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Mrs. Fields Franchising, LLC v. MFGPC, Inc.

United States District Court, D. Utah

August 20, 2018

MRS. FIELDS FRANCHISING, LLC, a Delaware limited liability company, Plaintiff and Counterclaim-Defendant,
v.
MFGPC, INC., a California corporation, Defendant and Counterclaim-Plaintiff, and MRS. FIELDS FAMOUS BRANDS, a Delaware limited liability company, d.b.a. Famous Brands International, Third-Party Defendant.

          MEMORANDUM DECISION AND ORDER GRANTING MFGPC'S MOTION FOR SUMMARY JUDGMENT

          Jill N. Parrish, United States District Court Judge.

         Before the court are: (1) a Motion for Summary Judgment (ECF No. 99) filed by Mrs. Fields Franchising, LLC and Mrs. Fields Famous Brands, LLC (collectively, “Mrs. Fields”); (2) a Motion for Leave to File Amended Complaint (ECF No. 101) filed by MFGPC; (3) a Motion Under Rule 56(d) to Defer or Deny Consideration of Defendants' Motion for Summary Judgment (ECF No. 102) filed by MFGPC; (4) a Request for a Status and Scheduling Conference (ECF No. 103) filed by MFGPC; and (5) a Motion for Summary Judgment (ECF No. 120) filed by MFGPC.

         I. INTRODUCTION

         This is a contract case. MFGPC and Mrs. Fields entered into a Licensing Agreement. MFGPC received a license to manufacture and sell prepackaged popcorn bearing the “Mrs. Fields” trademark. In exchange, Mrs. Fields received royalties. The parties performed under the Agreement for over a decade.

         In the eleventh year, Mrs. Fields purported to terminate the Agreement, citing MFGPC's failure to pay a “Guaranteed Royalty.” But MFGPC had paid the Guaranteed Royalty in full, so MFGPC informed Mrs. Fields that the termination was ineffective. Mrs. Fields never responded and instead filed suit.

         Mrs. Fields' lawsuit sought a declaration that it had properly terminated the Agreement. MFGPC asserted a counterclaim for breach of contract. MFGPC alleged that Mrs. Fields' attempted termination was without basis and therefore constituted a repudiation of the Agreement.

         Mrs. Fields moved to dismiss the counterclaim, and the court granted the motion. Because the court held that MFGPC failed to state a claim for breach of contract, Mrs. Fields moved to dismiss its complaint as moot. The court granted the motion and dismissed Mrs. Fields' complaint.

         MFGPC appealed, arguing, among other things, that the court erred when it dismissed the claim for breach of contract. The Tenth Circuit agreed, reversing the dismissal of the claim for breach of contract and remanding the case for further proceedings. On remand, MFGPC's counterclaim for breach of contract is the only remaining claim.

         Both parties have moved for summary judgment. Mrs. Fields argues that the undisputed facts establish that it properly terminated the Agreement. MFGPC contends that the undisputed facts establish the opposite: that the termination was without basis and therefore constituted a repudiation of the Agreement.

         II. UNDISPUTED FACTS AND PROCEDURAL BACKGROUND

         On April 30, 2003, Mrs. Fields, through a predecessor entity, entered into a Trademark Licensing Agreement with LHF, Inc. Under the Agreement, LHF obtained a license to develop, manufacture, package, distribute, and sell prepackaged popcorn products bearing the “Mrs. Fields” trademark. Christopher Lindley executed the Agreement on behalf of LHF. On June 30, 2003, LHF assigned its right and obligations under the Agreement to MFGPC-another entity owned and operated by Mr. Lindley.

         1. The Initial Term, the Guaranteed Royalty, and Running Royalties

         The Agreement provides for an “Initial Term” of five years. The Initial Term began on April 30, 2003. At the end of the Initial Term, the Agreement automatically renewed for successive five-year terms if certain conditions were met. These terms are called “Option Periods.”

         During the Initial Term, MFGPC was required to pay Mrs. Fields a “Guaranteed Royalty.” Section 6(a) of the Agreement defines the Guaranteed Royalty as four guaranteed payments due at the end of the second, third, fourth, and fifth years of the Initial Term. The schedule for payment of the Guaranteed Royalty is as follows:

Year 1:
$0.00
Year 2:
$50, 000
Year 3:
$100, 000
Year 4:
$100, 000
Year 5:
$100, 000 [1]

         During the Initial Term and all Option Periods, MFGPC was required to pay “Running Royalties.” Running Royalties are “5% of Net Sales of Royalty Bearing Products.”[2] MFGPC was required to remit these royalties to Mrs. Fields “on the last day of the month following the end of each calendar quarter covered by the Agreement.”

         Section 7 provides that “[i]f [MFGPC] fails to generate royalties sufficient to meet its Guaranteed Royalty as set forth in Section 6(a) . . ., [Mrs. Fields] shall have the option to receive additional Running Royalties from [MFGPC] in the manner and in an amount equal to the Running Royalties that would have been paid had [MFGPC] met its Guaranteed Royalty, and if paid, [MFGPC] shall retain the exclusive license described herein.”

         As noted above, at the end of the Initial Term, the Agreement would automatically renew if certain conditions were met. Specifically, Section 16(a) provides:

The initial term of this Agreement shall begin upon the execution hereof and shall continue for a period of sixty (60) months. So long as [MFGPC] is not in material default and subject to Section 7, has met and/or paid Running Royalties based on its Guaranteed Royalty as described in paragraph 6(a) hereof, this Agreement would then automatically renew for successive five year terms (“Option Periods”) until such time as either party terminates the Agreement upon no more [sic] than twenty (20) days prior written notice to the other party.[3]

         Both parties agree that the Agreement automatically renewed at the end of the Initial Term.

         2. Termination Provisions

         The resolution of this lawsuit turns on the Agreement's termination provisions. Section 16(b) of the Agreement provides the only grounds on which either party could terminate the Agreement. There are six paragraphs in Section 16(b). The first three are relevant here:

(i) If [MFGPC] defaults in the payment of any Running Royalties then this Agreement and the license granted hereunder may be terminated upon notice by [Mrs. Fields] effective thirty (30) days after receipt of such notice, without prejudice to any and all other rights and remedies [Mrs. Fields] may have hereunder or by law provided, and all rights of [MFGPC] hereunder shall cease.
(ii) If [MFGPC] fails to pay its Guaranteed Royalty as set forth in paragraph 6(a) hereof, then, this Agreement and the license granted hereunder may be terminated upon receipt of such notice by [MFGPC], without prejudice to any and all other rights and remedies [Mrs. Fields] may have hereunder or by law provided, and all rights of [MFGPC] shall cease.
(iii) If [MFGPC] fails to perform in accordance with any material term or condition of this Agreement (other than described in paragraph 16(b)(i) and (ii) above) and such default continues unremedied for thirty (30) days after the date on which [MFGPC] receives written notice of default, unless such remedy cannot be accomplished in such time period and [MFGPC] has commenced diligent efforts within such time period and continues such efforts until the remedy is complete, then this Agreement may be terminated upon notice by [Mrs. Fields], effective upon receipt of such notice, without prejudice to any and all other rights and remedies [Mrs. Fields] may have hereunder or by law provided.

         In summary, Section 16(b)(i) covers termination based on MFGPC's failure to pay Running Royalties, Section 16(b)(ii) covers termination based on MFGPC's failure to pay the Guaranteed Royalty, and Section 16(b)(iii) covers termination based on MFGPC's failure to perform any other “material term or condition” of the Agreement. Notably, before Mrs. Fields could terminate the Agreement under Section 16(b)(iii), it was required to give MFGPC “written notice of default” and an opportunity to cure.

         3. The First Two Option Periods

         MFGPC paid the Guaranteed Royalty in full during the Initial Term. In June 2008, at the end of the Initial Term, the Agreement automatically renewed for a five-year Option Period that ran from June 1, 2008 to April 30, 2013. The parties continued to perform under the Agreement, and it automatically renewed for another five-year Option Period in June 2013 that ran from June 1, 2013 to April 30, 2018. Indeed, an employee from Mrs. Fields sent MFGPC an email on June 21, 2013, in which the employee wrote, “Your agreement just Auto-Renewed for another 5 years.”

         4. The Notice of Termination

         On December 22, 2014, counsel for Mrs. Fields, Avery Samet, sent a letter to MFGPC. The letter states, in relevant part:

Our records indicate that MFGPC . . . has paid royalties of merely $5, 206.22 since the fourth quarter of 2011 and no payments whatsoever since the third quarter of 2012. Pursuant to section 6(a) of the [Agreement], MFGPC was required to pay [Mrs. Fields] a Guaranteed Royalty of $100, 000 a year.
Pursuant to Section 16 of the [Agreement], the Agreement would not automatically renew at the conclusion of its five-year term in 2012 if, among other things, MFGPC had failed to remit its Guaranteed Royalty to [Mrs. Fields]. Because of MFGPC's failure to do so, the Agreement did not renew, the license terminated and MFGPC lost any right to use the Mrs. Fields mark or to represent itself as a licensee of Mrs. Fields.
To the extent that MFGPC claims that the Agreement did renew, notwithstanding the failure to pay Guaranteed Royalties, the Agreement is hereby terminated pursuant to Section 16(b)(ii) for MFGPC's failure to pay Guaranteed Royalties for periods beyond July 2012.

         This letter was inaccurate for a number of reasons. First, there was no requirement that MFGPC pay “a Guaranteed Royalty of $100, 000 a year.” The Guaranteed Royalty is defined as four payments that MFGPC was required to make during the Initial Term. Second, the second Option Period ended in 2013, not 2012. Third, the Agreement did automatically renew at the end of the second Option Period, and MFGPC therefore retained a license to manufacture and sell “Mrs. Fields” branded popcorn. Fourth, the Agreement could not be terminated “pursuant to Section 16(b)(ii) [based on] MFGPC's failure to pay Guaranteed Royalties, ” because MFGPC had paid the Guaranteed Royalty in full.

         5. MFGPC's Response

         On January 19, 2015, counsel for MFGPC, Carolyn Dye, responded to Mrs. Fields' termination letter. Ms. Dye explained that the letter was inaccurate:

[Y]our letter is inaccurate because there is no requirement of any Guaranteed Royalties beyond the initial term
. . .
The words “initial term” are defined in the License as the first five years of the agreement. Following that definition, Section 6(a) clearly provides that Guaranteed Royalties were to be paid only during the “Initial Term” and the payment schedule in Section 6(a) follows that definition.
. . .
As of August 15, 2008, 100% of the . . . Guaranteed Royalty due [Mrs. Fields] by MFGPC during the Initial Term had been [paid] in full.
. . .
You also suggest in your letter that because MFGPC failed to pay Guaranteed Royalties beyond July 2012, the License was actually terminated at that time. Again, you misread the contract. Nothing in Section 16 . . ., which discusses the “Terms and Termination” aspects of the Agreement, can be read to permit a termination on that basis. Because Guaranteed Royalties were fully paid, the License automatically renewed (and without any notice required for renewal) every five years unless there has been a default of another kind, and even in that event, there must be a required notice and opportunity to cure pursuant to Section 16(b)[iii].

         Ms. Dye also explained that Mrs. Fields could not terminate the Agreement based on MFGPC's failure to pay Running Royalties, even though Mrs. Fields had not attempted to do so. She noted that, during the course of the parties' relationship, Mrs. Fields had purchased prepackaged popcorn from MFGPC and that, from time to time, the parties would offset the amount Mrs. Fields owed for the popcorn against the amount MFGPC owed in Running Royalties. Ms. Dye, in her letter, explained that Mrs. Fields owed MFGPC $70, 222.60 for popcorn and that MFGPC currently owed Mrs. Fields $43, 562.17 in Running Royalties. Accordingly, Ms. Dye notified Mrs. Fields that MFGPC was owed the difference: $26, 660.43. Ms. Dye requested a response on or before January 26, 2015 and ...


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