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Pinnacle Pizza Co., Inc. v. Little Caesar Enterprises

March 22, 2010


Appeal from the United States District Court for the District of South Dakota.

The opinion of the court was delivered by: Smith, Circuit Judge

Submitted: October 22, 2009

Before RILEY, SMITH, and GRUENDER, Circuit Judges.

Pinnacle Pizza Company, Inc. ("Pinnacle"), a franchisee, brought suit against Little Caesar Enterprises, Inc. (LCE), the franchisor, alleging, inter alia, breach of the corporation's franchise agreement and violation of the South Dakota Franchise Act (SDFA). Pinnacle also sought to cancel LCE's federal trademark for the phrase "HotN-Ready." LCE counterclaimed, alleging breach of the franchise agreement on the part of Pinnacle. The district court*fn1 granted LCE summary judgment on all claims. On appeal, Pinnacle argues that the district court erred in granting LCE's motions for summary judgment. Specifically, Pinnacle argues that the district court erred in finding that (1) LCE did not breach the franchise agreement; (2) LCE did not violate the SDFA; (3) LCE did not obtain its federal trademark through fraudulent means; and (4) Pinnacle did breach the franchise agreement by challenging LCE's trademark application. We affirm.

I. Background

Pinnacle is a South Dakota corporation formed in 1991 by Jim Fischer and Mike Nichols to own and operate Little Caesar's pizza franchises in Sioux Falls, South Dakota. Pinnacle entered into a franchise agreement with LCE, LC Trademarks, Inc., and Ilitch Holdings, Inc. for each franchise store.*fn2 The three franchise agreements are substantially similar and comprise the contract at issue.

The relevant portion of the franchise agreement governs "Advertising." Section XII.D states:

Franchise Owner, at its sole expense, may utilize LITTLE CAESAR's television and radio advertising materials (for its sole benefit or jointly with other LITTLE CAESAR Franchisees), by dealing directly with LITTLE CAESAR's advertising agency. LITTLE CAESAR may not use the original advertising materials created by Franchise Owner without its prior written consent.

(emphasis added).

The parties dispute the right to use the phrase "Hot-N-Ready" in pizza restaurant advertising. Pinnacle asserts that Fischer coined the phrase after receiving inspiration following a LCE convention in Las Vegas. This concept and phrase, Pinnacle asserts, turned around Pinnacle's and ultimately LCE's economic fortunes. Pinnacle's stores, consistent with LCE franchise and company stores nationwide, struggled financially during the mid-1990s. To counter this downturn, Pinnacle, via Fischer, began a new advertising strategy that guaranteed customers a hot, medium pepperoni pizza for $4 within five minutes of request every Tuesday. Pinnacle first advertised this offer on May 7, 1997, in a newspaper advertisement coupled with the phrase "Hot N' Ready."*fn3 Pinnacle asserts that the "Hot-N-Ready" concept was extremely successful and rescued its business.

Pinnacle contends that other LCE franchise stores began to copy the "Hot-N-Ready" concept after observing Pinnacle's success. Pinnacle avers that LCE breached the franchise agreement and wrongfully used Pinnacle's "original advertising materials" without its consent.

LCE, on the other hand, claims that the origin of the "Hot-N-Ready" concept predates Fischer's asserted inspiration. LCE represents that beginning in 1992, it encouraged franchisees to hold "Customer Appreciation Days" once per quarter, during which ready-for-pick-up pizzas were sold at a discounted price. Although not specifically called "Hot-N-Ready," these promotions embodied the same components as Pinnacle's later promotion. LCE argues that Fischer derived his "Hot-N-Ready" concept by adapting portions of sales presentations made by LCE, as well as other franchisees, that contained components of the concept.

Neither party disputes that Fischer and Pinnacle readily shared this "Hot-N-Ready" concept with other franchisees and in fact encouraged its use by certain franchisees. Pinnacle neither claimed ownership of the concept when it first shared the phrase nor restricted those franchisees with whom it shared the idea from further spreading the phrase. For instance, Scott Stewart, an LCE franchisee, began sharing "Hot-N-Ready" success stories with LCE and other franchisees in late 1997. Stewart wrote a September 25, 1997 memorandum to LCE describing the "Hot-N-Ready" program as "the best local promo we have done in a long time." Subsequently, LCE distributed Stewart's memo in a booklet of marketing ideas to all franchisees. Stewart also gave a presentation regarding the "Hot-N-Ready" concept in October 1997 at a LCE workshop in Nashville, Tennessee.

Following Stewart's presentation, LCE continued to promote the "Hot-N-Ready" idea to all of its franchisees. By 1999, LCE provided all franchisees with advertising materials which featured the "Hot-N-Ready" phrase. In June of 2000, LCE sent franchisees, including Pinnacle, a "Hot-N-Ready" implementation guide. In late 2000, a LCE executive visited Fischer in Sioux Falls and told Fischer that LCE planned on turning the "Hot-N-Ready" concept into a national program.

The program was unquestionably successful, and according to Pinnacle, transformed LCE from a company loaded with $200 million in debt into one brimming with $200 million in assets. In 2002, LCE filed an application with the United States Patent and Trademark Office (USPTO) to register the phrase "Hot-N-Ready" as a trademark. In that application, LCE indicated that the date of first use of the mark was May 6, 1997-the date Pinnacle submitted its first newspaper advertisement for "Hot-N-Ready" (the advertisement was actually published the following day). LCE ultimately obtained a federal service mark for "Hot-N-Ready."

Pinnacle filed suit against LCE alleging a variety of claims stemming from LCE's use of the "Hot-N-Ready" concept. Pinnacle asserted state law claims for (1) breach of contract (for violation of the franchise agreement); (2) violation of the SDFA (because Pinnacle argued that LCE engaged in "unfair and inequitable" conduct through its use of the "Hot-N-Ready" phrase); (3) breach of fiduciary duty and confidential relationship; and (4) violation of South Dakota trademark law. Finally, Pinnacle asserted a federal claim to cancel LCE's registered trademark with the USPTO. LCE filed a counterclaim for breach of contract, arguing that by challenging the validity of LCE's registered trademark, Pinnacle breached the franchise agreement.

The district court granted summary judgment in favor of LCE on a number of Pinnacle's claims. First, the court granted LCE's motion for summary judgment against Pinnacle's breach of contract claim. The court did so after determining that "original advertising materials" in the franchise agreement unambiguously refers to only the tangible advertisements that Pinnacle created, not the underlying concepts or ideas that such advertisements promote, or the slogans contained in such advertisements that describe the underlying concepts.

Because the district court found that LCE did not breach its contract through the use of the "Hot-N-Ready" phrase, the court also found that LCE did not breach its obligations under the franchise agreement. Specifically, the district court found that LCE did not act in an "unfair and inequitable" manner under the SDFA and thus granted LCE's motion for summary judgment on Pinnacle's claim under the SDFA.

The district court also granted LCE's motion for summary judgment to dismiss Pinnacle's claim to cancel LCE's trademark application because the court found that Pinnacle did not set forth any evidence that LCE knowingly made false, material representations of fact in connection with its attempt to trademark the phrase "Hot-N-Ready."

Next, the district court awarded LCE nominal damages and denied Pinnacle's motion for summary judgment to dismiss LCE's counterclaim for breach of contract.

The district court found that the franchise agreement contained a covenant not to sue that applies to any contest to the validity or ownership of LCE's proprietary marks, whether made in good faith or in bad faith. The district court found that the undisputed facts ...

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