Opinion ID: 565168
Heading Depth: 2
Heading Rank: 1

Heading: The Fact Pattern

Text: 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.