PATEL v. DUNKIN' DONUTS

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Docket Number

No. 85-2092

Attorney(S)

Arthur R. Ehrlich, of Goldman Marcus, of Chicago, for appellants. Gary Senner, Jeffrey Lennard, and Steven M. Levy, all of Sonnenschein, Carlin, Nath Rosenthal, of Chicago, for appellees.

Judges

JUSTICE MURRAY delivered the opinion of the court:

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Smart Summary

Factual and Procedural Background

This case arises from a dispute between plaintiffs Amrit J. Patel and A.J. Patel Food Service, Inc., franchisees of Dunkin' Donuts, and defendants Dunkin' Donuts of America, Inc. and Dunkin' Donuts of Illinois, Inc. Plaintiffs have operated a Dunkin' Donuts franchise at 3132 West Devon Avenue in Chicago since 1975 under a franchise agreement granting them the right to operate at one specific location. The agreement also expressly reserved to defendants the right to operate or franchise other Dunkin' Donuts shops at locations and on terms of their choosing.

In 1985, plaintiffs learned that defendants planned to open a new Dunkin' Donuts franchise within one mile of plaintiffs' location, at Rosemont and Western avenues. Plaintiffs requested a grievance panel review, which recommended against the new location, but the recommendation was nonbinding. Defendants proceeded with construction.

Plaintiffs filed suit seeking a preliminary injunction to prevent the new franchise, alleging breach of the franchise agreement and an implied covenant of good faith and fair dealing. The trial court granted defendants' motion for judgment on the pleadings and denied plaintiffs' injunction motion, finding no contractual bar to the new franchise, that plaintiffs' claims were speculative, and that damages could be pursued later. Plaintiffs appealed.

Legal Issues Presented

Whether the trial court erred in granting judgment on the pleadings when plaintiffs alleged a material issue of fact regarding damages.
Whether plaintiffs were entitled to a preliminary injunction to prevent defendants from opening a competing franchise within one mile, based on breach of the franchise agreement or an implied covenant of good faith and fair dealing.
Whether the implied covenant of good faith and fair dealing can be interpreted to prohibit defendants from opening a new franchise location proximate to plaintiffs' franchise, despite an express contractual provision allowing defendants to open other shops at their discretion.

Arguments of the Parties

Appellants' Arguments

A material issue of fact exists as to plaintiffs' damages, so judgment on the pleadings was improper.
The loss of future business and profits is not speculative and justifies injunctive relief.
The breach of the implied covenant of good faith and fair dealing arises from defendants' conduct denying plaintiffs the benefits of their franchise agreement, not from a claim to territorial exclusivity.

Appellees' Arguments

Defendants did not breach the implied covenant because the franchise agreement expressly grants them discretion to open new shops anywhere.
Because the agreement permits defendants' actions, plaintiffs' complaint fails to state a cause of action and they are not entitled to injunctive relief.
Plaintiffs have an adequate remedy at law for damages, making injunctive relief inappropriate.

Table of Precedents Cited

Precedent	Rule or Principle Cited For	Application by the Court
Bank Trust Co. v. Arnold N. May Builders, Inc., 90 Ill. App.3d 454 (1980)	A court cannot grant judgment on the pleadings if a material issue of fact exists.	Confirmed that judgment on the pleadings admits all well-pleaded facts and is inappropriate if factual disputes exist.
Walker v. State Board of Elections, 65 Ill.2d 543 (1976)	A motion for judgment on the pleadings admits all well-pleaded facts of the opposing party.	Reiterated that factual allegations must be accepted as true for the motion.
Sadat v. American Motors Corp., 104 Ill.2d 105 (1984)	To obtain injunctive relief, the complaint must clearly establish a right, inadequacy of legal remedy, and irreparable injury.	Applied to determine that plaintiffs failed to plead facts establishing a clear right to injunction.
Dayan v. McDonald's Corp., 125 Ill. App.3d 972 (1984)	Implied covenant of good faith and fair dealing is recognized absent express contrary provisions.	Confirmed existence of implied covenant but noted it cannot override express terms of the contract.
Snyder v. Howard Johnson's Motor Lodges, Inc., 412 F. Supp. 724 (S.D. Ill. 1976)	Implied covenant of good faith does not extend to create noncompetition covenants absent contractual language.	Held that defendants’ express contractual discretion precluded implying a covenant against competition.
Disher v. Fulgoni, 124 Ill. App.3d 257 (1984)	Illinois courts favor fair competition and disfavor restraints of trade.	Supported the court’s reluctance to impose territorial exclusivity absent contractual language.
Konicki v. Oak Brook Racquet Club, Inc., 110 Ill. App.3d 217 (1982)	Noncompetition covenants require reasonable time and geographic limits and protectable proprietary interests.	Applied to conclude plaintiffs lacked a protectable proprietary interest under the franchise agreement.
Prudential Insurance Co. v. McCurry, 143 Ill. App.3d 222 (1986)	Recognizes exclusive territory clauses require clear contractual language.	Referenced to illustrate that plaintiffs were effectively seeking to insert such a clause where none existed.

Court's Reasoning and Analysis

The court acknowledged that judgment on the pleadings is improper if material facts are disputed and that all well-pleaded facts must be taken as true. While plaintiffs alleged damages from defendants’ actions, the court held that mere damage allegations do not ipso facto entitle plaintiffs to injunctive relief. A complaint seeking injunction must clearly establish a right to relief, inadequacy of legal remedies, and irreparable harm, which plaintiffs failed to do.

The central factual dispute concerned whether defendants breached an implied covenant of good faith and fair dealing by opening a competing franchise nearby. The court emphasized that although such a covenant is implied in contracts absent express contrary terms, the franchise agreement expressly granted defendants sole discretion to open other Dunkin' Donuts shops at locations and terms of their choosing. This express provision negated any implied covenant restricting competition.

The court relied on precedent rejecting the extension of implied covenants to create noncompetition obligations where the contract addresses the issue, as in Snyder v. Howard Johnson's. Additionally, Illinois law favors free competition and enforces noncompetition clauses only under strict conditions, which plaintiffs’ agreement did not meet. Plaintiffs’ attempt to impose an exclusive territory was unsupported by the contract and thus legally insufficient. The grievance panel's recommendation was nonbinding and did not create proprietary rights.

Consequently, the court found plaintiffs’ complaint failed to state a cause of action for breach of contract or implied covenant and affirmed the trial court’s judgment on the pleadings and denial of the injunction.

Holding and Implications

The appellate court affirmed the trial court's judgment on the pleadings and denial of plaintiffs' motion for a preliminary injunction.

The decision directly results in dismissal with prejudice of plaintiffs' claim for injunctive relief preventing defendants from opening a new franchise within one mile. The court explicitly left open plaintiffs' right to pursue damages in a future action. No new legal precedent was established; rather, the court reinforced that express contractual provisions govern franchisee and franchisor rights and that courts will not imply restrictive covenants inconsistent with the parties' agreement. The ruling underscores the principle that injunctive relief requires clear, precise allegations of rights and irreparable harm beyond speculative damages.

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AMRIT J. PATEL et al., Plaintiffs-Appellants, v. DUNKIN' DONUTS OF AMERICA, INC., et al., Defendants-Appellees.

JUSTICE MURRAY delivered the opinion of the court:

This action is brought by plaintiffs Amrit J. Patel and A.J. Patel Food Service, Inc., a franchisee of defendants, Dunkin' Donuts of America, Inc., and Dunkin' Donuts of Illinois, Inc. Plaintiffs are appealing from a trial court order granting judgment on the pleadings in favor of defendants and denying plaintiffs' motion for a preliminary injunction. Plaintiffs had sought to enjoin defendants from opening a Dunkin' Donuts franchise within one mile of plaintiffs' business on the basis that defendants had breached its franchise agreement with plaintiffs.

The facts are undisputed. Plaintiffs have operated a Dunkin' Donuts franchise at 3132 West Devon in Chicago since 1975. Their franchise agreement with defendants provides in part:

"DUNKIN' DONUTS hereby grants to the FRANCHISEE and the FRANCHISEE accepts a franchise to operate a donut shop utilizing the DUNKIN' DONUTS SYSTEM at one location only, such location to be 3132 West Devon Avenue Chicago Illinois 60645, or at a location to be mutually agreed on in writing * * *."

The agreement also states:

"DUNKIN' DONUTS, in its sole discretion, has the right to operate or franchise other DUNKIN' DONUTS SHOPS under, and to grant other licenses in, and to, any or all of the PROPRIETARY MARKS, in each case on such terms and conditions as DUNKIN' DONUTS deems acceptable."

The agreement also contains an integration clause which provides that the document constitutes the full and complete agreement between the parties.

In 1985 plaintiffs learned of defendants' plans to construct a new Dunkin' Donuts franchise at Rosemont and Western avenues for a third-party franchisee. The Western location is within one mile of plaintiffs' franchise. Subsequently, and pursuant to their franchise agreement, plaintiffs requested a grievance panel to consider the merits of the new location. In March 1985 the panel recommended that defendants not develop the Western location. That decision was nonbinding on the parties, and defendants informed plaintiffs that they were proceeding with construction of the Western shop.

In April plaintiffs filed their complaint seeking an injunction and other relief asserting that defendants' actions were a breach of the franchise agreement and an implied covenant of fair dealing and good faith. Plaintiffs alleged that the new franchise would create a loss of future business and profits for plaintiffs' business. In June 1985 the trial court granted defendants' motion for judgment on the pleadings and denied plaintiffs' motion for a preliminary injunction. The court so ruled after noting that the franchise agreement did not bar defendants from building a new franchise proximate to plaintiffs' shop, that a franchise offering circular was not integrated into the franchise agreement, and held that plaintiffs had not stated a cause of action because their suit was anticipatory and speculative and damages could be recovered in a future action at law. The court dismissed plaintiffs' cause with prejudice, but specifically did not rule on their right to bring a future action for money damages.

On appeal plaintiffs contend that judgment on the pleadings should not have been granted when a question of material fact existed as to plaintiffs' damages. Furthermore, they argue that the loss of future business or profits is not so speculative so as to preclude injunctive relief. Plaintiffs also assert that, in alleging defendants' breach of the implied covenant of good faith and fair dealing, they are not claiming entitlement to territorial exclusivity. Rather, the breach arises from defendants' conduct by denying plaintiffs the fruits of their franchise agreement. Defendants contend that they did not breach the covenant of good faith since the agreement expressly gave them the right to open a new shop where they wished. Defendants further argue that, as a result of the agreement, plaintiffs' complaint did not state a cause of action, and therefore, plaintiffs were not entitled to an injunction, especially where they had a remedy at law for damages.

For the following reasons, this court affirms the decision of the trial court.

• 1-3 Plaintiffs correctly point out that a court cannot enter a judgment on the pleadings where a material issue of fact exists. ( Bank Trust Co. v. Arnold N. May Builders, Inc. (1980), 90 Ill. App.3d 454, 456, 413 N.E.2d 183, 184.) They are also correct in their contention that a motion for judgment on the pleadings admits all facts well pleaded by the opposing party. ( Walker v. State Board of Elections (1976), 65 Ill.2d 543, 553, 359 N.E.2d 113, 117.) Plaintiffs assert that their complaint raises an issue of fact as to their damages. However, the mere fact that they will be damaged by defendants' conduct does not ipso facto entitle them to injunctive or other relief. A well-pleaded complaint for an injunction must contain on its face a clear right to relief and assert facts which establish the right to such relief in a positive, certain, and precise manner. Furthermore, factual allegations must specifically establish the inadequacy of the legal remedy and the irreparable injury plaintiff will suffer without an injunction. Sadat v. American Motors Corp. (1984), 104 Ill.2d 105, 116, 470 N.E.2d 997, 1002.

• 4 Although plaintiffs have adequately charged damages, they have failed to show any right to either damages or an injunction. The only issue of fact suggested by plaintiffs is the assertion of an implied covenant of good faith and fair dealing in the franchise agreement. According to plaintiffs, that implied covenant would prohibit defendants from erecting a Dunkin' Donuts shop at a location that would result in injury to plaintiffs' business and future profits, and in so doing, defendants have breached the covenant.

As a matter of law, there is no breach of an implied covenant shown by the pleadings. It is true that a covenant of good faith and fair dealing is implied in every contract as a matter of law, absent an express provision to the contrary. Dayan v. McDonald's Corp. (1984), 125 Ill. App.3d 972, 989-90, 466 N.E.2d 958, 971.

However, the court in Snyder v. Howard Johnson's Motor Lodges, Inc. (S.D. Ill. 1976), 412 F. Supp. 724, refused to extend the implied covenant of fair dealing to imply a covenant against competition in a licensing agreement. The Snyder court noted that the basis for an implied covenant is that the parties would have expressed that which the law implies had they thought of it or felt it necessary. ( 412 F. Supp. 724, 727-28.) In the case at bar, the parties did address the competition issue in the franchise agreement by giving defendants the right to establish a new business at its own discretion and on its own terms. Thus, there is no way the implied covenant of good faith can be expanded to bar defendants from opening a new franchise within one mile of plaintiffs' business. The Snyder court also, in discussing the defendant's operation of a restaurant connected with plaintiff's lodge in a substandard manner, stated that where the fruits of a contract to one party depend on the efforts of another, a covenant of fair dealing can be implied. ( 412 F. Supp. 724, 728.) That is inapposite to the situation in the present case where defendants' efforts under the agreement involve doing things such as supplying instructions and products to plaintiffs.

Illinois courts favor fair competition and do not encourage restraints of trade. ( Disher v. Fulgoni (1984), 124 Ill. App.3d 257, 261, 464 N.E.2d 639, 642.) Noncompetition covenants will be enforced only if certain strident criteria are met, including reasonable chronological and geographical restrictions as well as the existence of a proprietary interest to be protected by the restriction. ( Konicki v. Oak Brook Racquet Club, Inc. (1982), 110 Ill. App.3d 217, 224, 441 N.E.2d 1333, 1338.) Contrary to plaintiffs' argument, they, in reality, are attempting to insert an exclusive-territory clause into the franchise agreement. (See Prudential Insurance Co. v. McCurry (1986), 143 Ill. App.3d 222, 227-28, 492 N.E.2d 1026.) They seek to enjoin defendants from franchising a competitor within one mile of their business. Plaintiffs' complaint fails to show the necessary protectable, proprietary interest since their franchise agreement contains no geographical or time restraints regarding the establishment of another Dunkin' Donuts franchise. In fact, the agreement expressly grants one location to plaintiffs and reserves, without restriction, defendants' right to operate or franchise other shops on such terms as defendants deem appropriate. Rather than giving any proprietary rights in other locations, the agreement rejects such rights. Rather than restricting defendants' establishment of Dunkin' Donuts shops within defined geographical and chronological limits, the agreement authorizes defendants' unrestricted competition.

Plaintiffs point out that the grievance committee found that the new Western Avenue location would significantly encroach on plaintiffs' market area. There is nothing in the record indicating that the parties were contractually bound by that decision. Even if there were, the committee's decision would not give plaintiffs proprietary rights absent the stringent criteria relating to express noncompetition contracts discussed above. It is also of interest to this court that the record apparently indicates that the new shop at Western Avenue commenced operation sometime in July 1985.

In this case, the franchise agreement between plaintiffs and defendants authorized the operation of other Dunkin' Donuts shops by defendants or their franchisees without restriction as to time or place. It is also clear that plaintiffs' complaint was legally insufficient to state a cause of action for breach of an implied covenant of good faith and fair dealing. Thus, since the pleadings do not establish a proprietary right in plaintiffs' behalf, the order of the trial court granting defendants' judgment on the pleadings and denying plaintiffs' request for a preliminary injunction is affirmed.

Affirmed.

LORENZ and PINCHAM, JJ., concur.