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GREAT EARTH INTERNATIONAL FRANCHISING v. MILKS DEVELOPMENT

March 3, 2004.

GREAT EARTH INTERNATIONAL FRANCHISING CORP., Plaintiff, -against- MILKS DEVELOPMENT, et al., Defendants


The opinion of the court was delivered by: ALVIN HELLERSTEIN, District Judge

OPINION AND ORDER REGULATING CLAIMS AND PROOFS, AND STRIKING JURY DEMAND
This case stems from an attempt to enter the growing Canadian market for health products such as vitamins and dietary supplements. The parties envisioned a network of stores throughout Canada that would satisfy the popular demand for those products. What resulted instead were disappointments, acrimony and, ultimately, this lawsuit.

This case is now approaching the eve of trial, which is scheduled to begin on April 19, 2004. A final settlement conference held on September 30, 2003, was successful only in demonstrating how far apart the parties remain. With the settlement date looming, each side is eager to gain tactical advantage and to limit the scope of the other's claims. Plaintiff has renewed one earlier motion and brought a second, and defendants have added a motion of their own. Before me are these three motions: (1) plaintiffs renewed motion for summary judgment and motion in limine on defendants' fraud defense and counterclaims; (2) plaintiffs motion in limine to exclude evidence relevant to defendants' claims for lost profits; and (3) defendants' motion to strike plaintiff's demand for a jury trial. For the reasons stated below, I deny plaintiffs first motion, subject to important qualifications, grant plaintiffs second motion, and grant defendants' motion. Page 2

  I. Facts

  Plaintiff Great Earth International Franchising Corp. ("Great Earth" or "GEIFC") is an American franchisor of health and dietary supplement stores. Defendant 1039405 Ontario, Inc. ("Ontario") is a Canadian corporation which contracted, under a Master Franchise Agreement ("MFA") dated May 14, 1996 and several Additional Agreements, to become GEIFC's Master Franchisee in Ontario and to establish franchises that would sell GEIFC's products in the Canadian market. Defendants Milks Developments, Inc. ("Milks"), RGH Holdings Co. ("Gilchrest"), Edward Ricciardi, and Ted Odd (collectively, the "subfranchisees"), are Canadian subfranchisees that contracted, under Sub — Franchise Agreements signed between August 28, 1998 and September 1, 1999, to open stores for the sale of GEIFC products. One other subfranchisee, Great Earth Vitamins, Inc. ("GEV"), is not a party to the case. It is owned by the same individuals who own Ontario, and it is currently a dormant company.

  Six Great Earth stores — two run by GEV, and one by each of the other four subfranchisees — opened between 1997 and 1999. The relationship nourished for several years. In September 1999, GEV entered into a leasing agreement with Hudson Bay malls to open stores, with dozens of stores contemplated over time and four that were opened within several months. Although there were sporadic problems with deliveries during this period, particularly with shipments of product seized at the border between the United States and Canada for unspecified reasons, the parties continued the enterprise and seemed satisfied with the results. Great Earth vitamin and health supplements included such products as Super Multi Minerals, Super Hy-Vites, Whey Ahead, and Ultra Energy Vanilla and Chocolate.

  Between May and July 2000, a number of events occurred which caused a deterioration in the contractual relationship. In June 2000, a GEIFC shipment was seized at the Canadian border, again for unspecified reasons, and as a result, GEIFC stopped all shipments to defendants until near the end of August, when it resumed shipments with a reduced menu of products. Between May and July 2000. GEY and several of the subfranchisees stopped performing Page 3 some of their contractual duties, including providing GEIFC with monthly gross sales information, making payments for royalties and for products that they had received, and ordering Great Earth products. The sequences, reasons, and interrelationships underlying these various events are disputed by the parties and are not at issue in the instant motions; evidence regarding these questions will undoubtedly be presented at trial.

  Under Canadian regulations, a number of products that are available over the counter in the United States can be sold in Canada only with a prescription. These products include vitamin K, boron, chromium picolinate, ephedrine, and yohimbe bark. Defendants allege that GEIFC assured them that those of its vitamins and supplements which contained these ingredients would be reformulated to comply with Canadian law, and that the labels on the reformulated products would indicate that they did not contain any of these ingredients. In October 2000, suspicious that GEIFC was relabeling the products without actually reformulating them, defendants tested a number of GEIFC products. The tests revealed that the supposedly reformulated products contained the prohibited ingredients, even though the labels did not list them.

  By September or October 2000, the Hudson Bay stores began to close, and several of the other subfranchisees stopped ordering products. GEIFC served notice of termination on Ontario on December 1, 2000, alleging numerous breaches, including failure to open stores in accordance with the contractual schedule, failure to remit fees and to make required financial disclosures, and failure to comply with applicable laws. On the same date, GEIFC notified the subfranchisees that it had terminated Ontario under the MFA, and that the duties of the subfranchisees under the Sub — Franchise Agreements were now duties owed directly to GEIFC. Ten days later, on December 11, 2000, GEIFC served notice of termination on the subfranchisees, alleging that they had failed to pay required fees to GEIFC and that their employees were not properly trained in accordance with the Sub — Franchise Agreements; GEIFC also asserted a number of other breaches that would become grounds for termination if they were not immediately cured. Page 4 GEIFC filed a lawsuit against the subfranchisees on January 8, 2001, and against Ontario on August 5, 2002.*fn1

  II. The Contracts

  The MFA established a franchise system for the operation of retail stores to sell Great Earth products. It defined GEIFC as the Franchisor and Ontario as the Master Franchisee, responsible for establishing and maintaining such stores. The initial franchise lasted ten years, with Ontario holding two successive five — year renewal options.

  Article V of the MFA established a requirements contract for GEIFC to sell product to Ontario, and for Ontario to distribute it. Ontario was to buy all of its product from GEIFC, and, rather than have Great Earth product sold in supermarkets, pharmacies, or other more generalized stores, the product was to be sold only in Great Earth stores, specifically dedicated to selling Great Earth products. However, section 5.03(a) provided that GEIFC did not guarantee supply of product, and under section 5.09, GEIFC disclaimed liability for unavailability or delay in shipment or receipt of product for a list of reasons beyond its reasonable control.

  Ontario and the subfranchisees assumed a number of other contractual duties. They were required to advertise, with such advertising to be overseen by GEIFC. They were required to share with GEIFC their financial data, including monthly gross receipts. Under section 5.03(b), they were required to purchase all other store supplies and merchandise from GEIFC or its designated sources. They were also required to make a number of payments, including royalty fees and payments for goods received.

  Article XI contained several provisions governing lawsuits arising from the contract. Under section 11.02(a), all lawsuits were to be brought in the United States District Court for the Eastern District of New York. (These cases were brought in the Southern District of New York on Page 5 consent.) Section 11.02(b) provided that "[t]he parties agree that all disputes . . . shall be tried by the Court sitting without a jury, notwithstanding any state or federal constitutional or statutory rights or provisions." Section 11.02(c) barred punitive or exemplary damages, and section 11.04 limited the potential liability of GEIFC. Section 11.04(c) provided:
Nothing in this Agreement shall obligate Franchisor in respect of any claim by Master Franchisee or any third party (including, without limitation, . . . any claim for lost profit or for consequential damages) arising out of the use of any know — how, technical information or processes or the sale or use of any products to which this Agreement relates. . . .
Finally, section 11.14 provided that New York law was to govern the contract.

  The parties also signed, on the same day, an Additional Agreement, which further specified various royalty payments, fees for opening stores, and a schedule of stores to be opened. It also defined the territory covered by the MFA as the province of Ontario, Canada, and the first right of refusal for the city of Winnipeg. Finally, the parties also entered into an Addendum Agreement on January 15, 1998, revising the schedule of stores to be opened and the accompanying payments.

  Milks, Gilchrest, Ricciardi, and Odd each signed essentially identical Sub — Franchise Agreements. These contracts covered much of the same ground as the MFA, including the initial ten — year terms with five — year renewal options, use of trademarks, advertising, and the requirement that supplies and product be purchased from GEIFC through Ontario. They also defined additional rights and responsibilities in areas including training of employees and the selection and construction of store sites. In section 15.3, the Sub — Franchise Agreements selected New York law to control all contractual disputes, and in section 15.7(a), they selected the United States District Court for the Southern District of New York as the proper venue for all non arbitrable disputes. Section 15.7(b), like its counterpart in the MFA, stated that "[t]he parties agree that all disputes admitted to the Court pursuant to section 15.2 shall be tried to the Court sitting without a jury, notwithstanding any state or federal constitutional or statutory rights or provisions." Page 6

  III. Claims

  GEIFC sued Ontario and the subfranchisees, asserting the following eight causes of action: (1) declaratory judgment of defendants' breach of contract; (2) breach of contract; (3) an accounting; (4) trademark infringement; (5) unfair competition through trademark misappropriation; (6) permanent injunction, enjoining defendants from using the Great Earth name and trademarks; (7) tortious interference with business relationships; and (8) loss of business reputation and destruction of goodwill.

  Defendants' defenses and counterclaims include: (1) breach of contract; (2) fraud; (3) violation of the New York Franchise Act; (4) tortious interference with contractual relations; and (5) breach of warranty. In their fraud defense and counterclaim, defendants allege that GEIFC fraudulently mislabeled the franchised products. Defendants allege that they relied on the labels, and that once they discovered that the labels were false, they could no longer order the products that were fraudulently labeled. Moreover, defendants argue that they could no longer trust in the reliability of GEIFC products, making the franchises essentially valueless. On this defense and counterclaim, defendants claim they were damaged to the extent of their unrecouped investments and the cost of unsaleable merchandise. On their other claims, defendants alleged damage to the extent of their unrecouped expenses, including royalties and fees paid, and the lost profits they claim to have been able to make.

  IV. Legal Standards

  A. Motions for Summary Judgment

  A court may enter summary judgment if the "pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits . . . show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Page 7 Fed.R.Civ.P. 56(c). A "genuine issue" of "material fact" exists "if the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). When parties have filed cross — motions for summary judgment, "each party has an initial burden of informing the court of the basis for its motion and of identifying those parts of the record which it believes demonstrate the absence of a genuine issue of material fact." Vogel v. W.A. Sandri Inc., 898 F. Supp. 254, 255 (D. Vt. 1995). Although all facts and inferences therefrom are to be construed in the light most favorable to the party opposing the motion, see Harlen Associates v. Village of Mineola, 273 F.3d 494, 498 (2d Cir. 2001), the nonmoving party must raise more than just "metaphysical doubt as to the material facts," Matsushita Electric Industrial Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986). "[M]ere speculation and conjecture is insufficient to preclude the granting of the motion." Harlen, 273 F.3d at 499. "If the evidence is merely colorable or is not significantly probative, summary judgment may be granted." Anderson, 477 U.S. at 249-50 (citations omitted).

  B. Motions In Limine

  "The purpose of a motion in limine is to allow the trial court to rule in advance of trial on the admissibility and relevance of certain forecasted evidence." United States v. Paredes, 176 F. Supp.2d 192, 193 (S.D.N.Y. 2001). The Supreme Court has explained that "[a]lthough the Federal Rules of Evidence do not explicitly authorize in limine rulings, the practice has developed pursuant to the district court's inherent authority to manage the course of trials." Luce v. United States, 469 U.S. 38, 41 n.4 (1984); see also Palmieri v. Defaria, 88 F.3d 136. 141 (2d Cir. 1996) (approving the practice). In ruling on a motion in limine, a court may exclude evidence which is "clearly inadmissible on all potential grounds." Parades, 176 F. Supp.2d at 193. Because of its posture, an in limine ruling may be reviewed at trial, and "the district judge is free, in the exercise of sound judicial discretion, to alter a previous in limine ruling." Luce, 469 U.S. at 41-42. While "dismissing claims is not the prototypical purpose of a motion in limine," such motions have Page 8 sometimes been addressed on the ...


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