Opinion ID: 565168
Heading Depth: 1
Heading Rank: 1

Heading: background material

Text: 2 This case is on appeal following the entry of summary judgment by the district court. Concluding that there were no genuine disputes of material fact with respect to the defendants' affirmative defense, the district court held that the defendants were entitled to a judgment in their favor as a matter of law. On appeal, the plaintiffs contend that the district court should not have entered summary judgment until the outstanding discovery was complete. Plaintiffs also contest the district court's interpretation of the relevant substantive law and its conclusion that on the record before the court there were no disputed issues of fact precluding summary judgment. 3 Because this matter is before the court following summary judgment, we are obliged to construe all the evidence and reasonable inferences deduced therefrom in a light most favorable to the plaintiffs, the nonmoving party in the court below.
4 Plaintiffs are International Shortstop, Inc. and its president Sam Talkington (collectively referred to as Shortstop); the defendant is Rally's, Inc. (Rally's). They are direct competitors in the business of fast-food, take-out restaurants, specializing in the rapid service of hamburgers and other products of the culinary art sold at drive-through windows. 5 Shortstop was formed by Sam Talkington in 1984. Sometime in August 1988, Talkington began preliminary negotiations with Al Copeland for the sale of Shortstop to Copeland. Copeland was the majority shareholder of A. Copeland Enterprises, Inc., owner of the Popeye's fast-food chicken chain. Talkington hoped that the merger would offer Shortstop a network of franchise locations, franchisees, and other resources which would propel Shortstop's growth. At a meeting in late August, Copeland and Talkington agreed that Copeland would purchase Shortstop for $1.2 million. Both men believed that they reached a firm agreement concerning the Copeland-Shortstop purchase. They relegated to their financial officers the task of arranging for the structure of the deal. In late December the two men confirmed in a conversation that the Copeland-Shortstop deal would close sometime shortly after the completion of Copeland's takeover of the Church's Fried Chicken chain, which had begun in the fall of 1988. 6 Rally's was formed in 1985 and opened its first restaurant in Jeffersonville, Indiana, eighteen months after Shortstop opened its restaurant in Austin, Texas. By the fall of 1988, Rally's had several restaurant locations, including Miami, Florida, Shreveport, Louisiana, and Little Rock, Arkansas. Rally's began receiving complaints from these franchisees that Shortstop franchises were copying Rally's' building appearance, generating confusion among Rally's customers. Specifically, in January 1989, the Arkansas franchisee contacted Richard Sherman, President of Rally's (formerly president of Church's), to complain that a Shortstop franchise under construction looked very similar to the Rally's franchise. 7 In December 1988, Sherman had contacted a lawyer in connection with the alleged trade-dress infringement. This was not the first time that Rally's entertained the notion of protecting its perceived trade-dress: over the course of the previous three years, Rally's had pursued infringement claims against eight other companies, excluding Shortstop, and indeed, Rally's had appreciable success. It won two of the lawsuits it filed, settled three cases, and had pending suits against the remaining companies. 8 Meanwhile, throughout 1988, Sherman had expressed interest in expanding Rally's by purchasing surplus property from Church's. Aware of the pending takeover of Church's by Copeland, Sherman contacted Copeland in February 1989 to discuss the purchase of Church's locations upon consummation of the takeover. They met on March 1, 1989, to discuss the purchase. Sherman was already aware that Copeland had a general interest in also acquiring Shortstop but was apparently not aware of the precise negotiations which had transpired between Talkington and Copeland. During the March 1st meeting, however, Copeland told Sherman of the Copeland-Shortstop agreement. In response, Sherman commented that Shortstop was a third tier company that did not have a very strong franchise system, and that Copeland would be far better off associating with Rally's than with Shortstop. No mention was made at that meeting that Rally's was contemplating a trade-dress infringement lawsuit against Shortstop. 9 The following week, Sherman inquired of Jim Flynn, president of Copeland Enterprises, regarding the availability of the surplus Church's locations. He also asked about the status of the Copeland-Shortstop deal. 10 Between March 7 and March 17, 1989, Sherman conferred with his counsel about instituting a trade-dress infringement action in Arkansas. According to Rally's, they had contemplated bringing such an action since December 1988, but there had been some delay in pursuing the action because counsel for Rally's was tied up with other, unrelated matters. In any event, Rally's' counsel soon contacted Talkington (Shortstop's president) to advise him of Rally's' intentions to file a trade-dress infringement action in Arkansas. 1 This was the first Talkington had heard of Rally's' concerns about alleged trade-dress infringement by Shortstop. 11 On March 22, 1989, Sherman and Talkington discussed the lawsuit. Sherman indicated that Rally's had filed the lawsuit on March 20, but that it had nothing to do with the Copeland-Shortstop deal. Settlement efforts failed. On the same day, Sherman called Flynn of Copeland Enterprises to congratulate him on the successful takeover of Church's. He also mentioned to Flynn that Rally's had instituted the Arkansas lawsuit against Shortstop, but indicated that the litigation had nothing to do with the Copeland-Shortstop deal. In fact, the lawsuit was not filed until the following day (the Arkansas lawsuit). 12 Because of Rally's' Arkansas lawsuit against Shortstop, Copeland declined to consummate the purchase of Shortstop. In the words of Copeland himself, the lawsuit interfered with the deal. In Copeland's view, the lawsuit threatened to undermine Copeland's intended expansion of Shortstop because if Rally's succeeded, Copeland would have been forced to change the image of all of the Shortstop restaurants. He also observed that [f]ranchisees don't want to buy into companies that have major lawsuits.
13 Shortstop filed the instant lawsuit in Texas state court alleging, inter alia, that Rally's' Arkansas lawsuit was filed in bad faith and constituted tortious interference with the Copeland-Shortstop agreement. 2 14 Rally's removed the action to federal district court on August 11, 1989. Rally's promptly moved the court to dismiss the complaint. Shortstop amended the complaint, and Rally's again moved to dismiss. Once the motion was fully briefed, the court took the motion under advisement and by order dated May 7, 1990, denied the motion. Simultaneously, the district court set the case on the trial calendar commencing September 24, 1990, with a discovery cut-off deadline of August 13, 1990. The court admonished the parties that Motions to Compel, Motions for Protective Order, and similar motions were discouraged. 15 The parties proceeded with discovery, which had already been underway since early in the case. On June 28, 1990, before the discovery cut-off, Rally's moved for summary judgment averring the absence of a genuine dispute of material facts. Specifically, Rally's contended that it was privileged as a matter of law to file the Arkansas lawsuit and that therefore, the Arkansas lawsuit could not form the basis of a tortious interference cause of action. In Rally's' view, the filing of a lawsuit, whether in bad faith or otherwise, was absolutely privileged. Rally's also maintained that Shortstop's cause of action necessarily would fail because the evidence in the record did not establish the requisite elements of tortious interference, namely, the existence of a contract between Copeland and Shortstop, willful and intentional interference by Rally's, proximate causation, and damages. Shortstop filed a timely response to the merits of Rally's' motion for summary judgment, but indicated in a footnote to its memorandum that several depositions were still pending. 16 Meanwhile, the parties were unable to resolve a discovery dispute: Shortstop sought from Rally's and its trade-dress lawyers disclosure of information concerning the Arkansas lawsuit in order to establish Rally's' bad faith in proceeding with that lawsuit. Rally's had refused to provide that information, invoking the attorney-client privilege and the attorney work-product doctrine. Left with no choice but to seek court intervention, Rally's moved the court on July 23, 1990 to quash and for a protective order; in turn, Shortstop moved to compel the discovery. All of the discovery motions were referred by the district court judge to a United States magistrate judge for resolution. The magistrate judge granted Shortstop's motion to compel on August 10, three days before the discovery cut-off, and ordered the discovery to proceed. 17 By August 13, the discovery cut-off date, Shortstop had not completed the necessary discovery, so Shortstop filed an amended motion to extend discovery. 3 Four days later, Shortstop moved the district court again to extend the discovery deadline and also requested permission to file a supplemental brief in opposition to Rally's' motion for summary judgment. Shortstop alerted the district court to the proceedings before the magistrate judge, indicating that it expected to obtain, through the additional discovery, attorney-client evidence undermining Rally's' claimed privilege to file the Arkansas lawsuit. On the same day, Rally's filed an appeal to the district court from the magistrate judge's discovery order and asked the court to stay discovery pending the appeal. 4 18 The court never ruled on these discovery matters. Instead, on August 23, the court filed its memorandum opinion and order on Rally's' motion for summary judgment. Without making reference to the pending discovery matters, the district court found that there was no dispute as to any material issues of fact regarding Rally's' privilege to file the Arkansas lawsuit (which allegedly interfered with the Copeland-Shortstop deal). The district court studied with great care the relevant body of Texas law and held that the privilege that Rally's was asserting was qualified, not absolute as Rally's contended. The court interpreted the privilege as being qualified by a good faith limitation: a lawsuit is privileged only if it asserts a colorable claim or if the party filing the lawsuit has a good faith belief that it asserts a colorable claim. The court concluded that the record amply supported Rally's' assertion of the qualified privilege; in the court's view, there was no evidence in the record contradicting Rally's' evidence that it filed the Arkansas lawsuit believing in good faith that it was asserting a colorable claim. 5 Although the privilege was a complete defense to the tortious interference claim, the district court nevertheless denied the motion for summary judgment. The court concluded that there were genuine disputes as to the facts germane to the elements of Shortstop's tortious interference claim precluding summary judgment. On Rally's' motion for reconsideration, however, the court entered summary judgment, apparently recognizing that its holding that Rally's held a qualified privilege as a matter of law vitiated Shortstop's interference claim in its entirety. 19 Shortstop appeals, permanently pressing its argument that the district court misinterpreted Texas law on the issue of privilege to tortiously interfere with a contract. Shortstop maintains that the privilege is qualified by the limitation that the allegedly tortious lawsuit be filed in good faith, which according to Shortstop means without malicious motive. In Shortstop's view, even if the party filing the lawsuit has a good faith belief that the claim asserted is colorable, the party may not file the lawsuit for the sole purpose of interfering with another's contract. In addition, Shortstop avers that even if the district court correctly interpreted the privilege under Texas law, there existed on the record before the court disputed issues of material fact as to Rally's' alleged good faith in filing the Arkansas lawsuit. Finally, Shortstop argues that the court erred by failing to permit the additional discovery which the magistrate judge had ordered; according to Shortstop, the discovery could have elicited evidence undermining Rally's' privilege.