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American Dairy Queen Corp. v. Universal Investment Corp.

United States District Court, W.D. Wisconsin

August 25, 2017

AMERICAN DAIRY QUEEN CORPORATION, Plaintiff and Counter Defendant,



         In this civil action, plaintiff American Dairy Queen Corporation ("ADQ") seeks a declaratory judgment that it properly terminated the relationship with the defendant Universal Investment Corporation under the provisions of the Wisconsin Fair Dealership Law, Wis.Stat. § 135.01 et seq. ("WFDL"), that Universal violated the Lanham Act, 15 U.S.C. §§ 1141, 1125(a)(1), by using the DAIRY QUEEN® trademark without maintaining brand standards. For its part, Universal asserts counterclaims against ADQ for tortiously interfering with a prospective contract to purchase DAIRY QUEEN® territory rights in Eau Claire County, Wisconsin, as well as violations of the WFDL. Although the WFDL would appear to dictate the ultimate outcome of this lawsuit, pending before the court are: (1) Universal's motion for partial summary judgment on ADQ's Lanham Act claim as barred by the doctrine of laches (dkt. #31); and (2) ADQ's motion for summary judgment on Universal's tortious interference counterclaim based on privilege and justified interference with the transfer of territory rights (dkt. #43). For the reasons that follow, the court will grant in part and reserve in part Universal's motion, finding that laches bars a Lanham Act claim premised on pre-October 2015 trademark violations, while also finding that material issues of fact concerning ADQ's WFDL claim precludes summary judgment after that date. For similar reasons, the court will enter judgment in ADQ's favor on Universal's tortious interference claim, finding that this defense applies here.


         A. Background

         American Dairy Queen Corporation ("ADQ") is the franchisor and owner of the DAIRY QUEEN® franchise system. ADQ licenses its trademarks to third parties who operate and/or sublicense restaurants under that name. There are currently 6, 700 DAIRY QUEEN® restaurants operating in the United States and abroad, including 132 in Wisconsin.

         Historically, ADQ has licensed franchisees in two ways: (1) through "territory operators" who take the responsibility for issuing sublicenses to individual stores in a specified territory and for supervising the stores; and (2) through licensees that contract directly with ADQ to operate stores who are supervised directly by ADQ. The second approach is now ADQ's preferred business model. Indeed, ADQ has not entered into an agreement with a new territory operator for more than twenty-five years.

         Universal Investment Corporation operates a restaurant in Eau Claire, Wisconsin, on Menomonie Street under the DAIRY QUEEN® name and sells soft serve treat products using the DAIRY QUEEN® trademark. John and Maureen (also known as "M.M.")[2]Robertson are husband and wife, and they remain the sole owners of Universal. John Robertson began working in the first Dairy Queen in Eau Claire County while in high school. In 1973, he entered into an agreement with the former territory operators, Walter and Opal Stephen, to operate that Dairy Queen location himself. Initially in their own names and more recently as the sole owners of Universal, the Robertsons have operated that Menomonie Street DQfor more than forty years.

         While not a party to this action, Stephen Partnership, a Wisconsin general partnership, located in Eau Claire, Wisconsin, is central to the parties' dispute. Stephen Partnership is the successor in interest to Walter and Opal Stephens, and it is a former ADQ licensee and territory operator for Eau Claire County, Wisconsin. The Robertsons (and later Universal) have continued to maintain the same basic sublicense arrangement with Stephen Partnership for the Menomonie Street DQ that began with the Stephens in 1973.

         B. History of Territory Agreements Between ADQ and Stephen Partnership

         Similarly, through a series of their own written agreements (referred to generally as "territory agreements") between ADQ and Stephen Partnership (or their respective predecessors), Stephen Partnership maintained its license to operate and sublicense DAIRY QUEEN® stores that sell DAIRY QUEEN® products in Eau Claire County, Wisconsin, between 1955 and 2014. Lark Sales Company, a predecessor of ADQ entered into the first of the territory agreements with Walter G. Stephen and Opal R. Stephen, the predecessors of Stephen Partnership, granting a license to operate and sublicense DAIRY QUEEN® restaurants that sell DAIRY QUEEN® soft serve products in Eau Claire County (the "1955 Territory Agreement").[3] (Beck Decl., Ex. A (dkt. #47-1).) ADQ and Opal Stephen entered into a subsequent Food Service Addendum, dated September 16, 1982 (the "1982 Addendum"), for the operation and sublicensing of DAIRY QUEEN® restaurants using the DAIRY QUEEN® BRAZIER® trademarks in Eau Claire County, Wisconsin. (Beck Decl., Ex. B (dkt. #47-2).) At that time, ADQ also licensed the DAIRY QUEEN® BRAZIER® marks in connection with ADQs food service system and the sale of cooked food products such as hamburgers, hot dogs, french fries and other food products. (Id. at App. D.)

         Important to the current dispute, the 1982 Addendum included an Appendix G that reflected an agreement between Walter G. and Opal R. Stephen and Burton Myers, made on January 31, 1959, granting the Stephens a license to use the trade name "Dairy Queen" under the "Trade Mark Registrations #4163, 6524, and 6825 as registered with the Department of State for the State of Wisconsin" (the " 1959 Agreement"). (Id. at App. G.) The 1982 Addendum also affirmed that the 1955 Territory Agreement "shall remain in full force and effect in accordance with its terms, " including the subsequent rights as described in Appendix G. (Id. at § 1.7.) The 1982 Addendum further explained that if there was an inconsistency between the 1982 Addendum and the 1955 Territory Agreement as it related to dairy products, the 1955 Territory Agreement governed. (Id.)[4]

         As the territory operator, Stephen Partnership (or its predecessors in interest) had the apparent authority to -- and did -- enter into sublicenses for the operation of DAIRY QUEEN® restaurants in Eau Claire County. Beginning in 1973, there can be no reasonable dispute that John Robertson initially and Universal most recently relied upon the agreements with the Stephens initially and Stephen Partnership most recently to operate one or more Dairy Queen stores in Eau Claire. Most notably, in 2000, Universal and Stephen Partnership entered into a sublicense agreement.[5] Under that sublicensee relationship, Universal had the right to sell soft serve products under ADQs trademarks, but it did not have the right to sell food offerings under ADQ's trademarks. Universal could also sell food though that was not packaged with ADQ's trademarks.[6]

         C. Stephen Partnership's Default and 2014 Lawsuit

         On February 15, 2013, ADQ issued a Notice of Default to Stephen Partnership for failure to submit monthly store reports and pay monthly royalty and sales promotion fees, along with accrued interest from September through December 2012. (Beck Decl., Ex. C (dkt. #47-3).) The notice also informed Stephen Partnership that it had sixty days from receipt to cure these defaults. On May 8, 2013, ADQ extended this cure period until May 15, 2013, and issued a Notice of Termination, effective August 6, 2013, if Stephen Partnership failed to cure timely. (Id., Ex. D (dkt. #47-4).) Because Stephen Partnership failed to cure, ADQ formally advised on June 7, 2013, that its rights under the 1982 Addendum and 1955 Territory Agreement would terminate effective August 6. (Id., Ex. E (dkt. #47-5).) On September 28, 2013, John Robertson also received a letter from ADQ which informed Universal that Stephen Partnership's territory rights had been terminated and that Universal was now considered a direct-licensed restaurant with ADQ.

         On March 24, 2014, ADQ further filed a lawsuit against Stephen Partnership in the Western District of Wisconsin, seeking a declaratory judgment that it had validly terminated the 1982 Addendum, as well as asserting affirmative claims against the partnership under the Lanham Act for alleged unauthorized use of ADQ's trademarks post-termination and for breach of contract based on unpaid fees under the 1982 Addendum. Am. Dairy Queen Corp. v. Stephen P'ship, No. 3:14-cv-00218-wmc (W.D. Wis. Mar. 24, 2014). (See also Beck Decl., Ex. H (dkt. #47-8).) The parties to that lawsuit entered into a settlement agreement, which became effective December 1, 2014 (the "Settlement Agreement"). (Beck Decl., Ex. I (dkt. #47-9).) Under the terms of that agreement, all of Stephen Partnership's "rights, title and interests" under the 1955 Territory Agreement, 1982 Addendum, and Appendix G to the 1982 Addendum (which includes the 1959 Agreement) were "terminated and thereby revert to ADQ." (Id. at ¶¶ 7, 9-10.) The Settlement Agreement also provided that Stephen Partnership's rights as a licensor with Universal were transferred to ADQ. (Id. at ¶ 8.)

         D. Robertsons' Interest in Acquiring Territory Rights

         In January 2014, approximately three months after being advised that ADQ had purportedly terminated Stephen Partnership's territory rights under the agreement and two months before the filing of the lawsuit between ADQ and Stephen Partnership, the Robertsons became interested in acquiring DAIRY QUEEN® territory rights in Eau Claire County. As John Robertson testified at his deposition, he believed the territory "was a valuable commodity to us and [we] were interested in buying it and [Stephen Partnership was] interested in settling it." (J. Robertson Depo. (dkt. #58) 83.) That same month, the Robertsons met with Stephen Partnership's owner, Sandra Stephen-Bailie, to discuss terms of a purchase, including general payment terms for Stephen Partnership's DAIRY QUEEN® territory rights in Eau Claire County.

         Over the course of the next couple of months, the Robertsons and Stephen Partnership, through counsel, agreed generally to a $250, 000 upfront cash payment, payments of $850 monthly (increasing after six years) and "up to $75, 000" in relation to "potential liability" for ADQ's lawsuit. (J. Robertson Depo. (dkt. #58) 85-86.) In May 2014, the parties even exchanged a draft contract to purchase all or a part of Stephen Partnership's DAIRY QUEEN® territory rights in Eau Claire County. That draft contract was between M.M. Robertson and Stephen Partnership. Universal was not a party to the prospective contract, though defendant points out that the contract was with "M.M. Robertson, doing business as DAIRY QUEEN OF EAU CLAIRE COUNTY, or assigns." (See, e.g., Mirr Decl., Ex. 4 (dkt. #83-4) p.l, Art. 5 (emphasis added).) Universal also contends that "M.M. Robertson acted as the agent of Universal Investment Corporation in offering to purchase the Stephens Partnership Territory." (Def.'s Add'l PFOFs (dkt. #80) ¶ 5.) Still, there is no dispute that the proposed contracts did not specifically name Universal as a party.

         On July 9, 2014, the Robertsons and Stephen Partnership circulated what Universal characterizes as the "final" draft of purchase contract, with the goal of signing it two days later on July 11, 2014.[7] However, the parties did not sign the agreement on that date; to the contrary, the record reflects ongoing changes to the prospective contract. (Pl.'s Resp. to Def.'s Add'l PFOFs (dkt. #101) ¶ 20.)

         Sometime later in July, ADQ apparently became aware of the proposed sale, and alerted Stephen Partnership's counsel that: (1) ADQ would have to consent to any sale of its territory rights and (2) Stephen Partnership would need to submit the proposed agreement for it to make that determination. (Stephen-Bailie Depo., Ex. 77 (dkt. #61-2) 18.) In a July 14, 2014, email to the Robertsons' counsel, counsel for Stephen Partnership characterized this consent requirement as the "right to veto the transfer." (Mirr Decl., Ex. 7 (dkt. #83-7) 5.) The email also advised that "ADQ would not approve of [the Robertsons] as the Territory Operator." (Id.) In response, the Robertsons and Stephen Partnership discussed restructuring the proposed deal to have M.M. Robertson purchase 99 shares of Stephen Partnership, leaving it with one share.[8] However, Stephen Partnership's counsel sent an email to Robertsons' counsel on October 16, 2014, advising that even with this change to the deal, ADQ "will challenge any transfer whereby my client is no longer in control of the territory." (Id., Ex. 8 (dkt. #83-8) 4.)

         The Robertsons' negotiations with Stephen Partnership on the prospective contract continued through November 2014, but on December 19, 2014, Stephen Partnership advised the Robertsons in writing that "[u]nfortunately due to the extreme exposure of the ADQ lawsuit, my client has decided to settle the case with ADQ and will not be selling the territorial rights to the Robertsons." (Rotchadl Decl., Ex. C (dkt. #76-3).) As a result, a final agreement between the Robertsons and Stephen Partnership was never reached.

         E. Universal's Direct Licensee ...

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