad faith,
then the other party is relieved of the effects of contrac-
tual breaches caused by that bad faith. See Interim
Health Care, 225 F.3d at 885-86.
For example, in Interim Health Care there was evidence
that the defendant-franchisor usurped its franchisee’s ter-
ritory in bad faith. This usurpation arguably forced the
franchisee to default on royalty payments, prompting the
franchisor to terminate the franchisee’s contract. The
franchisee then sued for wrongful termination. The dis-
trict court granted summary judgment for the franchisor
because it was undisputed that the franchisee defaulted.
We reversed, however, because it was arguable that
the franchisor’s bad-faith actions brought about the very
default upon which it based the termination. Id.
We are unpersuaded by the Zeidlers’ argument that
A & W—like the franchisor in Interim Health Care—oper-
ated in bad faith such that we should ignore their aban-
donment of the restaurant. First, we note that they
have failed to offer any evidence that A & W acted in
bad faith when it threatened to terminate the license
agreement. In fact, A & W seems to have had good rea-
sons to threaten to terminate: the Zeidlers’ restaurant
was in a slovenly condition and lacked the required insur-
ance. The Zeidlers’ unsupported assertions that A & W
exaggerated the restaurant’s horrid conditions are not
evidence sufficient to defeat a motion for summary judg-
ment. See Patterson v. Chicago Ass’n for Retarded Citi-
zens, 150 F.3d 719, 724 (7th Cir. 1998).
6 No. 01-1341
Second, even assuming that A & W threatened the
Zeidlers in bad faith, the Zeidlers have not shown how
those threats caused them to shut the restaurant down.
Bad faith only negates contractual breaches that it has
brought about; if a party acting in bad faith has a reason
to terminate—like the other party’s abandonment of the
agreement—that his or her bad faith has not caused, then
he or she can do so. See Tuf Racing Prods., Inc. v. Amer-
ican Suzuki Motor Corp., 223 F.3d 585, 589 (7th Cir.
2000). There is no evidence that A & W supported its
termination threats with actions that made the restau-
rant impossible to run, such as refusing to supply the
Zeidlers. And if A & W’s termination threats were in fact
unjustifiably undermining the business’s profitability
then the Zeidlers could have sued for the damages caused
by those threats. See, e.g., Lippo v. Mobil Oil Corp., 776
F.3d 706, 716-17 (7th Cir. 1985). But the Zeidlers can-
not argue that A & W’s bad faith excused their closing down
of the restaurant without demonstrating a causal link
between A & W’s termination threats and the restaurant’s
closure.
In conclusion, we note that the district court correctly
dismissed on the pleadings the Zeidlers’ remaining
claim that A & W breached an independent covenant of
good faith and fair dealing. The covenant is only an aid
to interpretation, not a source of contractual duties or
liability under Illinois law. See Beraha v. Baxter Health
Care Corp., 956 F.2d 1436, 1443-44 (7th Cir. 1992); Cramer
v. Insurance Exch. Agency, 675 N.E.2d 897, 903 (Ill. 1996).
AFFIRMED.
No. 01-1341 7
A true Copy:
Teste:
________________________________
Clerk of the United States Court of
Appeals for the Seventh Circuit
USCA-97-C-006—8-21-02