Searching over 5,500,000 cases.

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.

Inc. v. Schulenburg

United States District Court, N.D. Ohio, Eastern Division

January 6, 2020

KENNETH S. SCHULENBURG, et al., Defendants.



         This matter comes before the Court upon the parties' cross-motions for partial summary judgment. On August 30, 2019, Handel's Enterprises, Inc. (“Handel's”), Leonard Fisher (“Fisher”), and James Brown (“Brown”) filed a Motion for Partial Summary Judgment on the California Franchise Investment Law (“CFIL”) claims of Kenneth Schulenburg (“Schulenburg”) and Moonlight101, Inc. (“Moonlight101”). (Doc. No. 72.) The same day, Schulenburg and Moonlight101 also filed a Motion for Partial Summary Judgment with respect to their CFIL claims. (Doc. No. 73.) Both motions have now been fully briefed. (Doc. Nos. 72, 73, 79-82.)

         Also, currently pending is Schulenburg, Juliana Ortiz (“Ortiz”), and Moonlight101's Motion to Dissolve Injunction and Request for Evidentiary Hearing (“Motion to Dissolve Injunction”), filed on November 6, 2019. (Doc. No. 85.) Handel's filed a brief in opposition on November 20, 2019, to which Schulenburg, Ortiz, and Moonlight101 replied on November 26, 2019. (Doc. Nos. 91, 92.) The Court also granted Handel's leave to file a sur-reply, which Handel's filed on December 3, 2019. (Doc. No. 95.)

         Finally, on November 12, 2019, Handel's filed a Motion to Correct the Expiration Date of the June 22, 2018 Preliminary Injunction Order (“Motion to Correct the Expiration Date”). (Doc. No. 87.) Schulenburg, Ortiz, and Moonlight101 filed a brief in opposition on November 20, 2019, to which Handel's replied on November 27, 2019. (Doc. Nos. 90, 93.)

         For the following reasons, (1) Handel's, Fisher, and Brown's Motion for Partial Summary Judgment (Doc. No. 72) is GRANTED; (2) Schulenburg and Moonlight101's Motion for Partial Summary Judgment (Doc. No. 73) is DENIED; (3) Schulenburg, Ortiz, and Moonlight101's Motion to Dissolve Injunction (Doc. No. 85) is DENIED; and (4) Handel's Motion to Correct the Expiration Date (Doc. No. 87) is DENIED.[1]

         I. Background

         a. Factual Background

         i. Execution of the Franchise Agreement

         Handel's is a nationwide franchisor and operator of ice cream parlors, with forty-seven locations in nine states. (Doc. No. 68 at ¶¶ 1, 5.) It is an Ohio corporation, but is registered with the California Department of Business Oversight (“DBO”) and authorized to do business in the State of California. (Doc. No. 69 at ¶ 4.) In late March and early April 2015, Handel's submitted a proposed 2015 franchise disclosure document (the “2015 FDD”) to the DBO for registration and approval. (Doc. No. 67 at ¶ 1.) On April 13, 2015, the DBO approved the 2015 FDD. (Id. at ¶ 2.) The 2015 FDD contains, among other things, the franchise agreement (the “Franchise Agreement”) to be signed by prospective franchisees. (Id. at ¶ 3.)

         In October 2015, Handel's met with Schulenburg in Ohio to discuss the possibility of purchasing a Handel's franchise in the San Diego, California area. (Doc. No. 68 at ¶ 28.) On October 14, 2015, Handel's provided Schulenburg with the 2015 FDD, which contained the Franchise Agreement that would govern the terms of the parties' franchisor-franchisee relationship. (Doc. No. 67 at ¶ 4.) The Franchise Agreement required franchisees to pay a $50, 000 franchise fee for each franchise location, and once operational, monthly royalty payments. (Doc. No. 67-1 at 87.) On December 17, 2015, Schulenburg made a $5, 000 payment to Handel's as a deposit towards the franchise fee. (Doc. No. 67 at ¶ 5.)

         Meanwhile, shortly after receiving Schulenburg's initial deposit, Handel's began to seek approval from the DBO for an amendment to the 2015 FDD. As part of that process, on January 11, 2016, Handel's submitted an application to the DBO to amend the 2015 FDD, which included changes to the Franchise Agreement. (Id. at ¶ 6.) The purpose of the amendment was to allow Handel's franchisees to qualify for Small Business Administration (“SBA”) financing. (Doc. No. 72-2 at ¶¶ 4-5.) On January 19, 2016, the DBO issued an order approving Handel's January 11, 2016 application and the amended 2015 FDD (the “Amended 2015 FDD”). (Doc. No. 67 at ¶ 8.)

         On the same day that the DBO issued this approval, Schulenburg also paid the remaining $45, 000 of his franchise fee. (Id. at ¶ 9.) Two days later, on January 21, 2016, Schulenburg met with Brown, who presented Schulenburg with a copy of the 2015 FDD-not the Amended 2015 FDD- and Schulenburg executed the Franchise Agreement contained therein. (Id. at ¶¶ 10-11.) At that time, Handel's did not provide the Amended 2015 FDD to Schulenburg.

         On March 22, 2016, about two months after executing the 2015 FDD, Schulenburg emailed Handel's to inquire about SBA financing. (Doc. No. 67-8 at 2.) One of Handel's employees, Jody Nerone (“Nerone”), responded the same day and wrote, in relevant part, the following:

We are not currently part of the Franchise Registry in terms of SBA financing. However, as of 1/11/2016 we have become compliant with SBA lending regulations and the State of California. We have updated our FDD to reflect the changes needed to secure SBA lending. We have 1 current franchisee who already has the lending, and 1 prospective franchisee besides yourself who is securing the lending as we speak.
If you would like to proceed with it, then we will have to execute a new FDD so that you can get the lending. The document you signed when Jim was out for his visit does not meet those requirements.

(Id. at 1.) Later that day, Schulenburg emailed Nerone and asked, “Can you prepare the new FDD agreement and send it to me in PDF - I can print the signature page - sign it - send it back via scan copy and mail the hardcopy?” (Id.) On March 23, 2016, Nerone emailed the Amended 2015 FDD to Schulenburg as he requested. (Id.) The first page of the Amended 2015 FDD that Schulenburg received contained the following notation: “Issuance Dated: 4/13/2015, as amended 1/11/2016.” (Id. at 5.) Schulenburg never executed the Amended 2015 FDD, however, and never applied for or was denied an SBA-guaranteed loan related to any Handel's franchise location. (Doc. No. 72-2 at ¶ 8.)

         ii. Terms of the Franchise Agreement

         The Franchise Agreement assigned Schulenburg a “three-mile radius surrounding the Lofts at Moonlight Beach” in Encinitas, California. (Doc. No. 1-3 at 113.) It also contemplated the grant of a second franchise location in the Gaslamp Quarter of downtown San Diego and provided Schulenburg a right of first refusal in that area for a period of two years after the execution of the Franchise Agreement. (Id.) The initial term of the agreement was for five years, beginning January 22, 2016 and ending January 22, 2021. (Id. at 82.)

         With regard to Handel's confidential information, the Franchise Agreement provided the following:

You acknowledge and agree that your total knowledge of the System, and construction, operation and promotion of the Ice Cream Parlor, is derived from information we disclosed to you under this Agreement, Handel's Manuals and otherwise, and that such information is proprietary, confidential and a trade secret of Handel's. You, as franchisee and principal, jointly and severally covenant and agree that you will maintain the absolute confidentiality of all such information during and after the term of this Agreement, and not use this information in any other business or manner unless approved in writing by Handel's.

(Doc. No. 1-3 at 87.) A separate provision also required Schulenburg to keep confidential the contents of Handel's “Confidential Operations Manual, ” which contained the “specifications, standards and procedures” for operating a Handel's franchise. (Id. at 85.)

         Finally, the Franchise Agreement included two non-compete provisions-one that applied during the term of the agreement and one that applied after termination. The in-term covenant not to compete provided that, during the initial term of the agreement, Schulenburg would not “directly, indirectly, or in any matter whatever, be involved with any business which is competitive with, or similar to [Handel's], in any way.” (Id. at 86.) The post-contract covenant not to compete precluded Schulenburg from being involved in the sale of ice cream and related products and services for a period of two years after termination of the agreement in “the Territory” or “within 2 miles of any Handel's franchised or company-owned store.” (Id. at 91.)

         iii. Dispute Over Gaslamp Quarter Location

         In mid-2017, about a year and a half after Schulenburg executed the Franchise Agreement and opened his franchise in Encinitas, California, Schulenburg began to discuss the development of his second Handel's location in the Gaslamp Quarter of downtown San Diego, and chose a location at 425 Market Street, San Diego, California. (Doc. No. 68 at ¶ 100.) According to Handel's, Schulenburg refused to provide Handel's with a copy of the final lease for the Gaslamp Quarter location or pay the franchise fee. (Id. at ΒΆ 108.) Despite ...

Buy This Entire Record For $7.95

Download the entire decision to receive the complete text, official citation,
docket number, dissents and concurrences, and footnotes for this case.

Learn more about what you receive with purchase of this case.