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TRAVELODGE HOTELS, INC. v. ELKINS MOTEL ASSOCIATES

October 17, 2005.

TRAVELODGE HOTELS, INC., a Delaware Corporation, Plaintiff,
v.
ELKINS MOTEL ASSOCIATES, INC., a West Virginia Corporation; and ROGER FUSSELL, an individual, Defendants.



The opinion of the court was delivered by: WILLIAM WALLS, District Judge

OPINION

Plaintiff Travelodge Hotels, Inc. ("Plaintiff" or "THI") moves for summary judgment on the First, Third, Fifth, and Seventh Counts of its First Amended Verified Complaint (the "Complaint") and seeks dismissal of Defendants Elkins Motel Associates, Inc. ("EMA") and Roger Fussell's ("Fussell") (together, the "Defendants") Counterclaims. Plaintiff states that if it is granted summary judgment on these claims, it will dismiss Counts Two, Four, and Six of the Complaint. The motion is decided without oral argument pursuant to Fed.R.Civ.P. 78. The motion is granted.

FACTS AND PROCEDURAL BACKGROUND

  The following facts are undisputed unless otherwise noted: THI is one of the largest guest lodging facility franchise systems in the United States, comprised of various federally-registered trade names, service marks, logos and derivations thereof (the "Travelodge marks"). THI does not own or operate any hotels: it licenses its trademarks to franchisees who own and operate the hotels under the Travelodge name. THI has the exclusive right to sublicense the Travelodge marks and its distinctive franchise system, and has invested a substantial effort over a long period of time to develop consumer recognition of the Travelodge marks.

  Defendant EMA is a West Virginia corporation with its principal place of business at the guest lodging facility in Elkins, West Virginia. Defendant Fussell is the sole shareholder of EMA. Fussell built the lodging facility, and has operated it since 1983 both as an independent facility and as a franchisee.

  On or about October 13, 2000, THI entered into a License Agreement (the "License Agreement") with EMA for the operation of a 63-room lodging facility located in Elkins, West Virginia. Pursuant to section 5 of the License Agreement, EMA was obligated to operate a Travelodge guest lodging facility for a 15-year term, during which time EMA would be permitted to use the Travelodge marks. Under section 7 and schedule C of the License Agreement and section 2 of the Addendum to the License Agreement, EMA was required to make certain periodic payments to THI for royalties, service assessments, taxes, interest, reservation system user fees, annual conference fees and other fees (collectively, the "recurring fees"). Section 7.3 of the License Agreement states that interest would accrue at the rate of 1.5% per month on all payments that became past due. Section 11.2 permits THI to terminate the License Agreement with notice to EMA for various reasons, including EMA's 1) failure to pay any amount owed to Plaintiff under the license agreement; 2) failure to remedy any other default of its obligations or warranties under the agreement within 30 days of receipt of written notice from Plaintiff; or 3) receipt of two or more notices of default in any one year period, regardless of whether the defaults were cured. Section 12.1 states that in the event THI terminates the License Agreement pursuant to section 11.2, EMA would pay liquidated damages to THI in accordance with a specified formula. Section 7 of the Addendum specifically set liquidated damages at $1,000.00, multiplied by the number of guest rooms at the facility, 63, for a total of $63,000.00. Section 13 provides that if the License Agreement is terminated, EMA must immediately cease using the Travelodge marks and reimburse THI for any costs associated with removal of THI's signage. With regard to legal matters, section 17.4 directs that "[t]he non-prevailing party will pay all costs and expenses, including reasonable attorneys' fees, incurred by the prevailing party to enforce this Agreement or collect amounts owed under this Agreement." (Cox Aff. at Ex. A).

  THI and Fussell also signed a Guaranty Agreement (the "Guaranty") effective as of the date of the License Agreement. According to the terms of the Guaranty, Fussell agreed that upon default of the License Agreement, he would "immediately make each payment and perform or cause Licensee to perform, each unpaid or unperformed obligation of licensee under the Agreement." (Cox Aff. at Ex. C). Under the Guaranty, Fussell also agreed to pay the costs, including reasonable attorneys' fees, incurred by THI in enforcing its rights or remedies under the Guaranty or the License Agreement.

  On August 20, 2001, Fussell signed a letter agreement with THI (initially dated June 1, 2001) whereby THI agreed to credit EMA $7,000.00 to off-set the costs of setting up or installing the property management system. The letter states that in consideration of the credit, EMA, "on behalf of itself, its partners, officers, employees, directors, shareholders and Guarantors, and the successors and assigns of all of them, hereby releases and holds harmless [THI], its officers, employees, agents, directors, shareholders, and the successors and assigns of all of them from any and all claims and causes of action whatsoever arising prior to and through the date of this letter relating to the offer, sale, negotiation, default, termination and reinstatement of the [THI] License Agreement for the Unit."*fn1 (Cox Aff. at Ex. D).

  Sometime in 2001, EMA stopped paying its recurring fees. (Fussell Dep. at 165:16-23). In a letter dated June 13, 2002, THI advised EMA that it had failed to file monthly reports for the Elkins facility, was in default of its financial obligations due to its failure to pay the recurring fees, and had ten days within which to cure the defaults. The letter added that if the defaults were not cured, then the License Agreement would be subject to termination. Thereafter, in another letter dated August 20, 2002, THI gave EMA notice that it was still in default of its financial obligations as it had not paid the recurring fees. THI advised EMA that if it failed to cure its defaults by November 20, 2002, it would terminate the License Agreement.

  In a November 22, 2002 letter, THI terminated the License Agreement and demanded EMA 1) discontinue the use of the Travelodge marks and any other indicia of operation as one of THI's facilities, 2) remove all items bearing the Travelodge marks, 3) change all signs and any listings in directories and similar guides that identified the hotel as a Travelodge, 4) pay THI $63,000.00 as liquidated damages for early termination of the agreement, 5) de-identify the hotel as a Travelodge within 14 days from the receipt of the letter, and 6) pay all outstanding recurring fees through the date of termination.

  In letters of December 3, 2003 and February 19, 2004, THI repeated EMA's post-termination obligations, including the requirement that EMA de-identify the facility as a Travelodge. However, EMA continued to use the Travelodge marks after the License Agreement was terminated.*fn2 THI claims that it was granted access to EMA's premises on March 8, 2004, to remove the Travelodge signs. EMA claims that it hired a sign removal company, Floyd, to remove the sign.

  THI's complaint asserts seven counts against the Defendants. The First Count seeks a permanent injunction and damages for trademark infringement under the Lanham Act. The Second Count seeks an accounting of all the revenue generated by the facility as a result of operating the hotel with the Plaintiff's marks. The Third Count is a claim for liquidated damages pursuant to the License Agreement and Addendum. The Fourth Count is an alternative claim for actual damages resulting from early termination of the License Agreement, should the Court find the liquidated damages clause unenforceable. The Fifth Count seeks recurring fees owed by Defendants to Plaintiff plus prejudgment interest. The Sixth Count is an alternative claim for unjust enrichment. The Seventh Count is a claim against Fussell under the Guaranty. Plaintiff also seeks attorneys' fees and costs of suit in accordance with the Lanham Act, the License Agreement and the Guaranty. Defendants have asserted counterclaims against Plaintiff for breach of contract and failure to mitigate damages.

  LEGAL STANDARD

  Summary judgment is appropriate where the moving party establishes that "there is no genuine issue as to any material fact and that [it] is entitled to a judgment as a matter of law." Fed.R.Civ.P. 56(c). A factual dispute between the parties will not defeat a motion for summary judgment unless it is both genuine and material. See Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48, 91 L. Ed. 2d 202, 106 S. Ct. 2505 (1986). A factual dispute is genuine if a reasonable jury could return a verdict for the non-movant and it is material if, under the substantive law, it would affect the outcome of the suit. See id. at 248. The moving party must show that if the evidentiary material of record were reduced to admissible evidence in court, it would be insufficient to permit the non-moving party to carry its burden of proof. See Celotex v. Catrett, 477 U.S. 317, 318, 91 L. Ed. 2d 265, 106 S. Ct. 2548 (1986).

  Once the moving party has carried its burden under Rule 56, "its opponent must do more than simply show that there is some metaphysical doubt as to the material facts in question." Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586, 89 L. Ed. 2d 538, 106 S. Ct. 1348 (1986). To survive a motion for summary judgment, a nonmovant must present more than a mere scintilla of evidence in his favor. Woloszyn v. County of Lawrence, 396 F.3d 314, 319 (3d Cir. 2005). The opposing party must set forth specific facts showing a genuine issue for trial and may not rest upon the mere allegations or denials of its pleadings. Shields v. Zuccarini, 254 F.3d 476, 481 (3d Cir. 2001). At the summary judgment stage the Court's function is not to weigh the evidence and determine the truth of the matter, but rather to determine whether there is a genuine issue for trial. See Anderson, 477 U.S. at 249. In doing so, the court must construe the facts and inferences in the light most favorable to the non-moving party. Curley v. Klem, 298 F.3d 271, 277 (3d Cir. 2002).

  DISCUSSION

  I. Liability on Counts Three, Five and Seven

  Plaintiff claims that Defendants are liable under the License Agreement and Guaranty for outstanding recurring fees and liquidated damages. Plaintiff further says that there is no dispute that Defendants stopped paying recurring fees, and that the License Agreement and Guaranty are unambiguous with regard to Defendants obligation to pay such fees.

  First, this Court must consider whether the terms of the contract were clear and unambiguous. When the "terms of a contract are clear and unambiguous there is no room for interpretation or construction and the courts must enforce those terms as written." City of Orange Tp. v. Empire Mortg. Services, Inc., 341 N.J. Super. 216, 224, 775 A.2d 174, 179 (App.Div. 2001) (citing Kampf v. Franklin Life Ins. Co., 33 N.J. 36, 43, 161 A.2d 717, 720 (1960); Levison v. Weintraub, 215 N.J. Super. 273, 276, 521 A.2d 909 (App.Div. 1987), certif. denied, 107 N.J. 650, 527 A.2d 470 (1987)). Whether a contract provision or term is clear or ambiguous is a question of law and therefore suitable for a decision on a motion for summary judgment. Driscoll Const. Co., Inc. v. State, Dept. of Transportation, 371 N.J. Super. 304, 313-14, 853 A.2d 270, 276 (App.Div. 2004). A review of the relevant provisions of the License Agreement and Guaranty leads this Court to the conclusion that the language with respect to recurring fees and liquidated damages is not ambiguous. This issue is not raised by the Defendants.

  The second inquiry concerns whether the Defendants complied with the terms of the License Agreement and Guaranty. Plaintiff contends that they have not been paid recurring fees since 2001. Their supporting evidence consists of the Defendants' answers to Plaintiff's Initial Interrogatories and Fussell's deposition testimony. In answer to Plaintiff's Initial Interrogatories asking Defendants to state whether they had paid all recurring fees, Defendants said that they "stopped paying the fees because plaintiff breached the agreement." (Plocker Aff. at Ex. P, ¶ 15). Fussell also admitted at his deposition that Defendants stopped paying recurring fees to Plaintiff sometime in 2001. (Id. at Ex. Q, 165:16-23.). While Defendants deny Plaintiff's assertion that they had failed to pay the outstanding recurring fees and liquidated damages, Defendants offer no evidence to contradict this statement. See, e.g., Port Auth. of N.Y. & N.J. v. Affiliated FM Ins., 245 F.Supp.2d 563, 572 n. 9 (D.N.J. 2001) (". . . it is incumbent on the responding party to issue a meaningful rejoinder to a given statement of material fact, lest that fact be deemed undisputed"). In light of this uncontradicted evidence and the unambiguous contract terms, all the elements necessary to establish a breach of the License Agreement and Guaranty by the Defendants are present.

  Next, this Court must determine whether the Defendants have any defenses to the breach. Rather than claim that they did not breach the License Agreement and Guaranty, Defendants argue that there are genuine issues of material fact regarding certain actions by Plaintiff that allegedly caused Defendants to default on their payments to Plaintiff. Specifically, Defendants argue that certain quality assurance inspectors who inspected the lodging facility either intentionally or negligently issued failing scores for the facility on April 13, 2001, and June 14, 2001. Defendants claim that because of these failing scores, they defaulted and lost the following rights: 1) the ability to terminate the License Agreement as provided in section 4.1 of the Addendum; 2) the right to pays fees equal to only 6.5 percent of gross room revenues for the first two years of the License Agreement, as opposed to 8.5 percent, pursuant to section 2 of the Addendum; 3) the right to participate in a sales and marketing training program, pursuant to section 6 of the Addendum; 4) the right to use the central reservation system; and 5) the right to borrow money from THI at favorable rates.

  Defendants claim that Plaintiff breached the License Agreement by "administering unfair and inconsistent quality assurance inspections as to force Elkins into default." (Defs' Br. at 2-3). They add that this material breach excused their performance under the contract. See Jafari v. Wally Findlay Galleries, 741 F. Supp. 64, 68 (S.D.N.Y. 1990) ("[W]here a party materially breaches, he has failed to substantially perform the contract, and the other party is discharged from performing his obligation."). New Jersey courts recognize that a material breach by either party to a bilateral contract excuses the other party from rendering any further performance. See Magnet Resources, Inc., v. Summit MRI, Inc., 318 N.J. Super. 275, 286, 723 A.2d 976, 981 (App.Div. 1998), which teaches that:

  Where a contract calls for a series of acts over a long term, a material breach may arise upon a single occurrence or consistent recurrences which tend to defeat the purpose of the contract. In applying the test of materiality to such contracts a court should evaluate the ratio quantitatively which the breach bears to the contract as a whole, and secondly the degree of probability or improbability that such a breach will be repeated. Id. However, Defendants do not point to any express provision of the License Agreement that obligates Plaintiff to conduct quality assurance inspections in a certain manner.

  The acts alleged by Defendants, however, may amount to a breach of the implied covenant of good faith and fair dealing, a covenant read into all contracts in New Jersey. See Wade v. Kessler Institute, 172 N.J. 327, 340, 798 A.2d 1251, 1259 (2002). Under such a covenant, "neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract." Id. While Plaintiff may not have materially breached an express term of the License Agreement, this Court must consider whether there is evidence to conclude that the Plaintiff materially breached the implied covenant of good faith and fair dealing.

  Defendants have not presented more than a scintilla of evidence to create a genuine issue of material fact with regard to this defense. First, to maintain a cause of action based on the implied covenant of good faith and fair dealing, the Defendant must show bad faith or ill motive. Seidenberg v. Summit Bank, 348 N.J. Super. 243, 257, 791 A.2d 1068, 1076 (App.Div. 2002). "[A]n allegation of bad faith or unfair dealing should not be permitted to be advanced in the abstract and absent an improper motive." Brunswick Hills Racquet Club, Inc. v. Route 18 Shopping Center Associates, 182 N.J. 210, 231, 864 A.2d 387, 399 (2005). To survive a motion for summary judgment, Defendants must show that there is a genuine issue of material fact as to whether the Plaintiff acted with bad faith or ill motive and, if so, that Plaintiff's breach of the implied covenant was material. The evidence Defendants offer to support their claim of a material breach is found in Fussell's affidavit and deposition testimony, a letter from THI granting waivers with respect to certain inspection items, and the inspection reports from December 20, 2000, April 13, 2001, June 14, 2001, September 26, 2001, February 1, 2002, and June 10, 2002. This evidence is unconvincing. While Fussell believes the results of the inspections were false, he did not accompany any of the inspectors on the inspections at issue, he did not review the inspection results with the inspector, and he does not know whether anyone else from his hotel discussed the inspection results with the inspector. (Fussell Dep. at 179:15-180:12). Indeed, Fussell testified that the basis for his allegations is simply that the quality assurance failures seemed "just very coincidental." (Fussell Dep. at 186:4-10). Fussell adds that he had "no way of knowing" whether THI intentionally assigned failing quality assurance scores to the Facility. Id. All this testimony amounts to are conclusory allegations. Construing this evidence in a light most favorable to Defendants, this evidence does not adequately support the required elements of bad faith or materiality. The variance in the grading of the facility by different inspectors, and the Plaintiff's failure to retroactively apply certain waivers for points taken off by the inspectors do not support a reasonable conclusion that the Plaintiff purposefully arranged for Defendants to receive failing scores so as to deprive them of the benefits of the contract. Because there is no genuine issue of material fact regarding a material breach by the Plaintiff that would excuse Defendants' performance under the License Agreement, that defense must fail as a matter of law. Moreover, the Defendants expressly waived and released any claims based on the April and June 2001 quality assurance inspections and THI's June 28, 2001. On August 20, 2001, Defendants executed a letter agreement with THI (originally dated June 1, 2001), pursuant to which Defendants expressly released THI from "any and all claims and causes of action whatsoever arising prior to and through the date of this letter relating to the offer, sale, negotiation, default, termination and reinstatement of the THI License Agreement for the [Facility]."*fn3 (Cox Aff. at ¶ 28; Fussell Aff. at Ex. N). "In New Jersey, an exculpatory release will be enforced if 1) it does not adversely affect the public interest; 2) the exculpated party is not under a legal duty to perform; 3) it does not involve a public utility or common carrier; or 4) the contract does not grow out of unequal bargaining power or is otherwise unconscionable. Gershon v. Regency Diving Ctr., Inc., 368 N.J. Super. 237, 248, 845 A.2d 720, 727 (App.Div. 2003) (citations omitted). Of the Gershon factors for evaluating exculpatory release clauses, only the fourth factor is applicable: whether the contract grows out of unequal bargaining power or is otherwise unconscionable. Defendants have not presented any evidence to suggest that they were at a disadvantage when bargaining with the Plaintiff, or to show why the Letter Agreement is otherwise unconscionable.

  Plaintiff adds that even if it did breach the License Agreement, its breach would not bar its claim against the Defendants for breach of the agreement. Plaintiff relies on McDonald's Corp. v. Robert A. Makin, Inc., 653 F. Supp. 401 (W.D.N.Y. 1986) for support. The McDonald's plaintiff had entered into an agreement with the defendants to franchise a restaurant. The franchise agreement obligated the defendants to make monthly payments to the plaintiff and provided the plaintiff with the right to terminate the license if the Defendants defaulted in their payments. The plaintiff alleged that the defendants stopped making monthly payments pursuant to the franchise agreement and that the defendants owed the plaintiff $40,129.48. The plaintiff asserted claims against the defendants for breach of contract and sought to recover amounts due under the franchise agreement. The defendants admitted that they had not made the payments, but alleged that they were not due because of various breaches of the agreement by the plaintiff. Specifically, the defendants alleged that the plaintiff had violated antitrust laws, discriminated amongst franchisees, breached a contractual duty not to deprive the defendants of the benefits of the franchise agreement, and interfered with the defendants' pre-contractual relations. The defendants made these allegations as part of their affirmative defenses and counterclaims against the plaintiff, and added at oral argument that these actions caused their inability to pay.*f ...


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