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South Plains Sno, Inc. v. Eskimo Hut Worldwide, Ltd.

Court of Appeals of Texas, Seventh District, Amarillo

April 12, 2019

SOUTH PLAINS SNO, INC., APPELLANT
v.
ESKIMO HUT WORLDWIDE, LTD., APPELLEE

          On Appeal from the 251st District Court Randall County, Texas Trial Court No. 73, 454-C, Honorable Ana Estevez, Presiding

          Before QUINN, C.J., and CAMPBELL and PIRTLE, JJ.

          MEMORANDUM OPINION

          PER CURIAM

         This is an interlocutory appeal from the grant of a temporary injunction[1] in a dispute between a frozen-drink franchisor, appellee Eskimo Hut Worldwide, LTD, and one of its franchisees, appellant South Plains Sno, Inc. The parties' dispute centers on a frozen drink marketed to the public as a to-go item. Their litigation began when South Plains sued Worldwide alleging breaches of the franchise agreement. Worldwide filed a counterclaim also asserting breaches of the agreement. Worldwide sought a temporary injunction which the trial court granted. We will overrule South Plains' four appellate issues and affirm the trial court's injunction order.

         Background

         Worldwide president Kevin Morgan testified at the temporary injunction hearing that Worldwide franchises Eskimo Hut convenience stores. The stores specialize in selling frozen daiquiris to go, referred to in the record as "Eskimo Hut branded daiquiris." The company has more than twenty franchises with stores located in cities throughout Texas. Morgan individually owns twelve stores. In 2014, South Plains became a Worldwide franchisee under the Eskimo Hut brand. Hearing evidence showed South Plains operates three Eskimo Hut stores in Lubbock.

         Morgan explained in testimony that the Eskimo Hut frozen drink process begins with a corn syrup "base mix" which Worldwide sells to its franchisees. The base mix, water and, if desired, wine or another alcoholic beverage, [2] are combined and frozen. A flavor of the customer's selection is then added to create the desired drink.

         While Worldwide approves the drink flavorings, the franchisee must supply the alcohol, because for Worldwide to do so, according to Morgan, would not be legal. Worldwide does not require franchisees to buy alcohol from a particular vendor nor does it specify the type of alcohol franchisees may add to the drink mixture. The drink is mixed according to Worldwide's directions, but the franchisee determines what, if any, amount of alcohol to add. Franchisees are not required to use alcohol at all in the frozen drinks they sell.

         According to Morgan's testimony, South Plains has violated the franchise agreement because it does not use the required base mix and flavors. There was hearing evidence that South Plains has either stopped purchasing Worldwide's base mix or is purchasing an amount insufficient to prepare the drink product according to Worldwide's specifications. In his hearing testimony, Brad Salley, owner of South Plains, did not deny that South Plains uses two ounces of Worldwide base mix in a drink batch rather than the specified three gallons. On cross-examination he conceded, "I am not currently following that exact recipe, no."

         Worldwide placed the franchise agreement in evidence at the hearing and on appeal points to the following provisions as relevant:

Section 7.A. - Franchisee agrees to comply with the uniform standards for quality, appearance, cleanliness, service, and promotion established from time to time by [Worldwide]. Franchisee acknowledges that these standards and the requirements of this Agreement are necessary, reasonable, and desirable in order to preserve and enhance the identity, reputation, and goodwill built by the Franchise System and the value of the Franchise.
Section 7.D. - Franchisee agrees to promote, prepare, and sell only the frozen drink and combinations as specified by [Worldwide] in the Confidential Operating Manual, if any, and any operations bulletins supplied by [Worldwide].
Section 7.F. (1) - Franchisee shall purchase only from [Worldwide] (if offered directly to Franchisee by [Worldwide]) or from [Worldwide] approved suppliers who have acquired such products through [Worldwide], all of its requirements for frozen drink mixes and such other future products as may then be required by Eskimo Hut Worldwide (collectively referred to as "Required Products").
Section 7.G. (1) - All drink products . . . shall be in full compliance with the specifications set forth in the Confidential Operating Manual or any operations bulletins and . . . shall be purchased and procured by Franchisee from either Eskimo Hut Worldwide (if offered by Eskimo Hut Worldwide), from suppliers designated by [Worldwide], or from suppliers selected by Franchisee and not disapproved in writing by [Worldwide].
Section 7.H. - Franchisee understands that it is essential to the proper preparation of all frozen beverage menu items that Eskimo Hut Worldwide's methods of preparation (according to specifications prepared and supplied by Eskimo Hut Worldwide) be used, and that they must be used as directed. Franchisee agrees to adopt and use such changes and methods and materials in the preparation of all frozen beverage menu items, if any, as may be directed from time to time by Eskimo Hut Worldwide.

         Morgan further testified it is important that each franchisee deliver a consistent drink product. When asked how this is possible, given the franchisee's control of the alcohol added to the drink mixture, Morgan explained the base mix contains the sugars that give the drink its unique taste.[3] On cross-examination when asked about drink inconsistency because each franchisee could use a different alcohol, Morgan responded, "you can get very close where you wouldn't be able to taste a difference."

         Morgan testified he had "no idea of the product" South Plains was delivering. He found the fact "terrifying" because "if [South Plains] puts in some cheap product and the drink tastes terrible, I am liable to lose customers for the rest of my life that I can't ever get back." Morgan's direct examination questioning concluded with the following exchange:

Q. And we have talked about brand integrity. What risk does [Worldwide] have if [South Plains] is selling a different product than the other Eskimo Huts?
A. Well, the risk is huge. I don't know what product it is. It could be a bad product. It could be a cheap product. I mean, it might turn people off and then they never visit another Eskimo Hut ever again. Those people are hard to get in your doors and they ...

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