Appendix — Doctor's Associates, Inc. v. Cox

Supreme Court brief1994

Ask Donna

What actually matters in this document.

Text

ry Oe

Wits

eo ;

ute

TABLE OF CONTENTS FOR APPENDIX

Page

Opinion of the Appellate Court of Illinois, Fifth Dis-

8: fe een a eo la

Notice from Illinois Supreme Court of Denial of Peti-

tion for Leave to Appeal (Oct. 6, 1993) 2220000... 48a

SUTG VORGIS CABTTE BG, BOGE) cncccccccccccccccccccccccesccccccccoees 44a

Jury Instructions (April 26, 1991) —...00...000000000... 45a

Franchise Agreement (August 13, 1987) —.......00000000..... 59a

APPENDIX

IN THE APPELLATE COURT OF ILLINOIS

FIFTH DISTRICT

No. 5-91-0657

Dick DEWAYNE Cox, Jr., and

SUBSTANTIAL ENTERPRISES, INC.,

Plaintiffs and Counter-

defendants-A ppellants

and Cross-A ppellees,

Doctor’s ASSOCIATES, INC.,

Defendant and Counter-

plaintiff-A ppellee and

Cross-A ppellant.

Appeal from the Circuit Court of Madison County

No. 88-L-699

Honorable P. J. O’Neill, Judge Presiding

[Filed May 14, 1993]

PRESIDING JUSTICE CHAPMAN delivered the

opinion of the court:

Doctor’s Associates, Inc. (Doctor’s Associates), a Con-

necticut corporation, sells franchises to operate Subway

sandwich shops, which are retail establishments devoted

to the preparation and sale of foot-long sandwiches and

variations thereof.

Dick Dewayne Cox, his father Dick Cox, and Richard

Yates formed Substantial Enterprises, Inc., an Illinois cor-

poration (Substantial), in June of 1987. (Dick Dewayne

Cox’s father was not actively involved in Substantial or

in the proceedings below, and he is not a subject of this

appeal.) The men purchased six Subway franchises from

Doctor’s Associates and allegedly assigned all rights and

liabilities to the franchises to Substantial Enterprises, Inc.

Richard Yates sold two franchises which he had previ-

ously purchased from Doctor’s Associates to Substantial.

During 1987 and 1988, Substantial operated five Sub-

way sandwich shops, three in St. Clair County and two in

Madison County.

In 1987 Dick Cox and Richard Yates requested Doc-

tor’s Associates’ approval to open Subway shops in the

Mid Rivers Mall in St. Charles County, Missouri, and in

the Alton Square Mall in Alton, Illinois. Cox and Yates

wanted to open a Subway shop in the St. Clair Square

Mall in Fairview Heights, but they were told by mall

representatives that they first had to lease space at the

Mid Rivers and Alton Square Malls. Cox and Yates be-

lieved that if shops at the Mid Rivers Mall and the Alton

Square Mall proved successful they would be allowed to

open a shop in the St. Clair Square Mall. A dispute be-

tween the parties arose over whether or not Doctor’s

Associates approved of plaintiffs opening shops at these

three locations.

Cox testified that he and Yates sent a letter to Ted

Parent, a leasing representative for Doctor’s Associates,

regarding the three-mall plan. Next, Hossein Naemi, Doc-

tor’s Associates’ development agent, advised Cox and

Yates that Ted Parent approved of the three-mall plan.

Naemi suggested, however, that Cox and Yates buy Kelly

Clapp’s Subway store which was located one-fourth mile

from th. Mid Rivers Mall. Cox testified that at no time

was he advised that Doctor’s Associates was conditioning

the approval of his opening a Subway in the mall on his

purchase of Clapp’s store. Cox testified that he did not

purchase Clapp’s store because Kelly Clapp rejected his

offer to purchase it for $45,000. Soon thereafter, Hossein

advised Cox that he would not approve a Subway location

in Mid Rivers Mall because he feared Kelly Clapp would

sue him. Notwithstanding Naemi’s advice, Cox and Yates

leased space in the Mid Rivers and Alton Square Malls,

and opened sandwich shops at those locations under the

name SubCity. Cox told Hossein it was Doctor’s Asso-

ciates’ fault that they had to open the SubCity stores, but

that he was willing to convert them to Subway stores.

From June 1988 through September 1988, Cox wrote five

letter to Doctor’s Associates advising the corporation that

he considered Doctor’s Associates to be in breach of the

existing franchise agreements because (1) Doctor’s Asso-

ciates approved of the three-mall plan and later reneged,

and (2) Doctor’s Associates had refused to approve loca-

tions for three Subway stores located in Granite City,

Belleville, and Troy, Illinois. Cox testified that, after

notifying Doctor’s Associates, he ceased paying royalty

and advertising payments in accordance with his rights

under section 10n of the franchise agreement which

provides:

“In the event that the Company defaults in the per-

formance of any term or condition of the Agreement,

the Franchisee shall give the Comany, * * * written

notice within ninety (90) days of the occurrence of

the default and shall specify therein the acts or omis-

sions constituting the default. If the Company fails

to cure the default within sixty (60) days after re-

ceipt of the notice, the Franchisee’s obligation to

make Royalty payments thereafter shall cease until

the default is cured by the Company. Any default

by the Company that occurred more than ninety

(90) days prior to written notice thereof shall be

deemed waived by the Franchisee.”

Cox further testified that Leonard Axelrod, vice presi-

dent and chief legal officer of Doctor’s Associates, con-

tacted Cox and told him that opening the SubCity stores

would jeopardize Subway and was a breach of the fran-

chise agreements. Cox testified that Axelrod told him

that Doctor’s Associates would not sell any more fran-

chises to him, and also that it would not let him use the

three franchises he had already paid for but was not

using. Cox testified that Axelrod also told him that in

order to make amends Cox would have to pay Doctor’s

Associates $7,500 plus 8% of the royalties received from

the SubCity stores since opening, change the SubCity

stores to Subways, and purchase Kelly Clapp’s store.

Axelrod told Cox that if these conditions were not met,

Cox would be evicted from his Subway stores, and he

would be forced into bankruptcy.

Witnesses testifying on behalf of Doctor’s Associates

disagreed with much of Cox’s testimony. Ted Parent, a

leasing representative for Doctor’s Associates, testified

that when he first learned of the Cox-and-Yates plan to

open Subway stores in the three malls, he spoke with the

development agent, Naemi. Parent testified that Naemi

was surprised Cox had sent Parent information regarding

the Mid Rivers Mall and Alton Square Mall sites. Parent

had some problems with the Alton Square lease, but he

testified that those problems could have been resolved

through negotiation. Parent did not approve of the Mid

Rivers Mall site because of Naemi’s disapproval of the

site. Negotiations regarding the Alton Square lease were

never entered into. Parent testified that at no time did

Naemi approve of the Mid Rivers Mall location. Ted

Parent also testified that, after the dispute arose over Mid

Rivers Mall, Doctor’s Associates received an application

for a lease from Cox to open a Subway in Granite City,

————————

Illinois. The lease was approved by him and was sent to

Doctor’s Associates’ legal department for execution. Par-

ent testified that he was not involved in the decision not

to execute the Granite City lease.

Leonard Axelrod denied Cox’s allegations that Axelrod

threatened Cox with ultimatums. Axelrod testified:

“{T]here was never a decision made to terminate the fran-

chises, to get him out of the system.” Axelrod continued:

“We had a number of discussions and I am sure I wrote

him a letter by that time asking him for the $7,500 and

the 8% according to the Franchise Agreement which said

that he has got to pay that if he violates the noncompete

clause and waiting for a resolution to the problem.”

Plaintiffs filed a lawsuit against defendant on June 17,

1988, and about November 1988 plaintiffs ceased paying

franchise royalties and advertising fees. Sometime after

suit was filed, Cox and Substantial acquired Yates’ interest

in the six Subway shops. Since that time Yates has had

no involvement in the five Subway shops or in Sub City,

and he is not a party to this appeal.

The case proceeded to a jury trial on plaintiffs’ five-

count complaint alleging:

(1) breach of contract in that (a) defendant ap-

proved of site locations at the Alton Square, St. Clair

Square, and Mid Rivers Malls, and at additional sites

at Troy, Granite City, and Belleville, then without

cause or justification withdrew approval, and (b)

defendant refused to sell plaintiffs additional fran-

chises and terminated plaintiffs’ right to use their

three nonoperating franchises;

(2) willful and wanton breach of contract in that

defendant made false representations to plaintiffs be-

fore plaintiffs purchased their franchises, with the

intention of inducing plaintiffs to purchase the fran-

chises and enter into franchise agreements when they

knew said representations to be false;

ee oY

(3) Illinois Franchise Disclosure Act (Ill. Rev. Stat.

1987, ch. 121%, par. 1701 et seq.) violations as to

representations made by Doctor’s Associates regard-

ing (a) the number of franchises defendant would

seil to an individual franchisee, (b) territorial restric-

tions on franchisees, (c) termination of franchises,

(d) the venue selection clause in the franchise agree-

ments, and (e) Doctor’s Associates’ right to give

approval for a Subway location only to withdraw ap-

proval at a later time;

(4) fraud in that Doctor’s Associates misrepresented

the following material facts: (a) that plaintiffs could

consumate a deal with the mall representatives, (b)

that Doctor’s Associates would not grant territorial

rights, (c) that defendant would not unreasonably

withhold its approval, (d) that a franchisee could

purchase unlimited franchises, (e) that plaintiffs

could locate stores in the three malls, (f) that plain-

tiffs could open stores in Granite City, Troy, and

Belleville, and (g) that defendant would act in good

faith; and

(5) tortious interference with a contract in that

Doctor’s Associates wrongfully withdrew approval of

the three mall sites even though Doctor’s Associates

knew plaintiffs had consummated a deal with mall

representatives as to those sites.

The jury also decided the fate of defendant’s counter-

claims for trademark infringement and for reimbursement

for unpaid royalties and advertising fees. Doctor’s Asso-

ciates’ counterclaim for injunctive relief was severed at

the close of the evidence. The jury awarded Substantial

$200,000 in actual damages and $1,000,000 in punitive

damages. The jury returned a verdict for Doctor’s Asso-

ciates on its counterclaim for unpaid royalties and adver-

tising fees in the sum of $258,060. The jury returned a

verdict for Doctor’s Associates on its claim of trademark

infringement in the sum of $50,000.

The trial court entered judgment on the verdicts in the

total sum of $1,200,000 with interest in favor of Sub-

stantial and against Doctor’s Associates, and in the sum

of $308,060 in favor of Doctor’s Associates and against

Substantial and Cox. The court also granted Doctor’s

Associates’ post-trial motion for a permanent injunction

to enjoin Substantial and Cox from using the trademark

Subway. All! parties appeal.

Cox and Substantial raise the following issues on ap-

peal: (1) whether the trial court erred in not directing a

verdict and in not granting a judgment notwithstanding

the verdict on Doctor’s Associates’ counterclaims; and (2)

whether the trial court erred by entering a permanent in-

junction in favor of Doctor’s Associates. Plaintiff first

asserts one theory which underlies both of the issues.

That is, whether the trial court erred in permitting: the

defendant to prosecute its counterclaims where defendant

deliberately and intentionally refused to register as a for-

eign corporation within Illinois. Plaintffs argue that sec-

tion 13.70 of the Business Corporation Act of 1983 (805

ILCS 5/13.70 (West 1992)) and public policy demand

that defendant suffer the consequences of its refusal to

Section 13.70 of the Business Corporation Act of 1983

provides:

“No foreign corporation transacting business in this

tate without a certificate of authority is permitted

to maintain a civil action in any court of this State,

until the corporation obtains a certificate of author-

The failure of a foreign corporation to obtain a

certificate of authority to transact business in this

State does not impair the validity of any contract or

act of the corporation, and does not prevent the cor-

povation from defending any action in any court of

this State.

A foreign corporation that transacts business in

this State without a certificate of authority is liable

to this State, for the years or parts thereof during

which it transacted business in this State without a

certificate of authority * * *. The Attorney General

shall bring proceedings to recover all amounts due

this State under this Section.” 805 ILCS 5/13.70

(West 1992).

According to the record, Doctor’s Associates did not

this State at any time during these proceedings. However,

it was not until the trial, 14 months after the counter-

claims were filed, that Cox and Substantial raised the

argument that Doctor’s Associates could not maintain its

counterclaims because it did not obtain a certificate of

authority under section 13.70. The trial court rejected

plaintiffs’ argument:

“The Court has found that Doctor’s Associates,

Inc. transacts business in Illinois and it is undisputed

that it has no certificate of authority. * * * In the

absence of any Illinois case on point, the Court be-

lieves that bringing a counterclaim such as the one

here, which arises directly from the subject matter

of plaintiff's cause of action, should not be barred by

the statute.

* * * The defense that counterplaintiff failed to

obtain a certificate of authority was waived by the

counter-defendants’ failure to raise that objection

at the earliest opportunity. Amerco Field Office v.

Onoforio, 22 Ill.App.3d 989 (1974).”

We affirm the decision of the trial court on this point.

As for the trial court’s finding that the counterclaim

arose directly from the subject matter of plaintiffs’ cause

of action, we begin by examining the language of section

13.70. That section specifically provides that the “failure

of a foreign corporation to obtain a certificate of author-

ity * * * does not prevent the corporation from defend-

ing any action in any court of this State.” Section 13.70

distinguishes the right to assert a defense from the right

to defend. In McLaughlin v. Rainville Co. (1974), 22

[ll.App.3d 128, 316 N.E.2d 819, the court concluded that

the defendant foreign corporation could not have initiated

a cause of action in Illinois. However, because defendant

was impleaded in plaintiff's action, defendant could assert

its claim that it was entitled to the impleaded funds, even

though defendant had conducted business in the State

without a certificate of authority to do so.

McLaughlin did not deal with the issue of waiver, and

our research reveals scant case law on the issue. How-

ever, at least one case, Elsberry Equipment Co. v. Short

(1965), 63 Ill.App.2d 336, 211 N.E.2d 463, provides

that the issue of failure to register as a foreign corpora-

tion can be raised at any time. To the extent that the

trial court ruled that plaintiff waived its position by not

raising it until 14 months after the counterclaims were

filed, and over one week after trial had begun, we cannot

conclude that such a ruling was an abuse of discretion.

Cox and Substantial next argue that the trial court

erred in granting Doctor’s Associates a permanent injunc-

tion, because Doctor’s Associates has unclean hands.

Plaintiffs contend that bad faith, fraudulent misrepresenta-

tion, and willful and wanton breach of the franchise con-

tracts by Doctor’s Associates were established by the jury’s

verdict finding that Doctor’s Associates breached the fran-

chise agreements and that such a finding precludes Doc-

tor’s Associates from either enforcing the franchise agree-

ments or from obtaining injunctive relief.

The parties agree that unclean hands is a defense to a

Lanham Act (15 U.S.C. 1051 et seg. (1986) ) infringe-

ment suit. (Fuddruckers, Inc. v. Doc’s B.R. Others, Inc.

(9th Cir. 1987), 826 F.2d 837, 847.) One who comes

into equity must come with clean hands, or as otherwise

stated, one seeking equitable relief cannot take advantage

10a

of his own wrong. (Fair Automotive Repair, Inc. v.

Car-X Service Systems, Inc. (1984), 128 IlL.App.3d 763,

768, 471 N.E.2d 554, 558.) Before it is necessary to

determine whether a party seeking an injunction has clean

hands, however, there must be a demonstration that the

conduct of the party seeking the injunction “relates to

the subject matter of its claims.” (Fuddruckers, 826 F.2d

at 847; Fair Automotive, 128 Ill.App.3d at 768, 471

N.E.2d at 558.) In the case at bar, the activities plain-

tiffs complain constitute Doctor’s Associates’ unclean

hands are activities arising from Doctor’s Associates’ per-

formance under the franchise agreements, conduct which

is unrelated to Doctor’s Associates’ claims of trademark

infringement. We, therefore, find plaintiff's argument to

be without merit.

Cox and Substantial further argue that the trial court

erred in granting the permanent injunction without apply-

ing the doctrine of equitable recoupment to permit plain-

tiffs to recover their investment in the eight purchased

franchises.

Prior to trial, Doctor’s Associates filed a counterclaim

in which it asserted, among other things, claims for breach

of the franchise agreements and injunctive relief on

grounds of unfair competition and trademark infringe-

ment under the Lanham Act (15 U.S.C. 1051 et seg.

(1986)). On the breach-of-franchise-agreements claim,

Doctor’s Associates prayed that the court award Doctor’s

Associates $236,016 for royalty and advertising fees, plus

$15,000 for opening competing sandwich-shop businesses.

On the claims for injunctive relief, Doctor's Associates

prayed for the court to enjoin the plaintiffs from continu-

ing to operate plaintiffs’ five existing Subway shops and

to cease from infringing on the Subway trademark. Doc-

tor’s Associates also requested that the court award actual

and punitive damages against plaintiffs for the injuries

suffered by reason of plaintiffs’ conduct, and it requested

the attorney fees incurred in pursuing collection of the

withheld royalty and advertising fees. Plaintiffs’ respon-

lla

sive pleadings to defendant’s counterclaim did not raise

the issue of equitable recoupment, nor did plaintiffs ask

that they be awarded the amount of their investment in

the five existing franchises or that they be permitted to

recoup the amounts invested in the five stores prior to an

injunction being imposed against them.

At the jury-instruction conference at the close of the

evidence, the court inquired of counsel for Doctor’s Asso-

ciates whether the issue of trademark infringement, for

which Doctor’s Associates sought an injunction, should be

decided by the jury. Plaintiffs’ counsel argued that a

request for equitable relief could not be submitted to the

jury. Attorneys for Doctor’s Associates noted that its

counterclaim for violation of trademark infringement un-

der the Lanham Act sought recovery of actual and puni-

tive damages and would not be an action in equity. The

trial court agreed and ruled that the jury could

“go ahead and consider the complaint and the

counterclaim as the counterclaim pertains to dam-

ages for misuse or violation of the defendant’s trade-

mark rights and the patent rights, if those claimed

monetary damages, those are jury issues, factually to

be decided by the jury, but the Court reserves of

course to itself the resolution of the equitable relief

prayed by way of injunction.”

Doctor’s Associates’ counterclaim for injunctive relief was

severed from the damage claims at that time.

The case was submitted to the jury on the claims ard

counterclaims for damages. On the claim of trademark

infringement, the jury was instructed to determine the

amount of damages to be awarded, if any, on Doctor’s

Associates’ loss of goodwill, injury to business reputation,

and diminishment in value of the trademark. The jury

returned a verdict in favor of Doctor’s Associates on its

counterclaim of trademark infringement and awarded

damages in the amount of $50,000. Doctor’s Associates

12a

was also awarded $258,060 on its counterclaim for past-

due royalties and advertising fees.

After trial, Doctor’s Associates filed its motion for

permanent injunction for trademark infringement. Cox

and Substantial filed a motion for judgment notwithstand-

ing the verdict which for the first time alleged the theory

of equitable recoupment. Plaintiff's motion for judgment

notwithstanding the verdict provided in pertinent part:

“Counter-Defendants are entitled to the continuous

use of the tradename “Subway” at their 5 existing

stores, following the alleged termination of those 5

franchises by Doctor’s Associates, Inc., until Counter-

Defendants recover the amount of their investment,

which has not yet occurred, and therefore, as a mat-

ter of law, Counter-Plaintiff Doctor’s Associates, Inc.

is not entitled to a judgment for alleged trademark

infringement, and the $50,000 counterclaim award

should be set aside and judgment entered for Counter-

Defendants on that issue, and further, in the alterna-

tive, for the same reason Counter-Defendants are

entitled to use of the tradename after the alleged ter-

mination of the 5 franchise agreements for the 5 op-

erating stores until Counter-Defendants recover their

investment, which has not yet occurred, and there-

fore, as a matter of law, Counter-Plaintiff should not

be entitled to recover alleged past due royalties and

advertising fees, and the counterclaim verdict of

$258,060.00 should be set aside as a matter of law.”

At the hearing on the post-trial motions, the court granted

plaintiffs leave to amend their answer to Doctor’s Asso-

ciates’ counterclaim to assert their claim for equitable

recoupment. However, the court also indicated it did not

feel that the doctrine of equitab'e recoupemnt was recog-

nized in Illinois.

In anticipation of the court’s denial of their claim,

plaintiffs made an offer of proof setting forth what evi-

13a

dence they would present to establish how much they had

invested in the five stores and how they could recoup their

investment. Plaintiffs argued that they could: (1) con-

tinue to operate as a franchise indefinitely, paying the

requisite royalty and advertising fees; (2) sell the five

stores to bona fide purchasers; or (3) continue to operate

as a franchise until they recouped their investment.

The trial court granted Doctor’s Associates’ motion for

a permanent injunction and ruled that the doctrine of

equitable recoupment was not a bar to Doctor’s Asso-

Ciates’ request for injunctive relief. The court declined to

grant plaintiffs’ request for equitable recoupment and

ruled that “although the doctrine is recognized by federal

courts, no authority has been cited for recognition of the

doctrine by Illinois state courts.”

Plaintiffs argue that the trial court erred by not apply-

ing the doctrine of equitable recoupment to permit them

to recover their investment in the five franchises. We first

address whether plaintiffs were diligent in raising such a

claim.

Recoupment is in the nature of a cross-action in which

a defendant alleges that it has been injured by a breach

by plaintiff of another part of the contract on which the

action is founded. (Olin Mathieson Chemical Corp. v.

J. J. Wuellner & Sons, Inc. (1966), 72 Ill.App.2d 488,

218 N.E.2d 823.) Section 2-608 of the Code of Civil

Procedure abolishes the defense of recoupment and re-

quires recoupment to be considered a counter-claim. (735

ILCS 5/2-608 (West 1992); Baiocchi v. Magidson (1967),

81 Ill.App.2d 387, 225 N.E.2d 732.) That statute pro-

vides that a claim by a defendant against a plaintiff

“whether in the nature of a set-off, recoupment, cross-

claim or otherwise may be pleaded as a cross claim in any

action, and when so pleaded shall be called a counter-

claim.” 735 ILCS 5/2-608 (West 1992).

l4a

Section 2-608 is permissible. (Young Men’s Christian

Association v. Midland Architects, Inc. (1988), 174 II.

App.3d 966, 971, 529 N.E.2d 288, 291.) Courts have

repeatedly cited the interpretation of that statute as posed

in Miller v. Bank of Pecatonica:

“We are of the opinion, however, that while this

statute is designed to simplify the litigation between

parties by providing that all issues can be tried in one

forum at the same time, it does not require a defend-

ant to immediately assert his rights by way of

counterclaim * * *. The word ‘may’ in the quoted

words of the statute indicate[s] an election is avail-

able to the defendant and the cases have so inter-

preted this statuts.” (Miller v. Bank of Pecatonica

(1980), 83 IlLApp.3d 424, 427, 403 N.E.2d 1262,

1264; see also Young Men’s Christian Association v.

Midland Architects, Inc. (1988), 174 IlLApp.3d

966, 529 N.E.2d 288; Torcasse v. Standard Outdoor

Sales, Inc. (1992), 232 Ill.App.3d 500, 597 N.E.2d

772, appeal allowed (1992), 147 Ill. 2d 637, 606

N.E.2d 1235.)

Furthermore, courts have held that where it is con-

venient or strategically advisable to file a counterclaim

after the trial, the claimant is not precluded from doing

so. (See Young Men’s Christian Association, Torcasso.)

Although plaintiffs first raised the claim of equitable re-

coupment after trial, we find that plaintiffs did not waive

the right to assert their claim.

The parties have cited no Illinois cases dealing with

equitable recoupment, and our research of Illinois law

has uncovered scant reference to the doctrine. Some IIli-

nois cases spoke of recoupment as a tool which could be

used to promote justice, prevent litigation, and avoid the

multiplicity of suits. (Burroughs v. Clancey (1869), 53

Ill. 30; Peck v. Brewer (1868), 48 Ill. 54; Stow v.

Yarwood (1853), 14 Ill. 424.) These cases refer to re-

coupment as a means of set-off pled as a counter-action

15a

whether or not it arises from the underlying suit. We note

that our current Code of Civil Procedure includes recoup-

ment within its description of counterclaims (735 ILCS

5/2-608 (West 1992)). In view of the lack of Illinois

authority on recoupment, we have examined authority

from other jurisdictions which have applied the doctrine.

The doctrine of equitable recoupment has been held to

apply when a contract, such as a franchise contract, is

terminated without just cause before the franchisee has

recouped its investment. (Schultz v. Onan Corp. (3d Cir.

1984), 737 F.2d 339, 346.) For instance, it has been held

that where an exclusive franchise dealer under an implied

contract, terminable on notice, has at the instance of a

manufacturer or supplier invested his resources and credit

in establishing a costly distribution facility for the sup-

plier’s product, and the supplier thereafter terminates the

contract and dealership without giving the dealer an op-

portunity to recoup his investment, a claim may be stated.

(Clausen & Sons, Inc. v. Theo. Hamm Brewing Co. (8th

Cir. 1968), 395 F.2d 388, 391.) The doctrine of recoup-

ment is designed to remedy the inequity which arises when

a manufacturer, after requiring a distributor to make a

sizeable investment in the furtherance of a distributorship,

terminates the working relationship without just cause and

leaves the distributor with substantial unrecovered ex-

penditures. Ag-Chem Equipment Co. v. Hahn, Inc. (8th

Cir. 1973), 480 F.2d 482, 486.

After reviewing the authorities concerning the doctrine,

we find one significant factor underlying claims for equi-

table recoupment; there must be a showing by the com-

plainant that termination of the working relationship was

without just cause. See Ag-Chem Equipment Co. v. Hahn,

Inc. (8th Cir. 1973), 480 F.2d 482: Schultz v. Onan

Corp. (3d Cir. 1984), 737 F.2d 339; McGinnis Piano &

Organ Co. v. Yamaha International Corp. (8th Cir.

1973), 480 F.2d 474; W.K.T. Distributing Co. v. Sharp

Electronics Corp. (8th Cir. 1984), 746 F.2d 1333; West-

l6a

field Centre Service, Inc. v. Cities Service Oil Co. (1981),

86 N. J. 453, 432 A.2d 48; Gibbs v. Bardahi Oil Co.

(Mo. 1960), 331 S.W.2d 614; Clausen & Sons, Inc. v.

Theo. Hamm Brewing Co. (8th Cir. 1968), 395 F.2d

388; see also Hillman, An Analysis of the Cessation of

Contractual Relations, 68 Cornell L.Rev. 617 (1983);

Gellhorn, Limitations on Contract Termination Rights—

Franchise Cancelations, 57 Duke L.J. 465 (1967); 6

Corbin on Contracts § 1266 (1962 & Supp. 1992); Re-

statement (Second) of Contracts § 344 (1981).

Therefore, we examine the question of whether termina-

tion of the five Subway stores was for good cause. Section

19 of the Franchise Disclosure Act of 1987 (815 ILCS

705/19 (West 1992)) defines “good cause” as including

“the failure of the franchisee to comply with any lawful

provisions of the franchise or other agreement and to cure

such default after being given notice thereof and a reason-

able opportunity to cure such default, which in no event

need be more than 30 days.” The franchise agreements,

which are substantially similar to each other, provide in

pertinent part:

“8.a. Provided it gives the Franchisee written

notice at least ten (10) days prior thereto, the Com-

pany may, at its option and without prejudice to any

of its other rights or remedies provided for here-

under, terminate this Agreement if the Franchisee

fails to pay any sums of money due the Company or

one of its affiliates. The written notice shall specify

the default and further provide that the Franchisee

has ten (10) days from the date of delivery of the

notice to remedy the default.

* * * *

c. Upon termination of this Agreement, all of the

Franchisee’s rights hereunder shall terminate. The

Franchisee shall forthwith discontinue use of all

trade names, trademarks * * *,”

17a

It is clear that Doctor’s Associates had contractual au-

thority to terminate the franchise agreements in the event

plaintiffs failed to pay royalty or advertising payments.

Cox admitted that he stopped paying royalty and adver-

tising fees on or about November 1988. The jury awarded

Doctor’s Associates $258,060 for unpaid royalties and

advertising fees.

Doctor’s Associates’ request for injunctive relief was no

more than a request for enforcement of its contractual

right to terminate the franchise agreements. Based on the

evidence presented, we cannot conclude that termination

of the franchise agreements was without good cause. Be-

cause a claim for equitable recoupment begins with a

showing that the working relationship was terminated

without just cause, we conclude that the trial court prop-

erly refused to apply the doctrine of equitable recoupment.

We now turn to the issues raised by Doctor’s Associates

in its cross-appeal. Doctor’s Associates first contends that

the trial court erred in denying its motion for directed

verdict or judgment notwithstanding the verdict on count

I for breach of contract because Substantial was not the

proper plaintiff to maintain that cause of action. Doctor’s

Associates points out that in count I Substantial sought to

hold Doctor’s Associates liable for its alleged breach of

the franchise agreements. Doctor’s Associates argues that

only a party to a contract may sue another for breach of

that contract, and because Cox and Yates, not Substan-

tial, entered into the franchise agreements, Substantial

cannot maintain a claim for breach. Doctor’s Associates

argues that Cox voluntarily dismissed himself as a plain-

tiff during the trial and left Substantial as the sole plain-

tiff. Defendant contends it was never made aware of an

assignment of Yates’ and Cox’s interests to Substantial, and

that, even if said assignment was made, there is no evi-

dence to substantiate that Cox, Yates, and Substantial

complied with the assignment requirements set forth in

the franchise agreements. Doctor’s Associates argues that

18a

Cox erred in voluntarily dismissing himself from count I

because Substantial was not the proper party-plaintiff and,

therefore, the verdict as to count I should be reversed.

Plaintiffs point out that at the conclusion of the evi-

dence it was Doctor’s Associates who suggested that Sub-

stantial be dismissed as a party-plaintiff. Counsel for

plaintiffs replied that he would not dismiss either Cox or

Substantial as a plaintiff because he did not want to be

accused of dismissing the wrong party. Plaintiff's counsel

maintained: “Our position [is] that both of them are and

if they want to take a position one is correct and one in-

correct one [sic], they can take that position but I am not

going to dismiss one or the other and have them argu-

ing you dismissed the wrong one. They will have to make

the motion.” The trial court found that there was “an

assignment, the legal sufficiency of which has never seri-

ously been challenged.” After further argument by both

parties, but without an acknowledgement by plaintiffs

counsel that it was the proper course to take, the court

ruled that the proper plaintiff was Substantial and that

Cox was to remain in as a counterdefendant only.

We cannot find that the determination of the trial court

was in error. Plaintiffs argue that defendant was aware

of the assignment of Cox’ and Yates’ interests in the

franchises to Substantial. We note that the initial fran-

chise agreements permit the franchisee to assign his rights

under the agreement to a corporation. The franchise

agreements, while specifying certain restrictions on the

assignment of such interests, do not require notification

of Doctor’s Associates. In addition, while Cox acknowl-

eged that the franchise agreements were signed by Cox

and Yates personally, he testified that all checks written

to Doctor’s Associates or Subway were drawn on Substan-

tial’s checking account. Cox testified that both he and

Yates executed an assignment which transferred their in-

terests in the franchises to Substantial, and an assignment

executed by Richard Yates conferring his interest in the

franchises and leases to Substantial was admitted into

evidence.

ON RS ee aids eed “sedate Hn Ee

19a

A court of review will not substitute its Opinion and

disturb the findings of the trial court unless the decision

of the trial court is manifestly against the weight of the

evidence. (Herst v. Chark (1991), 219 Ill.App.3d 690,

579 N.E.2d 990.) We have reviewed the record in its

entirety. Given the evidence that notice of an assignment

to Doctor’s Associates was not required under the fran-

chise agreements, that all royalty and advertising fee pay-

ments to Doctor’s Associates were drawn on Substantial’s

account, and that Doctor’s Associates had reason to be-

lieve Substantial was the assignee of Cox’s and Yates’

interests in the franchises yet took no action to contest

the assignment, we cannot find that the trial court’s find-

ing that Substantial was the proper party-plaintiff was

erroneous.

Doctor’s Associates also raises several evidentiary is-

sues for our review. First, Doctor’s Associates argues

that the trial court erred in admitting evidence relating

to other eviction lawsuits filed by Doctor’s Associates.

Doctor’s Associates moved in limine to prevent plaintiffs

from questioning Leonard Axelrod about a lawsuit be-

tween Doctor’s Associates and a California franchisee.

Plaintiffs’ counsel argued that he would only need to

refer to the California lawsuit if Axelrod’s testimony

about the purpose behind the required sublease arrange-

ment differed from the testimony he gave in the California

action. The court denied defendant’s motion in limine.

Plaintiffs argue that the testimony as to the witnesses’

prior answers to the same questions involving Doctor’s

Associates’ business practices and policies as to evictions

was relevant because in the instant case Doctor’s Asso-

ciates represented in its franchise-offering circular that it

would use good faith in resolving disputes with its fran-

chisees before instituting an eviction action. Plaintiffs’

counsel used the California transcript to examine Axelrod

about Doctor’s Associates’ business practices with regard

to its use of the sublease arrangement and eviction law-

suits. Defendants argue that plaintiffs questioned Axelrod

20a

extensively about evictions of other franchisees. Our re-

view of the record demonstrates that the only reference

to any other lawsuit was the reference to the California

case to establish that Axelrod had previously testified about

the business practices of Doctor’s Associates in dealing

with its franchisees. Specific eviction lawsuits concerning

other franchisees were not brought out during Axelrod’s

examination.

A reviewing court will not reverse a trial court’s ruling

on a motion in limine unless the court abused its discre-

tion. (People v. Williams (1978), 60 Ill.App.3d 529,

532, 377 N.E.2d 367, 370; Department of Public Works

& Buildings v. Rochrig (1976), 45 Ill.App.3d 189, 359

N.E.2d 752.) Contrary to defendant’s assertion, we do

not find that the admission of the evidence was irrelevant

or prejudicial, nor do we find that the trial court abused

its discretion in denying the motion in limine.

A second evidentiary issue presented for review is the

trial court’s admission of evidence as to Doctor’s Asso-

ciates’ corporate and franchisor status in Illinois. Defend-

ants moved in limine to exclude any reference to its not

being registered as a foreign corporation in Illinois. The

court allowed the motion in limine under the condition

that plaintiffs would be permitted to present such evidence

if they could demonstrate that evidence of lack of registry

was relevant to the issues in this lawsuit. Doctor’s As-

sociates’ technical violations of the Illinois franchise reg-

istration laws were brought out during examination of

Leonard Axelrod and Hossein Naemi. Defendants argue

that this evidence was irrelevant and inflamatory and

admitted solely to poison the minds of the jury against

Doctor’s Associates, and that the evidence contributed

to the award of punitive damages. |

Plaintiffs tried to get Axelrod to admit that Doctor’s

Associates violated the Illinois franchise disclosure law

by not registering as a foreign corporation licensed to do

business in this State. Axelrod, while not admitting or

21a

denying that Doctor’s Associates was a registered foreign

corporation licensed to do business in Illinois, explained

that Doctor’s Associates believed that it was not required

to register with the Secretary of State:

“Doctor’s Associates does not own any property or

lease any property or have any employees in the

State of Illinois and as a consequence is not required

to register as a foreign corporation. All it does is

sell franchises into the State of Illinois.

* * *

* * * [T]he way we understand it is that Doctor’s

Associates by merely selling franchises into the State

of Illinois or any state is not required to register as

a foreign corporation.

* * *

* * * [I]t does not have any property here that

connects it, doesn’t do both things where it’s required

under the Interestate Commerce Act to register as a

foreign corporation in the State of Illinois so that

it would then have to pay taxes and file taxes, stuff

like that, in Illinois. It pays its taxes in Connecticut.

* * *

That’s correct, but since it doesn’t do those acts

which require it to register in the State of Illinois

as a foreign corporation and specifically one of the

reasons was for setting up that leasing corporation

to do this was so that it wouldn’t have both of those

facets, where it would be required to register * * *,”

With regard to plaintiffs’ counsel’s questions as to whether

development agent Naemi was at one point in 1987,

1988, or 1989 unlicensed and, therefore, unlawfully sell-

ing franchises in Illinois, Axelrod testified: “Oh, no. He

did not sell any franchises in Illinois until he was legally

qualified to do so.” Axelrod agreed that in order for

Naemi to act as a development agent and sell franchises

he would have to be registered with the State of Illinois.

Axelrod testified that although one of the duties of a

22a

development agent is to sell franchises, sometimes they

do not sell franchises. He testified that even though

Naemi was the development agent during a period of time

when he was not licensed to sell franchises, Doctor’s

Associates was still lawfully able to sell franchises in

Illinois.

As illustrated in the following colloquy, plaintiffs’ coun-

sel inquired as to whether Doctor’s Associates was law-

fully selling franchises in Illinois at the time the plaintiffs

purchased their franchises:

“Q. One of the job duties of a development agent

is to sell franchises?

A. That’s correct, but sometimes they don’t sell

franchises.

Q. All right. And if Mr. Naemi wasn’t the de-

velopment agent for this area in southern Illinois in

1987 and 1988, nobody was; is that right?

A. Oh, no. I can see you are confusing that.

Franchises get sold and can get sold very easily

through the company main office. It gets sold

through Fertman (phonetic), Foleo, whoever was

registered with the State of Illinois at the time, and

that’s how they get sold. I mean, you are confusing.

You believe that only development agents can sell a

franchise in the State of Illinois and that’s just un-

true. We have people within the organization that

are qualified and licensed annually, continually, to

sell franchises and that’s what probably happened.

Q. State of Illinois says for you to be involved

in any way—

A. He is not involved in those sales, because the

way they get sold is they get sold through the per-

son who is qualified and we qualify people within the

home office including Fred Deluca.

Q. The State of Illinois says to be involved in

the sale of a franchise in any way—

A. So what? It doesn’t mean that he was selling

those franchises. Those sales were coming through

—_—

23a

a person who was qualified to sell them. He wasn't

issuing any brochures. What he was doing was re-

ferring them back to the home office to do the sale.

* * *

Q. Mr. DeLuca is a registered dealer in the State

of Illinois because he has some remote involvement

in the sale of franchises so he has to be a registered

dealer?

A. No, sir, that’s not the reason we register him

as dealer. We register him as a dealer because there

are occasions when he may have a conversation with

somebody to sell them, that would involve him in

the sale of a franchise. Just be very, very safe.

However, what we do is we register our people at

the home office, and that’s where the sales take

place.”

Hossein Naemi was also questioned regarding alleged

violations of the Illinois franchise registration laws. He

testified that from approximately November 1987 through

July of 1988, for some reason unknown to him. Subway

could not sell franchises in Illinois. He testified that as

far as he knew no franchises were sold in Illinois during

that time.

Emphasis on a defendant's corporate nature is improper

because it tends to distract the jury from the real issue in

the case and tends to evoke prejudice the jury might har-

bor against corporations generally. (Babcock v. Chesa-

peake & Ohio R.R. Co. (1979), 83 Ill.App.3d 919, 404

N.E.2d 265.) However, a reference to corporate and

franchisor status need not require that a verdict be set

aside if it appears no actual prejudice resulted. (See

Ruffiner v. Material Service Corp. (1985), 134 Ill.App.3d

747, 758, 480 N.E.2d 1157, 1165, rev'd on other grounds

(1987), 116 Ill.2d 53, 506 N.E.2d 581; Congregation of

Passion, Holy Cross Province v. Touche Ross & Co.

(1991), 224 Ill.App.3d 559, 586 N.E.2d 600. appeal

allowed (1992), 144 Ill. 2d 632, 591 N.B.2d 20.) A

court of review looks not at whether an error-free trial

24a

occurred, but whether error occurred which prejudiced

the appellant or unduly affected the outcome. (Bruske

v. Arnold (1969), 44 Ill.2d 132, 139, 254 N.E.2d 453,

457.) We do not believe that the references at bar rose

to the level of reversible error.

While plaintiffs’ counsel apparently attempted to draw

testimony from the witnesses that Doctor’s Associates

violated the Illinois franchise laws, it is equally apparent

that the witnesses were given much latitude in testifying

that plaintiffs were wrong in their assumption and that

Doctor’s Associates believed that it did not violate any

law. As for specific inquiries by plaintiffs’ counsel as to

why Naemi waited to become a licensed broker and

whether Doctor’s Associates would have to pay Illinois

franchise taxes if it was wrong about not having to reg-

ister as a foreign corporation in this State, the court

sustained defendant’s objections to these questions. In

addition, the trial court instructed the jury that a corpora-

tion deserves the same fair treatment as an individual.

The trial judge was in a better position to assess prejudi-

cial impact upon the jury (see Ruffiner, 134 Ill.App.3d

at 759, 480 N.E.2d at 1165), and he denied defendant’s

post-trial motion which included an allegation of preju-

dicial error based on these references.

The next issue raised by defendant is whether the trial

court erred in admitting evidence of the earnings of the

two sole shareholders of Doctor’s Associates, Fred DeLuca

and Peter Buck.

At trial evidence was presented that the net worth of

the corporation was $7 million dollars as of April 1991.

In addition, the following statement was read into

evidence:

“Doctor’s Associates, Inc. has a corporate structure

which is perfectly legal, which pays the net annual

income of the corporation to the two shareholders of

that corporation in equal shares. The amount of

25a

compensation paid to Mr. Frederick DeLuca and

separately to Mr. Peter Buck for the past four years

is: 1987, five million dollars a piece; 1988, ten mil-

lion dollars a piece; 1989, sixteen million dollars a

piece; 1990, twenty-seven million dollars a piece.”

Defendant argues that the trial court erred in permitting

evidence of net earnings rather than net worth. Defend-

ant cites Fopay v. Noveroske (1975), 31 Ill.App.3d 182,

334 N.E.2d 79, in support of its argument.

Traditionally, courts have used net worth to measure a

defendant’s wealth, net worth being defined as the aggre-

gate of the equities representing proprietary interests; the

excess of the going-concern value of assets over liabilities

to outsiders. (Fopay, 31 Ill.App.3d at 200, 334 N.E.2d

94.) In Fopay, the court held that evidence of net earn-

ings was not admissible on the issue of punitive damages

because earnings were intertwined with net worth. In the

instant case, evidence was presented that in closely held

businesses, such as Doctor’s Associates, the shareholders

are free to take out whatever salary they choose, leaving

whatever net worth in the corporation that they desire.

Under the circumstances of this case, we do not find the

decision of the trial court to be inconsistent with the hold-

ing in Fopay.

Another evidentiary issue on appeal is whether the trial

court erred in permitting parol evidence to vary the terms

of the franchise agreements. Doctor’s Associates contends

that the trial court improperly allowed parol evidence on

two occasions. In particular, defendant maintains that

plaintiffs were permitted to testify that oral promises were

made that (1) plaintiffs could open as many franchises as

they wanted, and (2) space within a regional mall was a

separate market from the surrounding area. Defendant

asserts that neither of these alleged promises were set

forth in any written agreement, and that this erroneous

parol evidence operated to vary the terms of the franchise

26a

agreements, thus lending credence to the jury finding that

defendant breacined the contracts.

As for the first instance of alleged improper parol evi-

dence, we find that plaintiffs’ testimony was not incon-

sistent with the franchise-offering circular, the promo-

tional brochure, or the franchise agreements. These docu-

ments provided that there are no territorial limits and that

site approval for new locations would not be unreasonably

withheld. The franchise-offering circular, the promotional

brochure, and the franchise agreements are silent as to

how many franchises a franchisee is permitted to open.

Plaintiffs’ testimony that space within a regional mall was

a separate market from the surrounding area and that

plaintiffs could open as many franchises as they wanted

did not operate to vary the written terms. Under the

parol evidence rule, extrinsic evidence of a prior or con-

temporaneous agreement is inadmissible to vary, alter, or

contradict the terms of a written instrument that is com-

plete, unambiguous, valid, and unaffected by fraud, duress,

mistake, or illegality. (Chicago White Metal Casting, Inc.

v. Treiber (1987), 162 Ill.App.3d 562, 517 N.E.2d 7;

Johnson v. Flueckiger (1980), 81 IllL.App.3d 623, 401

N.E.2d 1317.) Based on the foregoing, we cannot find

that the trial court erred in allowing the plaintiffs’ testi-

mony.

The next issue on appeal is whether the trial court

erred in admitting evidence from Substantial’s expert wit-

nesses because plaintiffs violated Supreme Court Rule 220

(134 Ill.2d R. 220).

Pursuant to a pretrial discovery order, piaintiffs desig-

nated Lloyd Gordon and Robert Seiffert as their expert

witnesses. The pretrial discovery order provided that the

case was to be set for trial in late February 1991. Doc-

tor’s Associates deposed Seiffert on December 19 and 20,

1990. Doctor’s Associates argues that it was not until!

January 31, 1991, that plaintiffs supplemented discovery,

thereby putting defendant on notice of Seiffert’s opinion

27a

regarding a 50-store model. Plaintiffs tendered Seiffert for

an additional discovery deposition. Defendant objected

to redeposing Seiffert on new theories but did depose him

again on February 8, 1991. Defendant contends that the

trial court violated Supreme Court Rule 220 134 IIl.2d R.

220) by allowing Seiffert to testify regarding information

submitted to him after his first deposition.

We cannot find that the trial court erred. We note at

the outset that neither deposition of Seiffert is included in

the record. The record does show, however, that at a

hearing before the trial court defendant admitted to hav-

ing received notice at the first deposition on December 19,

1990, of Seiffert’s intention to testify about a 45-store

model. Defendant’s claim of prejudice regarding Seiffert’s

testimony on the multistore model is further diluted in

view of the fact that the trial court ruled that Seiffert

could rely upon documents produced to Doctor’s Asso-

ciates before Seiffert’s second discovery deposition but

could not rely upon any documents produced after Feb-

ruary 8, 1991. Supreme Court Rule 220 mandates the

completion of discovery no later than 60 days prior to

trial. (Ill.Rev.Stat. 1991, ch. 110A, par. 220; Marshall

v. Taylor-Wharton Co. (1992), 234 Ill.App.3d 596, 609,

599 N.E.2d 1015, 1022.) The trial began on April 15,

1991, more than 60 days after Seiffert’s second discovery

deposition. It appears from the record that discovery on

behalf of both parties, including, but not limited to, dis-

covery relating to Seiffert, resulted in the February trial

date being moved to April 1991. It is not evident in the

record, and defendant has not claimed, that the April

trial date was the direct result of the extended discovery

concerning witness Seiffert. Based on the circumstances,

we cannot conclude that Rule 220 was violated.

Defendant further contends that Rule 220 was violated

by the testimony of a leasing representative for May

Centers, Paul Nagel, who testified about demographics

and fast food franchises and gave his opinion that re-

28a

gional shopping malls constitute a separate market. Nagel

was not disclosed as an expert, and plaintiffs assert that

he did not testify as an expert at trial. Plaintiffs acknowl-

edge that Nagel gathered data about fast food restaurants

and shopping malls, but they contend that he testified

solely as an occurrence witness.

A review of Nagel’s testimony demonstrates that his

testimony was beyond that of an occurrence witness.

Nagel testified regarding data he gathered and a survey

he conducted concerning shopping malls and markets for

fast food franchises in general. Nagel concluded that

there is widespread recognition by the shopping mall in-

dustry that fast food franchises may be located both in-

side and outside an enclosed shopping mall without

infringing on each other’s market. Defendant argues that

the jury impermissibly heard expert testimony as to sepa-

rate market areas.

The question of whether a witness must be disclosed as

an expert under Rule 220 partially depends on the expert’s

relationship to the case. (Wakeford v. Rodehouse Restau-

rants of Missouri, Inc. (Ill. December 4, 1992), No.

73352, slip op. at 4, 154 Ill. 2d 543, N.E.2d 3

Nondisclosure of Nagel violated Rule 220, but we con-

clude that the error was harmless in this case. At the

most, the jury heard that it was feasible and a widely

accepted practice to have the same food franchise located

both inside and outside a mall. Defendant does not argue

how this testimony prejudiced Doctor’s Associates, and

without more we cannot find that the testimony was suffi-

cient to constitute reversible error.

Doctor’s Associates next argues that the trial court

erred by allowing speculative evidence to be introduced

by plaintiffs’ expert Robert Seiffert. Seiffert gave his opin-

ion of the value of Substantial’s Subway stores as of the

time of trial assuming Substantial had been permitted to

proceed with its 50-store development plan. Defendant

argues that Seiffert’s testimony was improper because he

29a

told the jury of Substantial’s lost earnings based upon a

hypothetical model which he and the plaintiffs created.

Doctor’s Associates also objected to various exhibits which

Seiffert created based upon his hypothetical model.

An expert may give an opinion without disclosing the

facts underlying such an opinion. (Wilson v. Clark

(i981), 84 Ill.2d 186, 417 N.E.2d 1322.) The burden

is on the adverse party during cross-examination to elicit

facts underlying the expert's opinion. (Wilson, 84 Ill.2d

at 194, 417 N.E.2d at 1326.) Defendant took advantage

of the opportunity to cross-examine Seiffert as to his

method of arriving at damages. Defendant also acknowl-

edges that its own expert, Dennis Nigles, gave his opinion

that plaintiffs’ projected multistore plan would not have

become a profitable operation.

Robert Seiffert is a certified public accountant. Plain-

tiffs point out, and the record substantiates, that Seiffert

utilized the following factors in arriving at an opinion of

total economic losses: demographic data on proposed site

locations, average sales figures in fast food restaurants for

different types of locations, the actual economic history

of the five stores operated by Substantial, documents from

Doctor’s Associates on average sales for Subway stores

and related information, actual sales records of typical

stores as well as the existing five stores, average expenses

for fast food restaurants at different types of locations,

traffic count at proposed locations, average sales per cus-

tomer at fast food restaurants, success and failure rate of

fast food restaurants in different types of locations, and

the estimated starting costs and Start-up dates at each new

location. Defendant's expert, Dennis Nilges, an account-

ant, testified that although he thought Seiffert’s underlying

assumptions were faulty, he would not say that Seiffert’s

overall methodology was. Niiges testified that changing

the underlying assumptions would change the bottom-line

figure on total damages. Nilges also testified that he has

used methods similar to those utilized by Seiffert.

30a

The difficulty of ascertaining damages for a particular

wrong is not a reason to deny a cause of action for its

redress. (Goldberg v. Ruskin (1986), 113 Ill.2d 482,

490, 499 N.E.2d 406, 410.) While damages may not be

predicated on mere speculation, absolute certainty con-

cerning the amount of damages is not necessary; the evi-

dence need only tend to show a basis for the computation

of damages with a fair degree of probability. (Amp-Rite

Electric Co. v. Wheaton Sanitary District (1991), 220

Ill.App.3d 130, 166, 580 N.E.2d 622, 646.) We do not

believe Seiffert’s testimony as to damages was too specula-

tive to have been considered.

The next issue Doctor’s Associates raises is whether the

trial court erred in failing to award sanctions against the

plaintiffs, their counsel, and their expert, for disclosing

confidential information. Defendant refers to a protective

order which limited the use and disclosure of Doctor’s

Associates’ financial data, including income statements

and statements as to gross profits and expenses, to desig-

nated experts and parties for the purpose of this litigation

only. After the conclusion of the trial, Doctor’s Asso-

ciates learned that confidential information may have been

disclosed to John Weible in violation of the protective

order. Weible was a witness called by plaintiffs who is

also a plaintiff in a California case against Doctor’s

Associates.

After defendants deposed Weible, they filed a motion

for sanctions alleging in pertinent part that: (1) Weible

admitted that he had obtained confidential financial in-

formation which was left in his hotel room, and that this

information was furnished by him to various State agen-

cies; (2) Weible admitted that contents of the deposi-

tion of Ralph Slivka were disclosed to him notwithstand-

ing the verbal promise of plaintiffs’ counsel at Slivka’s

deposition to keep such information confidential prior

to a ruling on the court with respect to its admissibility;

and (3) Weible admitted that he had furnished informa-

tion concerning Slivka’s deposition to Alberto Esteva,

3la

an attorney with the California Department of Corpora-

tions, about purported disclosures made by Slivka in his

deposition. The trial court denied defendant’s motion

for sanctions.

John Weible testified at his deposition that he was

asked to testify for the plaintiffs in the instant case, and

that sometime prior to trial he received: a copy of plain-

tiffs’ complaint, copies of pleadings, a copy of the pro-

posed protective order, copies of DeLuca’s deposition,

Parent’s deposition, and Christopher McDonald’s deposi-

tion, and answers to interrogatories propounded by the

defendant. When asked whether he was ever shown any

financial information of Doctor’s Associates, Weible testi-

fied that none of the attorneys or their representatives

showed him any financial documents. Weible testified

however, that he had seen documents containing financial

information which had been left in his room during the

course of the trial. He testified: “[T]hey were file boxes

that contained exhibits and other documents, develop-

ment agent agreements and information that was being

used during the course of the trial. * * * I saw financial

information on Mr. DeLuca. * * * I saw his tax return.”

Weible continued:

“At the time, I was just sitting in my room and I

decided to take a look at what they had compared

to what I had. And quite a bit of the information

I had supplied them was marked as exhibits during

the trial, and was in their file boxes. And I was just

looking at the documents. I did not copy any docu-

ment. I did not take any document.”

He further testified that he made no notes regarding

any of the documents.

At the hearing on the motion for sanctions, counsel for

the plaintiffs advised the court that John Weible had a

hotel room separate from a conference room which was

used to store evidence for the trial. Counsel] stated that

32a

he had no knowledge that any kind of confidential infor-

mation was made available or inadvertently left where

Weible could have looked at it.

Regarding Slivka’s deposition, which defendant asserts

Weible was made privy to during a car trip, Weible was

asked what was said in his presence. Weible testified

that he was not told anything regarding Slivka’s deposi-

tion, although he did recall overhearing that the fran-

chisee advertising fund did not exist until about January

of 1991. Weible further testified that he disseminated

information to the California Department of Corpora-

tions regarding what he had learned about Doctor’s As-

sociates after Slivka’s deposition was read in open court.

Weible testified that he told Esteva, an attorney with the

California Department of Corporations, that Weible’s

allegations regarding the franchise advertising fund were

confirmed by the testimony of Slivka which he had heard

in court.

The sanction, if any, to be imposed for failure to com-

ply with discovery orders depends on the facts of each

case and is within the trial court’s discretion. The trial

court’s discretion in deciding whether to impose such

sanctions is broad and will not be interfered with unless

it appears that it has been abused. (Amos v. Norfolk &

Western Ry. Co. (1989), 191 Tll.App.3d 637, 548

N.E.2d 96; Romano v. Bittner (1987), 157 Ill.App.3d

15, 510 N.E.2d 924; Fischer v. G & S Builders (1986),

147 Ill.App.3d 168, 497 N.E.2d 1022.) The trial court

decided that there was insufficient evidence to establish

that plaintiffs violated the protective order. Plaintiffs

denied intentionally or inadvertently leaving confidential

documents within Wieble’s reach. Furthermore, Weible’s

testimony about the dissemination of Slivka’s deposition

testimony does not demonstrate a violation of the pro-

tective order. We cannot find that the trial court abused

its discretion in refusing to grant Doctor’s Associates’

motion for sanctions,

ee Te

33a

The final issue for our review is whether the trial

court erred in submitting Substantial’s claim for punitive

damages to the jury.

Defendant first argues that Illinois punitive damages

law violates the due process and equal protection clauses

of the United States Constitution because Illinois puni-

itve damages law contains no limiting standard and,

therefore, allows a jury unfettered discretion to fashion

punitive damages awards. While it has been suggested

that unlimited jury or judicial discretion in fixing puni-

tive damage awards may border on unconstitutionality

(Pacific Mutual Life Insurance Co. v. Haslip (1991),

US. » 113 L.Ed.2d 1, 111 S.Ct. 1032), the

Supreme Court has also noted that general concerns of

reasonableness and adequate guidance from the court

when a case is tried to a jury enter into the constitutional

equation. Haslip, U.S. at , 113 L.Ed.2d at

, 111 S.Ct. at 1043.

By its instructions, the trial court informed the jury

that the plaintiff sought punitive damages to punish the

defendant’s willful and wanton conduct. The jury was

instructed that in order to find in favor of the plaintiff

the jury had to find the plaintiff proved each of the fol-

lowing propositions:

“First, that Defendant Doctor’s Associates, Inc.

willfully and with wanton disregard of the rights of

others failed to perform its promises and obligations

under the franchise contracts with Plaintiff in good

faith and with fair dealing; and

Second, that Defendant Doctor's Associates, Inc.

acted willfully and with wanton disregard for the

rights of others in making false representations of

material fact, known to be false by Defendant, made

to induce the Plaintiff to act, causing Plaintiff to

justifiably act in reliance on said representations and

that Plaintiff was caused to incur damages for breach

34a

of contract and Plaintiff is entitled to recover puni-

tive damages as a result of Defendant’s willful and

wanton conduct.”

The court described willful and wanton conduct as con-

duct which shows utter indifference to or conscious dis-

regard for another. The court also advised the jury of

the purpose of an award of punitive damages:

“If you find that the Defendant’s conduct was will-

ful and wanton and caused injury to the Plaintiff,

and if you believe that justice and the public good

require it, you may, in addition to any damages to

which you find the Plaintiff entitled, award an

amount which will serve to punish the Defendant

and to deter others from the commission of like

offenses.”

The instructions gave the jury considerable discretion

in its determination of punitive damages. However, that

discretion was not unlimited. The jury was required to

assess the evidence and determine whether defendant’s

conduct was willful and wanton. The definition of will-

ful and wanton was particularly described for the jury.

We also find it significant that the instructions required

that the plaintiff prove, in order to recover, not only

that defendant acted willfully and with wanton disregard

in making false representations to the plaintiff, but that

defendant acted willfully and with wanton disregard in

failing to perform its promises and obligations under the

franchise contracts in good faith and with fair dealing.

Apart from the instructions, the punitive damages

award was subjected to judicial scrutiny by the trial

court after defendant filed its post-trial motion contesting

the award. The trial court is empowered under section

2-1207 of the Code of Civil Procedure (735 ILCS 5/2-

1207 (West 1992)) to reduce punitive damages awards

and/or to apportion the award. The trial court did

neither in this case. Based on the jury instructions and

35a

the protective safeguards provided, we find that defend-

ant’s interests were reasonably accommodated and due

process was satisfied.

Defendant also argues that the Illinois punitive dam-

ages law violates the equal protection clause of the United

States Constitution because it promotes arbitrary and

irrational discrimination at the unfettered whim of the

jury. Defendant maintains that punitive damages awards

are a product of discrimination against the wealthy, out-

of-State defendants such as Doctor’s Associates and those

who are similarly situated. It is true that arbitrary and

irrational discrimination violates the equal protection

clause (Bankers Life & Casualty Co. y. Crenshaw

(1988), 486 U.S. 71, 83, 100 L.Ed.2d 62, , 108

S.Ct. 1645, 1653): however, we cannot conclude that

the Illinois punitive damages law violates equal pro-

tection.

Under an equal protection analysis, the Illinois puni-

tive damages law will be sustained if “the classification

* * * is rationally related to a legitimate state interest.”

(Bankers Life, 486 U.S. at 81, 100 L.Ed.2d at ’

108 S.Ct. at 1652.) Punitive or exemplary damages are

not awarded as compensation but serve instead to punish

an offender and to deter that party and others from com-

mitting similar acts of wrongdoing in the future. (Loitz

v. Remington Arms Co. (1990), 138 Ill.2d 404, 563

N.E.2d 397.) Because of their penal nature, punitive

damages are not favored in the law, and the courts must

take caution to see that they are not improperly or un-

wisely awarded. (Hammond v. North A merican Asbestos

Corp. (1983), 97 Ill.2d 195, 454 N.E.2d 210.) In this

case the jury was not free to assess punitive damages

without limitation. We find that the jury instructions and

procedural safeguards assured against arbitrary and irra-

tional discrimination violative of the equal protection

clause.

36a

Defendant complains that the jury’s privilege of deter-

mining an award of punitive damages encourages discrimi-

nation. The award of punitive damages has always been

left to the jury’s discretion, as the degree of punishment

to be inflicted must depend on the peculiar circumstances

of each case. (Haslip, U.S. at , 113 L.Ed.2d

at , 111 S.Ct. at 1042, citing Day v. Woodworth

(1852), 54 U.S. (13 How.) 363, 371, 14 L.Ed. 181,

.) Because the award of punitive damages is apt to

be higher where the punishment of a wealthy party is

concerned does not necessarily establish that punitive

damages single out the wealthy. Punitive damages by

their very nature serve to punish the wrongdoer. It is

logical that a punitive damages award against a party

with great wealth must be greater than an award against

a party with meager wealth, as the purpose of punitive

damages is to punish the wrongdoer. Moreover, defend-

ant has failed to demonstrate how punitive damages dis-

criminate against out-of-State defendants. Without more

than a cursory statement to that effect, we decline to

speculate as to defendant’s allegation.

Defendant’s next argument regarding the award of

punitive damages is that such damages are not recoverable

under the theories Substantial submitted to the jury. Spe-

cifically, Doctor’s Associates contends that Substantial’s

only claim was for breach of contract for which punitive

damages are not recoverable.

The jury was instructed as follows on Substantial’s

claim for punitive damages:

“In Count II of its Complaint, Plaintiff Substantial

Enterprises, Inc. claims that Defendant Doctor’s As-

sociates, Inc. did the following:

1. Willfully and with wanton disregard of the rights

of others failed to perform its promises and obliga-

tions under the Franchise Contracts with Plaintiff in

good faith with fair dealing in one or more of the

following respects:

37a

(a) Defendant gave approval to Plaintiff to put

Subway restaurants in Mid Rivers Mall, Alton

Square Mall and a future site in St. Clair Square

and, with knowledge of Plaintiff's commitment

to the May Centers, Inc., withdrew the ap-

proval;

(b) Defendant approved a second group of site

locations in Troy, Granite City and Belleville,

Illinois and then, because of the dispute with

Plaintiff over Mid Rivers Mall, Defendant re-

fused to allow Plaintiff to open a Subway res-

taurant at any of these three locations or to buy

additional franchises;

against Plaintiff before resolving the issue of de-

fault on the Mid Rivers Subway location by

either arbitration or litigation.

2. And by willfully and wantonly making one or

more of the following representatives to Plaintiff:

(a) That Defendant would not unreasonably

withhold site approval;

(b) That disputes would be resolved by ar-

bitration and that eviction actions would not

be initiated until and unless the issue of default

had first been decided in favor of the Defendant

by arbitration or litigation;

with knowledge that the above mentioned repre-

sentations were false; and the representations were

made by Defendant with the intention to induce

Plaintiff to purchase franchises and to purchase ad-

ditional franchises; and Plaintiff justifiably acted in

reliance on said representations in purchasing eight

franchises, opening five Subway restaurants and lin-

ing up investors and financing to implement a de-

velopment plan and, as a direct consequence of the

rans ten mpm mente en

38a

falsity of Defendant’s representations, Plaintiff was

caused to suffer damages for breach of contract.

Plaintiff seeks punitive damages to punish Defend-

ant’s willful and wanton conduct.

The Defendant Doctor’s Associates, Inc. denies that

it did any of the things claimed by the Plaintiff,

denies that it was fraudulent in doing any of the

things claimed by the Plaintiff and denies that any

claimed fraudulent representation on the Defend-

ant’s part was a proximate cause of the Plaintiff's

claimed injuries.”

The jury was thus instructed they could award punitive

damages if they found that Doctor’s Associates acted

willfully and wantonly in fraudulently misrepresenting its

method of resolving disputes with franchisees and/or

fraudulently misrepresenting its method of approving site

locations.

Doctor’s Associates argues that Substantial’s only claim

is for breach of contract for which punitive damages are

not recoverable. Doctor’s Associates points out that as

a general rule punitive damages are not recoverable for

breach of contract. (Morrow v. L.A. Goldschmidt As-

sociates, Inc. (1986), 112 Ill.2d 87, 94 492 N.E.2d 181,

183.) An exception to this rule arises when conduct

causing the breach amounts to an independent tort for

which punitive damages are recoverable. (Morrow, 112

Ill.2d at 94, 492 N.E.2d at 184; Bank of Lincolnwood

v. Comdisco, Inc. (1982), 111 Ill.App.3d 822, 444

N.E.2d 657.) However, merely describing a breach as

willful and wanton does not convert a breach of con-

tract claim into a tort claim. See Morrow, 112 Ili.2d

at 98, 492 N.E.2d at 185.

Doctor’s Associates maintains that in order to avoid this

well-established rule, Substantial has tried to disguise its

claim for breach as a tort of willful and wanton conduct

involving fraudulent misrepresentation. The two obliga-

—

39a

tions Substantial asserts Doctor’s Associates committed

to and then disavowed relate to (1) withholding site ap-

proval and (2) filing eviction actions without first re-

solving the issues by arbitration or litigation. Doctor’s

Associates argues that these actions, which Substantial

claims constitutes the purported tort, are precisely the

obligations which form the basis of plaintiff’s claim of

breach of contract.

It is clear that Substantial’s claim for breach of con-

tract parallels its claim for punitive damages in that the

same conduct is involved in each claim. The difference

between the two claims, however, is that the punitive

damages claim alleges the conduct was performed will-

fully and wantonly with Doctor’s Associates fraudulently

misrepresenting material facts. Substantial argues that the

fact that the claim for punitive damages arises from the

action for breach is of no matter because the breach in

this case constitutes an independent tort for which puni-

tive damages are recoverable. Plaintiff relies on Bank

of Illinois v. Bill’s King City Stationery, Inc. (1990), 198

['l.App.3d 434, 555 N.E.2d 1133, as authority.

In Bill's King City, the owners of a corporation agreed

to sell the stock of the corporation to Petersen, the third-

party defendant. The parties’ agreement provided that

the sellers would retain title and possession of the stock

until paid in full, and that Petersen would operate the

business as general manager until that time. Petersen

further agreed not to obligate the corporation for any

debts other than those incurred in the normal course of

operations. While the owners still retained possession of

the stock, Petersen obtained a loan from the plaintiff

bank, pledged the assets of the corporation as security,

and signed off on the loan as president of the company.

While Petersen stated that the loan would be used for

purchasing inventory and working capital, he in fact used

the loan to repay a personal debt. He eventually ceased

making payments to the owners for their stock. The

owners sued Petersen for breach of the stock-purchase

40a

agreement and for fraud. On appeal, the award of puni-

tive damages was upheld on the fraud claim because the

court found a fraud independent of Petersen’s breach of

his agreement with the owners. Petersen not only

breached his promise to pay for the stock, he committed

a fraud when he transformed his personal indebtedness

into a corporate indebtedness and pledged the corpora-

tion’s assets when he did not even own the company’s

stock.

In the instant case, evidence was presented that under

the Illinois Franchise Disclosure Act of 1987 (Ill.Rev.

Stat. 1987, ch. 121 1/2, par. 1701 et seg.) Doctor’s As-

sociates was required to deliver a disclosure statement

of its business practices and the details of its franchise

contracts to prospective franchisees. Substantial’s theory

behind its claim for punitive damages is that Doctor’s

Associates not only failed to make full disclosure but also

made overt fraudulent misrepresentations as to its busi-

ness experience, the details of the franchise contract,

and the relationship of the franchisor-franchisee. Evi-

dence was presented that the promotional brochure, on

which Doctor’s Associates admits prospective franchisees

are permitted to rely, represents that Doctor’s Associates’

approach is antiauthoritarian and democratic. Contrary

to the express language of the promotional brochure, the

franchise agreements, and the sublease agreements, Doc-

tor’s Associates admitted that it relied on eviction lawsuits

to control franchisees. Leonard Axelrod testified that

it was Doctor’s Associates’ practice to exert control over

the franchisee through the sublease agreement. The fran-

chise agreement and sublease agreement do not notify

the franchisee that Doctor’s Associates’ method of re-

solving disputes as to whether the franchisee is in de-

fault is by filing eviction lawsuits rather than via arbi-

tration or litigation.

The promotional materials distributed by Doctor’s As-

sociates represented that existing franchisees did not have

territorial rights and that franchisees would not unrea-

aaa

4la

sonably be denied site approval. These materials also

represented that Doctor’s Associates would act in good

faith and would make good faith efforts to negotiate any

disputes with its franchisee. In this case, there was evi-

dence that Hossein Naemi approved the three-mall deal

and Substantial committed to the mall-leasing representa-

tive to execute leases for the sites, only to have Doctor’s

Associates disavow its approval of the sites. Substantial

went ahead with opening a deli in the Mid Rivers Mall

under the name SubCity. The evidence demonstrated

that Doctor’s Associates warned Substantial that Doctor’s

Associates would evict and bankrupt Substantial unless

Substantial converted the SubCity into a Subway, paid

$7,500 for that franchise, purchased Kelly Clapp’s store,

and paid royaities to Doctor’s Associates on all sales at

the SubCity from the date it was opened. There was

evidence that negotiation between Doctor’s Associates

and Substantial as to their differences in opinion regard-

ing this matter was virtually nonexistent.

Additional evidence was presented that after Substan-

tial failed to comply with Doctor’s Associates’ demands

Doctor’s Associates refused to permit Substantial to use

any of its three purchased-but-unused franchise agree-

ments and refused to sell Substantial any new franchise

agreements. Cox testified that Axelrod told him that

Substantial was “stopped cold.”

Based on the evidence, we conclude that the jury could

find that the willful and wanton fraudulent misrepresen-

tation was extraneous to the breach, amounting to an

independent tort for which punitive damages could be

awarded.

Doctor’s Associates argues that even if punitive dam-

ages are recoverable in this case, the trial court should

not have submitted the issue to the jury because Doctor's

Associates’ conduct was not outrageous enough to war-

rant punitive damages. Defendant notes that for an award

of punitive damages to be proper the conduct must be

42a

outrageous, either because the defendant’s acts are done

with an evil motive or because they are done with reck-

less indifference to the rights of others. (Loitz v. Rem-

ington Arms Co. (1990), 138 Ill.2d 404, 415-16, 563

N.E.2d 397, 402.) Defendant claims that the case at bar

simply involves a private business dispute that arose in

the context of an arms-length business transaction, and

the imposition of punitive damages in such a circumstance

is clearly erroneous. Substantial maintains that there was

sufficient evidence that Doctor’s Associates willfully,

wantonly, and with reckless disregard made fraudulent

misrepresentations which induced the plaintiffs into en-

tering into a franchisee/franchisor relationship. Promises

Doctor’s Associates previously made were not kept, and

threats of eviction were made in attempts to coerce Sub-

stantial into performing at the specific direction of Doc-

tor’s Associates.

Punitive damages are intended to punish the wrong-

doer and to deter that party and others from committing

similar acts in the future. (Loitz v. Remington Arms Co.

(1990), 138 IlL.2d 404, 563 N.E.2d 397.) Under the

facts of this case, we cannot conclude the trial court

erred in denying defendant’s post-trial relief from the

jury’s imposition of punitive damages.

In light of the foregoing, we affirm the decision of

the circuit court of Madison County as to both the appeal

and the cross-appeal.

Affirmed.

GOLDENHERSH, J., and WELCH, J., concur.

43a

75663

ILLINOIS SUPREME COURT

JULEANN Hornyak, Clerk

Supreme Court Building

Springfield, Ill. 83708

October 6, 1993

Mr. Alan G. Gerson

Blumenfeld, Kaplan & Sandweiss, P.C.

168 North Meramec, $ #400

St. Louis, MO 63105

No. 75663—Dick DeWayne Cox, Jr. et al., respondents, v.

Doctor’s Associates, Inc., petitioner. Leave

to appeal, Appellate Court, Fifth District.

The Supreme Court today DENIED the petition for

leave to appeal in the above entitled cause.

The mandate of this Court will issue to the Appellate

Court on October 28, 1993.

44a

JURY VERDICT

4/26/91

Cox

Ladies and gentlemen of the jury and counsel, the

jury’s verdicts read as follows:

We, the jury, find for the plaintiff Substantial Enter-

prises, Inc. and against defendant Doctor’s Associates,

Inc., on Count I of plaintiff's Complaint. We assess dam-

ages in the sum of two hundred thousand dollars.

Verdict Form A-2: We, the jury, find for plaintiff

Substantial Enterprises, Inc., and against defendant Doc-

tor’s Associates, Inc., on Count II of plaintiff's Complaint.

We assess punitive damages in the sum of one million

dollars.

Form C-1: We, the jury, find for defendant Doctor’s

Associates, Inc. and against plaintiff Substantial Enter-

prises and DeWayne Cox on Count I of defendant’s coun-

terclaim. We assess damages in the sum of two hundred

and fifty-eight thousand and sixty dollars.

Verdict Form C-2: We, the jury, find for defendant

Doctor’s Associates, Inc. and against plaintiffs Substan-

tial Enterprises and DeWayne Cox on Count IV of de-

fendant’s counterclaim. We assess the actual damages

in the sum of fifty thousand dollars. We assess the puni-

tive damages in the sum of zero.

45a

JURY INSTRUCTIONS

4/26/91

Cox

THE COURT: Thank you once again, ladies and

gentlemen. You may be seated. Before I read the in-

structions on the law I would advise you, as counsel have

indicated, that you get to take these written instructions

with you to the deliberation room so you can govern

your note taking accordingly.

The arguments of the attorneys having been completed,

the Court will now instruct you as to the law.

Faithful performance by you as to your duties is vital

to the administration of justice. The law applicable to

this case is contained in these instructions and it is your

duty to follow them. You must consider these instruc-

tions as a whole, not picking out one instruction and

disregarding others. It is your duty to determine the

facts and to determine them from the evidence produced

in open court. You are to apply the law to the facts and

in this way decide the case. Neither sympathy nor prej-

udice should influence you. Your verdict must be based

upon evidence and not upon speculation, guess or con-

jecture. The evidence which you are to consider consists

of testimony of the witnesses and the exhibits offered and

received. The production of evidence in Court is gov-

erned by rules of law. From time to time, it has been

my duty as Judge to rule on the admissibility of evidence.

You must not concern yourselves with the reasons for

these rulings. And you are not to consider exhibits to

which an objection was sustained or testimony or exhibits

which were ordered stricken. Arguments, statements and

remarks of counsel are intended to help you in under-

standing the evidence and applying the law but are not

evidence. If any argument, statement or remark has no

46a

basis in the evidence, then you should disregard that ar-

gument, statement or remark.

The corporate plaintiff, Substantial Enterprises, Inc.

and the corporate defendant, Doctor’s Associates, Inc. in

this case, are entitled to the same fair and unprejudiced

treatment as an individual would be under like circum-

stances, and you should decide the case with the same

impartiality you would use in deciding a case between in-

dividuals. Evidence that was received for a limited pur-

pose should not be considered for any other purpose.

Neither by these instructions nor by any rulings or re-

mark which I have made do I or have I meant to in-

dicate any opinion as to the facts.

In determining whether any proposition has been proved,

you should consider all of the evidence bearing on the

question without regard to which party produced it.

A fact may be proved by circumstantial evidence.

Circumstantial evidence consists of proof of facts or cir-

cumstances which give rise to a reasonable inference of

the truth of the facts sought to be proved.

In considering the evidence in this case, you are not

required to set aside your own observation and experi-

ence in the affairs of life. But you have a right to con-

sider all the evidence in the light of your own observa-

tion and experience in the affairs of life.

You are the sole judges of the credibility of the wit-

nesses and of the weight to be given to the testimony

of each of them. In determining the credit to be given

any witness you may take into account his ability and

opportunity to observe, his memory, his manner while

testifying, any interest or bias or prejudice he may have,

and the reasonableness of his testimony considered in the

light of all the evidence in the case.

An attorney has a right to interview a witness for

the purpose of learning what testimony that witness will

give. The fact that the witness has talked to an attorney

and told him what he would testify to does not by itself

47a

reflect adversely on the truth of the testimony of the

witness.

The credibility of a witness may be attacked by in-

troducing evidence that on some former occasion the

witness made a statement inconsistent with the testimony

of the witness in this case on a matter material to the

issues. Evidence of this kind may be considered by you

in connection with all other facts and circumstances in

evidence in deciding the weight to be given to the tes-

timony of that witness.

During the trial certain testimony was presented to

you by the reading of a deposition and by stipulation.

This testimony is entitled to the same consideration you

would give it had the witnesses personally appeared in

court.

In Count I of plaintiff's Complaint, when I say that

a party has the burden of proof on any proposition or

use the expression “if you find” or “if you decide” I

mean you must be persuaded considering all of the evi-

dence in the case that the proposition on which the

party has the burden of proof is more probably true than

not true.

In Count Ii, when I say that a party has the burden

of proof on any proposition or use the expression “if

you find” or “if you decide”, I mean you must be per-

suaded, considering all of the evidence in the case, that

the proposition on which that party has the burden of

proof is proven by clear and convincing evidence.

When I use the expression “willful and wanton con-

duct”, I mean a course of action which shows utter in-

difference to or conscious disregard for another.

In Count I of its Complaint, plaintiff Substantial En-

terprises, Inc., claims against defendant Doctor’s Asso-

ciates, Inc., as follows: Plaintiff entered into franchise

contracts with defendant consisting of the 1987 franchise

offering circular, the franchise agreement, the subleases,

the 1987 franchise brochure, and advertising materials,

48a

Plaintiff Substantial Enterprises, Inc., substantially per-

formed all of their promises and obligations under the

franchise contracts up to the time Doctor’s Associates,

Incorporated, breached the franchise contracts. Defend-

ant Doctor’s Associates, Inc. failed to perform one or

more of their promises and obligations under the fran-

chise contracts in that: (1) Defendant gave approval to

plaintiff to put Subway restaurants in Mid Rivers Mall,

Alton Square Mall, and a future site in St. Clair Square

and, with knowledge of plaintiff's commitment to the May

Centers, Incorporated, withdrew the approval; (2) De-

fendant approved a secretary group of site locations in

Troy, Granite City and Belleville, Illinois, and then, be-

cause of the dispute with plaintiff over Mid River Mall,

defendant refused to allow plaintiff to open a Subway

restaurant at any of these three locations or to buy ad-

ditional franchises; (3) Defendant filed five eviction law-

suits against plaintiff before resolving the issue of default

on the Mid Rivers Subway location by either arbitration

or litigation. As a direct consequence of defendant’s

breach of its franchise contracts, plaintiff was damaged

by suffering monetary loss for out-of-pocket costs, lost

income, and lost value of stores plaintiff would have put

in operation under its development plan. The defendant

denies that it did any of the things claimed by the plain-

tiff, denies that it breached its contract with the plaintiff

in doing any of the things claimed by the plaintiff, and

denies that any of the claimed acts on the defendant’s

part was a cause of the plaintiff's claimed damages. The

defendant claims that the plaintiff is not entitled to re-

cover because plaintiff failed to perform all of the con-

ditions precedent to any recovery for breach of contract

under the franchise agreements between plaintiff and de-

fendant in one or more of the following respects: (a)

that the plaintiff was not in compliance with the fran-

chise contracts because plaintiff operated a competing

business in violation of the franchise contracts; (b) that

plaintiff was not in compliance with the franchise con-

tracts because plaintiff failed to furnish weekly sales re-

ports; (c) that plaintiff was not in compliance with the

49a

franchise contracts because plaintiff failed to have au-

tomatic withdrawal provisions for payment of franchise

advising funds and royalties; (d) that plaintiff was not

in compliance with the franchise contracts because plain-

tiff failed to pay royalties and franchise advertising fund;

(e) that plaintiff was not in compliance with the franchise

contracts because plaintiff refused to allow inspection by

field representatives; (f) that plaintiff was not in com-

pliance with the franchise contracts because plaintiff sold

unauthorized and unapproved products. The plaintiff

denies that it did any of these acts prior to defendant’s

breach of contract which relieves plaintiff of its duty to

perform these obligations under the franchise contracts.

In Count II of its Complaint plaintiff Substantial En-

terprise, Incorporated, claims that defendant Doctor’s As-

sociates, Inc. did the following: (1) Willfully and with

wanton disregard of the rights of others, failed to per-

form its promises and obligations under the franchise

contracts with plaintiff in good faith and with fair deal-

ing in one or more of the following respects: (a) the

defendant—excuse me, (a) defendant gave approval to

plaintiff to put Subway restaurants in Mid Rivers Mall,

Alton Square Mall and a future site in St. Clair Square

and, with knowledge of plaintiff commitment to the May

Centers, Incorporated, withdrew the approval; (b) De-

fendant approved a second group of site locations in

Troy, Granite City and Belleville, Illinois, and then, be-

cause of the dispute with plaintiff over Mid River Mall,

defendant refused to allow plaintiff to open a Subway

restaurant at any of these three locations or to buy ad-

ditional franchises; (c) Defendant filed five eviction law-

Suits against plaintiff before resolving the issue of default

on the Mid Rivers Subway location by either arbitration

or litigation. And (2) and by willfully and wantonly

making one or more of the following representations to

plaintiff: (a) That defendant would not unreasonably

withhold site approval; and (b) That disputes would be

resolved by arbitration and the eviction actions would

not be initiated until and unless the issue of default had

50a

first been decided in favor of the defendant by arbitra-

tion or litigation; with knowledge that the above men-

tioned representations were false, and the representations

were made by defendant with the intention to induce

plaintiff to purchase franchises and to purchase additional

franchises, and plaintiff justifiably acted in reliance on

said representations in purchasing eight franchises, open-

ing five Subway restaurants, and lining up investors, and

financing to implement a development plan and, as a

direct consequence of the falsity of the defendant’s rep-

resentations, plaintiff was caused to suffer damages for

breach of contract. Plaintiff seeks punitive damages to

punish defendant’s willful and wanton conduct. The de-

fendant Doctor’s Associates, Incorporated, denies that it

did any of the things claimed by the plaintiff, denies that

it was fraudulent in doing any of the things claimed by

the plaintiff, and denies that any claimed fraudulent—

excuse me, any claimed fraudulent representations on the

defendant’s part was a proximate cause of the plaintiff's

claimed injuries.

The plaintiff has the burden of proving each of the

following propositions on Count I of his Complaint:

First, that defendant Doctor’s Associates, Inc. had en-

tered into franchise contracts with plaintiff; Second, that

plaintiff substantially performed all of its obligations and

promises under the franchise contracts up to the time

the contracts were breached by the defendant; Third, that

defendant Doctor’s Associates breached its franchise con-

tracts with plaintiff by failing to perform all of its ob-

ligations and promises under the franchise contracts; and

Fourth, that plaintiff was damaged as a direct conse-

quence of defendant Doctor’s Associates, Inc.’s breach of

the franchise contracts. If you find from your considera-

tion of all the evidence that each of these propositions

has been proved, then your verdict should be for the

plaintiff on Count I, On the other hand, if you find from

your consideration of all the evidence that any of these

propositions has not been proved, then your verdict should

be for the defendant on Count I.

Sla

In Count II of its Complaint, plaintiff Substantial

Enterprises, Inc., has the burden of proving each of the

following propositions: First, that defendant Doctor’s

Associates, Inc. willfully and with wanton disregard of

the rights of others failed to perform its promises and

obligations under the franchise contracts with plaintiff in

good faith and with fair dealing; and Second, that defend-

ant Doctor’s Associates, Inc., acted willfully and with

wanton disregard for the rights of others in making false

representations of material fact, known to be false by

defendant, made to induce the plaintiff to act, causing

plaintiff to justifiably act in reliance on said representa-

tions, and that plaintiff was caused to incur damages

for breach of contract, and plaintiff is entitled to recover

punitive damages as a result of defendant’s willful and

wanton conduct. If you find from your consideration of

all the evidence that each of these propositions“has been

proved, then your verdict should be for the plaintiff on

Count II. On the other hand, if you find from your

consideration of all the evidence that any of these propo-

sitions has not been proved, then your verdict should be

for the defendant on Count II.

The defendant Doctor’s Associates, Inc. has a counter-

claim which consists of two counts. The issues to be

decided by you under Count I of the counterclaim are as

follows: The defendant Doctor’s Associates, Incorpo-

rated,, claims that it was damaged and that the plaintiffs,

Substantial Enterprises, Inc., and DeWayne Co., Jr.,

breached their contract with the defendant in one or more

of the following respects: One—excuse me, (a) to not

engage in another business during the term of their fran-

chise agreement identical with or similar to the business

reasonably contemplated by the franchise agreements and

to pay defendant seven thousand five hundred dollars plus

eight percent of gross sales for each store operated in

violation of this duty; (b) to pay weekly royalties to

defendant equal to eight percent of the gross sales for

each of the five sandwich shops through the term of the

52a

franchise agreements; (c) to keep in effect valid and ap-

propriate pre-authorized check forms for the five Subway

Sandwich Shops; (d) to report gross sales for each of

the five Subway Sandwich Shops within two days after

the end of the business week and to submit written weekly

summaries showing results of the five operations by the

following summaries showing results of the five operations

by the following Saturday; (e) to allow one of defend-

ant’s representatives of agents to enter the business pre-

mises of the five sandwich shops during regular business

hours to inspect and audit business operations; (f) to

pay into the franchise advertising fund two and a half

percent of the gross sales of the sandwich shops; (g) to

pay into the franchise advertising fund two and a half

percent of the gross sale of the sandwich shops during

the period of time in which defendant was allegedly in

default of the franchise agreements. The plaintiff denies

that it did any of the things claimed in the counterclaim,

denies that it breached the contract in doing or omitting

to do any of the things claimed in the counterclaim, and

denies that any claimed act or omission on its part was

a proximate cause of the claimed damages.

Turning now to Count IV of the counterclaim, the

issues to be decided by you under that count are as fol-

lows: The defendant Doctor’s Associates, Incorporated,

counterclaims that it was injured and sustained damage

and that the conduct of the plaintiff Substantial Enter-

prises, Inc., infringed upon its trademark or service mark

in one or more of the following respects: That plaintiff's

advertising and sales of products and services beginning

on or after July 5th, 1990, used defendant’s mark in a

manner likely to cause confusion, mistake or deception

upon persons using ordinary care and prudence in a pur-

chase of Subway products. The defendant further claims

that one or more of the foregoing was a proximate cause

of its damages. The plaintiffs deny that they did any of

the things claimed by the defendant, deny that they in-

fringed upon defendant’s trademark or service mark in

53a

doing any of the things claimed by the defendant, and

deny that any claimed act on the plaintiffs’ part was a

proximate cause of defendant’s claimed damages.

The defendant has the burden of proving each of the

following propositions in Count I of its counterclaim.

First, that the defendant performed all of the conditions

on its part required under the terms of the franchise

offering circular, the franchise agreements and the sub-

leases; second, that the plaintiff acted or failed to act in

one of the ways claimed by the defendant as stated to you

in these instructions and in, and that in so acting or fail-

ing to act, the plaintiff breached its contract with defend-

ant; Third, the defendant was damage; and Fourth, that

the breach of contract on the part of the plaintiff was a

proximate cause of the damage to the defendant. If you

find from your consideration of all the evidence that each

of these propositions has been proved, then your verdict

should be for the defendant. On the other hand, if you

find from your consideration of all the evidence that any

of these propositions has not been proved, then your ver-

dict should be for the plaintiff.

The defendant has the burden of proving each of the

following propositions in Count IV of its counterclaim:

First, that defendant has established the name “Subway”

as a mark for its products and services since August of

1967; and Second, that plaintiff's advertising and sales of

products beginning on or after July Sth, 1990, used the

defendant’s mark in a manner likely to cause confusion,

mistake or deception among persons using ordinary care

and prudence in a purchase of Subway products; and

Third, that defendant was damaged; and Fourth, that

plaintiff's conduct was a proximate cause of the damage

to defendant. If you find from your consideration of all

of the evidence that each of these propositions has been

proved, then your verdict should be for the defendant.

On the other hand, if you find from your consideration

of all the evidence that any of these propositions has not

been proved then your verdict should be for the plaintiff.

S4a

The term “trademark” includes any word, name, sym-

bol or device or any combination thereof adopted and

used by a manufacturer or merchant to identify his goods

and to distinguish them from those manufactured or sold

by others. The function of the trademark is to designate

goods as a product of a particular manufacturer or mer-

chant and to protect his good will against the sale of

another's product as his.

A mark is infringed when a second person, a later

use, uses it in a manner which is likely to cause confusion,

mistake or deception among ordinarily prudent purchasers

or prospective purchasers as to the source of the product

or service. The test is not one of actual confusion, mis-

take or deception. It is likelihood of confusion, mistake

or deception.

When a manufacturer or merchant has established a

trademark or service mark right by use or in association

with a product or service before anyone else, the right

to use it becomes an exclusion right and the mark is his

property. No other person can use the same or similar

words, symbols, designs or devices in any manner which

would be likely to cause confusion, mistake or deception.

A breach or non-performance of an obligation or a

promise by one party to a contract, so material as to

justify refusal of the other party to perform a contractual

duty, discharges that duty.

If you decide for the plaintiff on the question of liabil-

ity you must then fix the amount of money which will

reasonably and fairly compensate plaintiff for any of the

following elements of damages proved by the evidence

to have resulted from the wrongfui conduct of the de-

fendant: Out-of-pocket costs, lost profits, and lost value.

Whether any of these elements of damages has been

proved by the evidence is for you to decide—determine.

Thank you.

If you find that the defendant's conduct was willful and

wanton and caused injury to the plaintiff and if you

55a

believe that justice and the public good require it, you

may in addition to any damages to which you find the

plaintiff entitled, award an amount which will serve to

punish the defendant and to deter others from commission

of like offenses.

If you decide for the defendant on the question of

liability on Count I of the defendant’s counterclaim, you

must then fix the amount of money which will reasonably

and fairly compensate defendant for any of the following

elements of damage proved by the evidence to have re-

sulted from the wrongful conduct of the plaintiff: Unpaid

royalties, unpaid franchisee advertising funds, and attor-

neys fees. Whether any of these elements of damages has

been proved by the evidence is for you to determine.

If you decide for the defendant on the question of lia-

bility on Count IV of the defendant’s counterclaim, you

must then fix the amount of money which will reasonably

and fairly compensate defendant for any of the following

elements of damages provided by the evidence to have

resulted from the wrongful conduct of the plaintiff: Loss

of good will, injury to business reputation, and diminish-

ment of the value of the trademark. Whether any of

these elements of damages has been proved by the evi-

dence is for you to determine.

If you decide that the plaintiff's conduct was willful

and wanton and proximately caused injury to the de-

fendant, and if you believe that justice and the public

good require it, you may in addition to any damages

to which you find the defendant entitled on defendant's

counterclaim for trademark infringement award, an

amount which will serve to punish the plaintiff and to

deter others from the commission of like offenses.

Fred DeLuca, Leonard Axelrod, Hossein Naemi, Chris-

topher McDonald and Ted Parent were the agents of

the defendant Doctor’s Associates, Incorporated, at the

time of this occurrence. Therefore, any act or omission

of any of these agents at that time was in law the act

56a

or omission of the defendant Doctor’s Associates, Incor-

porated.

If you decide for the defendant on the question of

liability, you will have no occasion to consider the ques-

tion of damages as to the plaintiff's Complaint.

When you retire to the jury room, you will first select

a foreperson. He or she will preside during your deliber-

ations. Your verdicts must be unanimous. Forms of

verdicts are supplied with these instructions. After you

have reached your verdicts, fill in and sign the appro-

priate forms and return them to the Court. Your ver-

dicts must be signed by each of you. You should not

write or mark upon this or any of the other instructions

given to you by the Court. If you find for the plaintiff

Substantial Enterprises, Inc., and against defendant Doc-

tor’s Associates or Count I of Substantial Enterprises,

Inc.’s Complaint, then you should use verdict form A-l,

which says:

We, the jury, find for the plaintiff Substantial Enter-

prises, Inc., and against defendant Doctor’s Associates,

Incorporated on, Count I of the plaintiff's Complaint.

We assess damages in the sum of blank and there’s a

blank for you to fill in and lines for signature of all of

you.

If you find for plaintiff Substantial Enterprises, Inc.,

and against defendant Doctor’s Associates, Inc., on Count

II of Substantial Enterprises, Inc.’s Complaint, then you

should use verdict form A-2 which reads:

We, the jury, find for plaintiff Substantial Enterprises,

Inc., and against defendant Doctor’s Associates, Incor-

porated, on Count II of plaintiff's Complaint. We assess

punitive damages in the sum of blank, and again, there’s

a blank for you to fill in if you use this verdict form and

lines for signature of all of you.

If you find for defendant Doctor’s Associates, Incor-

porated, and against plaintiff Substantial Enterprises on

57a

Count I of plaintiff's Complaint, then you should use

Verdict Form B-1, which reads:

We, the jury, find for defendant Doctor’s Associates,

Inc., and against plaintiff Substantial Enterprises, In-

corporated, on Count I of plaintiff's Complaint. There’s

lines for signature.

If you find for defendant Doctor's Associates and

against plaintiff Substantial Enterprises on Count II of

plaintiff Substantial Enterprises’ complaint, then you

should use verdict Form B-2, which says:

We, the jury, find for the defendant Doctor’s Associ-

ates and against plaintiff Substantial Enterprises on Count

II of plaintiff's complaint, and again lines for signature.

If you find for the defendant Doctor’s Associates, and

against plaintiff Substantial Enterprises and DeWayne

Cox on Count I of the Doctor’s Associates counterclaim,

you should use Verdict Form C-1. And on these verdict

forms we changed by interlineation the words “counter-

claim” for counterdefendant back to defendant and plain-

tiff to be consistent with the parites throughout.

So, C-1, finding for the defendant Doctor’s Associates

reads:

We, the jury, find for defendant Doctor’s Associates,

Inc. and against plaintiffs Substantial Enterprises and

DeWayne Cox on Count I of the plaintiff's counterclaim.

We assess damages in the amount of blank.

Form C-2, finding for the defendant Doctor’s Associ-

ates and against plaintiff on the counterclaim reads:

We, the jury, find for defendant Doctor’s Associates,

Inc., and against plaintiffs Substantial Enterprises and

DeWayne Cox on Count IV of defendant’s counterclaim.

We assess the actual damages in the sum of blank. We

assess punitive damages in the sum of blank. And again,

if you use that verdict form, you fill those amounts in.

If you find for the plaintiff Substantial Enterprises and

DeWayne Cox and against the defendant Doctor's Asso-

58a

ciates on Count I of the Doctor’s Associates counter-

claim, then you use Verdict Form D-1, which says:

We, the jury, find for plaintiffs Substantial Enterprises

and DeWayne Cox and against defendant Doctor’s Asso-

ciates on Count I of defendant’s counterclaim.

Finally, if you find for the plaintiff Substantial Enter-

prises and against the defendant on Count IV of the

counterclaim you use verdict form D-2:

We, the jury, find for the plaintiff, Substantial Enter-

prises and DeWayne Cox and against defendant Doctor's

Associates on Count IV of defendant’s counterclaim.

And I might add that you will note there is just Counts

I and IV. The other counts aren’t given you so you

don’t need to worry about those. That concludes the

instructions on the law.

59a |

FRANCHISE 3570

OWNER NUMBER _ 1963

DATE EXECUTED 8/13/87

FRANCHISE AGREEMENT

DOCTOR’S ASSOCIATES, INC.

with

RICHARD T. YATES

DICK DW COX JR

60a

FRANCHISE AGREEMENT

Agreement, this 13th day of August, 1987, between

DOCTOR’S ASSOCIATES, INC., a Connecticut cor-

poration located at Milford, Connecticut (hereinafter

called the Company) and Richard T. Yates and Dick

DW Cox Jr. of Illinois (hereinafter called the Franchisee,

for one SUBWAY Sandwich Shop to be located in the

States of Illinois.

A. The Company is the owner of proprietary and

other rights and interests in various service marks, trade-

marks and trade names used in its business including the

trade name and service mark “SUBWAY”.

B. The Company operates, and enfranchises others to

operate, sandwich shops under the trade name and serv-

ice mark SUBWAY using certain recipes, formulas, food

preparation procedures, business methods, business forms

and business policies it has developed. The Company

has also developed a body of knowledge pertaining to the

establishment and operation of sandwich shops. The

Franchisee acknowledges that he does not presently know

these recipes, formulas, food preparation procedures, busi-

ness methods or business policies, nor does the Franchisee

have these business forms or access to the Company’s

body of knowledge.

C. The Franchise intends to enter the sandwich busi-

ness and desires access to the Company’s recipes, for-

mulas, food preparation procedures, business methods,

business forms, business policies and body of knowledge

pertaining to the operation of a sandwich shop. In ad-

dition, the Franchise desires access to information per-

taining to new developments and techniques in the Com-

pany’s sandwich business.

D. The Franchisee desires to participate in the use of

the Company’s rights in its service marks and trademarks

in connection with the operation of one sandwich shop

6la

to be located at a site approved by the Company and

the Franchisee.

E. The Franchisee understands that information re-

ceived from the Company or from any of its officers, em-

ployees, agents or franchisees is confidential and has been

developed with a great deal of effort and expense. The

Franchisee acknowledges that the information is being

made available to him so that he may more effectively

establish and operate a sandwich shop.

F. The Company has granted, and will continue to

grant to others, access to its recipes, formulas, food prep-

aration procedures, business methods, business forms,

business policies, body of knowledge pertaining to the

operation of sandwich shops and information pertaining

to new developments and techniques in its business.

G. The Company has and will continue to license

others to use its service marks and trademarks in con-

nection with the operation of sandwich shops at Com-

pany approved locations.

H. The Franchise Fee and Royalty constitute the sole

consideration to the Company for the use by the Fran-

chisee of its body of knowledge, systems and trademark

rights.

I. The Franchisee acknowledges that he received the

Company’s franchise offering prospectus at or prior to the

first personal meeting with a Company representative and

at least ten (10) business days prior to the signing of

this Agreement.

J. The Franchisee acknowledges that he understands

that the success of the business to be operated by him

under this Agreement depends primarily upon his efforts

and that neither the Company or any of its agents or

representatives have made any oral, writtten or visual

representations or projections of actual or potential sales,

earnings, net or gross profits.

62a

AGREEMENT

Acknowledging the above recitals, the parties hereto

agree as follows:

(check either a or b)

(1) 1. a. Upon execution of this Agreement, the Fran-

chisee shall pay to the Company a Franchise Fee of

$7,500.00 which shall not be refunded in any event; or

b. Upon execution of this Agreement, the Fran-

chisee shall pay to the Company a reduced Franchise Fee

of $1,000.00 which shall not be refunded in any event.

This reduction is being made available to the Franchisee

in view of the fact that the Franchisee presently owns a

franchise and all of his existing franchises are in full

compliance with the Company’s Operating Manual. In

the event that the Franchisee is not in full compliance

at the time a lease is executed for this franchise, the

Franchisee shall pay the Company the additional sum of

$6,500.00.

2. The Franchisee shall also pay to the Company,

weekly, a Royalty equal to eight (8%) per cent of the

gross sales from each sandwich shop which he operates

throughout the term of this Agreement. “Gross sales”

means all sales or revenues derived from the Franchisee’s

location exclusive of sales taxes.

3. The Company hereby grants to the Franchisee:

a. access to the Company’s receipts, formulas,

food preparation procedures, business methods, business

forms, business policies and body of knowledge pertaining

to the operation of a sandwich shop.

b. access to information pertaining to new develop-

ments and techniques in the Company’s sandwich busi-

ness.

c. license to use of the Company’s rights in and

to its service marks and trademarks in connection with

63a

the operation of one sandwich shop to be located at a

site approved by the Company and the Franchisee.

4. The Company agrees to:

a. provide a training program for the operation

of sandwich shops using the Company’s recipes, formulas,

food preparation procedures, business methods, business

forms and business policies. The Franchisee shall pay all

transportation, lodging and other expenses incurred in

attending the program. The Franchisee must attend the

training program before opening his store.

b. provide a Company Representative that the

Franchisee may call upon for consultation concerning

the operation of his business.

c. provide the Franchisee with a program of as-

sistance which shall include periodic consultations with a

Company Representative, publish a periodical advising

of new developments and techniques in the Company’s

sandwich business, and grant access to home office per-

sonnel for consultations concerning the operation of his

business.

5. The Franchisee agrees to:

a. begin operation of a sandwich shop within 365

days. The shop will be at a location found by the Fran-

chisee and approved by the Company. The Company

or one of its designees will lease the premises and sublet

them to the Franchise at cost. The Franchisee will then

construct and equip his unit in accordance with Com-

pany specifications contained in the Operating Manual.

Upon request, which shall not be unreasonably withheld,

the Company will grant additional time to the Franchisee

to begin operations. In all instances, the location of each

unit must be approved by the Company and the Fran-

chisee.

b. operate his business in compliance with appli-

cable laws and governmental regulations. The Franchisee

will obtain at his expense, and keep in force, any permits,

64a

licenses or other consents required for the leasing, con-

struction or operation of his business. In addition, the

Franchisee shall operate his store in accordance with the

Company’s Operating Manual which may be amended

from time to time as a result of experience, changes in the

law or changes in the marketplace. The Franchisee shall

refrain from conducting any business or selling any prod-

ucts other than those approved by the Company at the

approved location.

c. be responsible for all costs of operating his unit

including, but not limited to, advertising, taxes, insurance,

food products, labor and utilities. Insurance shall include,

but not be limited to, comprehensive liability insurance

including products liability coverage in the minimum

amount of $1,000,000. The Franchisee shall keep these

policies in force for the mutuai benefit of the parties. In

addition, the Franchisee shall save the Company harmless

from any claim of any type that arises in connection with

the operation of his business.

d. refrain from engaging in any other business, di-

rectly or indirectly, during the term of this Agreement,

identical with or similar to the business reasonably con-

templated by this Agreement at any place except as a

duly licensed franchisee of Doctor’s Associates, Inc. In

the event the Franchisee breaches this provision he shall

pay to the Company $7,500.00 for each store opened

in violation of this paragraph plus eight (8%) per cent

of the gross sales of each store opened in violation of this

subparagraph.

e. execute and deliver to the Company appropriate

preauthorized check forms for his store’s checking ac-

count prior to the opening of the sandwich shop so that

the Company will be able to deposit the Royalty and

Advertising Fund charges that accrue on a timely basis.

f. report his gross sales by telephone within two

(2) days after the end of the business week (currently

Tuesday) and submit written weekly summaries showing

65a

results of his operations by the following Saturday. If

the Franchise fails to report his gross sales on a timely

basis, the Company may estimate his sales. The Company

will then deposit, into its account and the account of

the Franchisee Advertising Fund, the Franchisee’s pre-

authorized checks for the amounts due.

g. allow the Company’s representatives or agents

to enter his business premises during regular business

hours to inspect and audit his business operations. For

a period of three years, the Franchisee will keep all of

the following on file at the store: cash register tapes,

control sheets, weekly inventory sheets, deposit slips,

bank statements and cancelled checks, sales and pur-

chase records, business tax returns and accounting rec-

ords. Also, the Franchisee hereby grants permission to

the Company to examine all records of any supplier per-

taining to his purchases.

h. reimburse the Company for the amount of the

Royalties and Advertising Fund charges that would have

been billed had his sales been reported accurately, plus

interest on said amounts at the maximum legal rate in

the jurisdiction in which the store is located, if it is found

by the Company that the Franchisee has under-reported

sales of his unit. In addition, if the amount of sales re-

ported for any calendar years are less than ninety-eight

(98%) per cent of the actual sales for that period, the

Franchisee agrees to reimburse the Company for all costs

of the investigation that uncovered the under-reported

sales including salaries, travel, meals and lodging. In

addition, the Franchisee will pay for all costs of the audit

if his books and records are not produced at the time

of audit provided that the Company gives five (5) days

written notice of the audit prior to the scheduled date.

i. pay into the Franchise Advertising Fund two

and one-half (242%) per cent of the gross sales of his

sandwich shops. It is contemplated by the parties that

the percentage payment may change in the future de-

66a

pending upon the prevailing market conditions and ad-

vertising requirements. However, it is agreed that no

change in the percentage payment may be made without

the approval of seventy-five (75%) per cent of the ex-

isting franchised units on the basis of one vote for each

unit operating.

j. refrain from placing “For Sale” or similar signs

at or in the general vicinity of the unit or using any words

in any advertising denoting that the subject of a sale is

a SUBWAY unit.

k. make prompt payment of all charges which are

properly due in addition to the Royalty and Advertising

Fund Payment.

6. Any relocation of the unit shall be made only

upon the prior written approval of the Company. In the

event the unit is relocated, the Franchisee will pay all

expenses incidental to the termination of the lease and all

moving expenses. If this Agreement is materially breached

by the Franchisee, the Company or its designee may can-

cel the Sublease with the Franchisee upon such notice as

is required in the Sublease.

7. The term of this Agreement shall be for a period

of twenty (20) years from the date of its execution. The

“Franchisee shall have the option to extend the Agreement

under the same terms and conditions for additional con-

secutive twenty (20) year periods if he gives the Com-

pany written notice of his election to do so not less than

one (1) year prior to the expiration of each twenty-year

term.

8. a. Provided it gives the Franchisee written notice

at least ten (10) days prior thereto, the Company may,

at its option and without prejudice to any of its other

rights or remedies provided for hereunder, terminate this

Agreement if the Franchisee fails to pay any sums of

money due the Company or one of its affiliates. The

written notice shall specify the default and further pro-

67a

vide that the Franchisee has ten (10) days from the date

of delivery of the notice to remedy the default.

b. Provided it gives the Franchisee written notice

at least ninety (90) days prior thereto, the Company

may, at its option and without prejudice to any of its

other rights or remedies provided for hereunder, termi-

nate this Agreement in the following circumstances:

(1) the Franchisee does not substantially per-

form all of the terms and conditions of this Franchise

Agreement not otherwise covered in Paragraph 8.a.;

(2) the Franchisee loses possession of the

premises at which his store is located or fails to make

rental payments on a timely basis;

(3) the Franchisee is guilty of any material

misrepresentation in the reporting of gross sales that he

is required to make to the Company. An understatement

of gross sales in the amount of two (2%) per cent for

a calendar year shall be deemed to be a material misrep-

resentation;

(4) the Franchise makes an assignment for

the benefit of his creditors or files a petition under Chap-

ter 7 of the Bankruptcy Act;

(5) the Franchisee loses any permit or license

which is a prerequisite to the operation of his unit.

The notice required under Subparagraph

8.b. shall specify the default and provide that the Fran-

chisee has sixty (60) days in which to remedy the

claimed deficiency. If the default is cured within sixty

(60) days, the notice shall be void.

c. Upon termination of this Agreement, all of the

Franchisee’s rights hereunder shall terminate. The Fran-

chisee shall forthwith discontinue use of all trade names,

trademarks, service marks, signs, colors, structures,

printed goods and forms of advertising indicative of the

STS

68a

Company’s sandwich business and return the Operating

Manual to the Company. In the event of a breach of this

provision, the Franchisee will be obligated to pay the

Company $100.00 per day for each day he is in default.

d. In the event that the foregoing conditions un-

der which the franchise can be terminated are violative

of the laws of the State in which the Franchisee is op-

—________¢fating his unit, the laws of that State relating to termi-

nation shall prevail.

e. In the event of a termination of the franchise,

the Franchisee shall not be directly or indirectly associ-

ated as an employee, proprietor, stockholder, partner,

agent or officer with or in the operation of any sand-

wich business within a radius of three (3) miles of an

existing Company or franchised unit for a period of one

(1) year. This provision also extends to locations in

which a SUBWAY unit formerly existed within the pre-

vious year. In the event of a breach of this provision

the Franchisee shall pay to the Company $7,500.00 for

each store plus eight (8%) per cent of the gross sales

of each store he is associated with within the restricted

area during the one (1) year period.

9. The Franchisee’s rights hereunder are transferable

only as follows:

a. The Franchisee may sell his franchise and sand-

wich shop to a natural person, provided;

(1) the Franchisee first offers, in writing, to

sell his franchised sandwich shop to the Company on

the same terms and conditions as offered by a bona fide

third party offeror and the Company fails to accept such

offer for a period of thirty (30) days; and

(2) the purchaser has a satisfactory credit rat-

ing, is of good moral character, will comply with the

Company’s standard training requirements, has received

the required disclosure documents in accordance with

69a

the Federal and State laws, rules and regulations and

executes the then current Franchise Agreement being

utilized by the Company; and

(3) all money obligations of the Franchisee to

the Company and the Franchisee Advertising Fund are

fully paid and the Franchisee is not otherwise in default

under this Agreement; and

(4) the Franchisee pays the Company

$3,750.00 for its legal, accounting, training, and other

expenses incurred in connection with the transfer.

b. The franchisee may assign his rights under

this Agreement to a corporation without being relieved

of any personal liability hereunder, provided:

(1) the corporation is newly organized and its

activities are confined exclusively to operating the Fran-

chisee’s SUBWAY sandwich shop; and

(2) the Franchisee is, and, at all times re-

mains, the owner of the controlling stock interest of the

corporation; and

(3) the corporation agrees in writing to as-

sume all of the Franchisee’s obligations hereunder; and

(4) all stockholders of the corporation guar-

antee in writing the full and prompt payment and per-

formance by the corporation of all its obligations to the

Company pursuant to the assignment.

c. Upon the Franchisee’s death his rights here-

under may pass to his next of kin or legatee provided

such next of kin or legatee agrees in writing to assume

the Franchisee’s obligations hereunder and to attend the

Company’s next training session.

10. The parties also agree as follows:

a. The Franchisee is, and at all times during the

term of this Agreement shall be, a natural person (not

70a

a corporation), an independent contractor and not an

agent or employee of the Company.

b. If the Franchisee, for any reason, abandons,

surrenders, or suffers revocation of all or any part of his

rights and privileges under this Agreement, all such rights

shall revert to the Company.

c. Any controversy or claim arising out of or re-

lating to this contract or the breach thereof shall be

settled by Arbitration in accordance with the Commer-

cial Arbitration Rules of the American Arbitration As-

sociation at a hearing to be held in Bridgeport, Connec-

ticut and judgment upon an award rendered by the Arbi-

trator(s) may be entered in any court having jurisdic-

tion thereof. The commencement of arbitration proceed-

ings by an aggrieved party to settle disputes arising out

of or relating to this contract is a condition precedent

to the commencement of legal action by either party.

The cost of such a proceeding will be borne equally by

the parties.

d. In the event that the Franchisee withholds

any monies due under this Agreement in the absence of a

Court Order, or order of an Arbitrator selected in ac-

cordance with Paragraph 10.c, permitting the withholding

of monies, the Company shall be reimbursed by the

Franchisee for all reasonable costs that it incurs in pur-

suing the collection of the withheld monies. These costs

shall include but not be limited to Arbitration fees, Court

costs, attorneys’ fees, management preparation time, wit-

ness fees, and travel expenses incurred by the Company.

e. No waiver by the Company of any default of

the Franchisee shall constitute a waiver of any other

default and shall not preclude the Company from there-

after requiring strict compliance with this Agreement.

f. Should any provision of this Agreement be

construed or declared to be invalid, such decision shall

not affect the validity of any remaining portion which

shall remain in full force and effect as if this Agreement

had been executed with such invalid portion eliminated.

Tila

g. This Agreement may be transferred and as-

signed by the Company and shall inure to the benefit of

its successors and assigns.

h. No previous course of dealing or usage in the

trade not specifically set forth in this Agreement shall be

admissible to explain, modify or contradict this Agree-

ment.

i. Whenever notice is required under the terms

of this Agreement, the same shall be given in writing

and sent by registered or certified mail. All such notices

to the Franchisee shall be addressed to the store address

or his home address.

j. The Company may charge interest on all past-

due accounts of the Franchisee at the maximum legal

rate in the jurisdiction in which the store is located.

k. In the event any of the Franchisor’s service

marks or trademarks are challenged by third parties

claiming infringement of alleged prior or superior rights

in such marks, the Franchisor shall have the option and

right to modify or discontinue service marks or trade-

marks and adopt substitute service marks or trademarks

in the Franchisee’s geographical business areas and in

such other areas as the Franchisor chooses. The Fran-

chisor’s liability to the Franchisee under such circum-

stances shall be limited to the cost of replacement of the

Franchisee’s signs and advertising materials in effecting

such modification, discontinuance or adoption of substi-

tute service marks or trademarks.

1. In the event the Franchisor is required to pur-

chase the equipment and/or leasehold improvements of

the Franchisee upon termination of this Agreement pur-

suant to the requirements of any Federal, State or local

statute, rule or regulation or any judicial determination,

the purchase price shall be computed at the Franchisee’s

cost less depreciation and amortization based upon a five

(5) year life under the straight-line method.

72a

m. In the event that this Agreement is wrongfully

terminated by the Franchisee wherein he, or a successor,

continues to operate in the sandwich business, he shall

be additionally liable to the Franchisor for lost royalties

based upon prospective sales of the unit, actual expenses

incurred by the Franchisor to re-establish a franchise in

the Franchisee’s market area and for applicable develop-

ment costs of the Franchisor’s merchandising system mis-

appropriated by the Franchisee.

n. In the event that the Company defaults in the

performance of any term or condition of the Agreement,

the Franchisee shall give the Company, by registered mail

or certified-mail,-written-notice-within-ninety- (90) days

of the occurrence of the default and shall specify therein

the acts of omissions constituting the default. If the Com-

pany fails to cure the default within sixty (60) days after

receipt of the notice, the Franchisee’s obligation to make

Royalty payments thereafter shall cease until the default

is cured by the Company. Any default by the Company

that occurred more than ninety (90) days prior to writ-

ten notice thereof shall be deemed waived by the Fran-

chisee.

11. All terms and words used in this Agreement, re-

gardless of the number and gender in which they are

used, shall be deemed and construed to include any other

number, singular or plural, and any other gender, mas-

culine, feminine, or neuter, as the context or sense of the

Agreement or any section, paragraph or clause herein may

require, as if such words had been fully and properly writ-

ten in the appropriate number and gender.

12. This Agreement shall be governed by and con-

strued in accordance with the laws of the State of Con-

necticut and contains the entire understanding of the

parties. Other than the representations contained in the

Agreement, the Offering Circular and advertising ma-

terials of the Franchisor, no other representations have

ieee

73a

been made to or relied on by the Franchisee except as

set forth below:

13. Each of the parties hereto acknowledges that he

has read and understands this Agreement and consents

to be bound by all of its terms and conditions.

__ Signed & Sealed in the presence of:

DoctTor’s ASSOCIATES, INC.

by /s/ [Illegible]

Duly Authorized

/s/ Richard T. Yates

RICHARD T. YATES

Franchisee

/s/ Dick DW Cox, Jr.

Dick DW Cox, Jr.

Franchisee

Subscribed and sworn before me

this 12th day of August, 1987.

/s/ Donna L. Maddox

Notary Public

This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.