In re the Matterhorn Group, Inc.

Full title: In re: THE MATTERHORN GROUP, INC., et al., Chapter 11, Debtors. THE…

Court: United States Bankruptcy Court, S.D. New York

Date published: Nov 15, 2002

Case Nos. 97 B 41274 through 97 B 41278 (SMB), A.P. No. 97-8273 (SMB) (Jointly Administered) (Bankr. S.D.N.Y. Nov. 15, 2002)

Opinion

Case Nos. 97 B 41274 through 97 B 41278 (SMB), A.P. No. 97-8273 (SMB) (Jointly Administered)

November 15, 2002

SOLOMON TANENBAUM, P.C., Attorneys for Plaintiffs White Plains, New York.

Clifford M. Solomon, Esq., Eric D. Cherches, Esq. Of Counsel MARCUS LEVY, Co-Counsel for Defendants New York, New York., Samuel D. Levy, Esq. Of Counsel,

LEBOEUF, LAMB, GREENE MACRAE, Co-Counsel for Defendants, New York, New York. John M. Nonna, Esq., Marc L. Abrams, Esq., Of Counsel

POST-TRIAL DECISION AND ORDER

STUART M. BERNSTEIN, Chief Bankruptcy Judge

The plaintiffs and debtors-in-possession are a holding company and four subsidiaries who were former licensees of the defendant SMH (U.S.) Inc. They brought this adversary proceeding to assert various tort, contract, unfair competition and franchise act claims arising out of their transactions and relationships with the defendants.¹

1 The Court has subject matter jurisdiction over this adversary proceeding pursuant to 28 U.S.C. § 1334(b) and 157, and the District Court's General Order of Reference, dated July 10, 1984. The parties have consented to the Court's core jurisdiction. (See Joint Pre-Trial Order, dated Nov. 26, 2001, at § 2, at p. 3) (ECF Doc. no. 88.)

The Court conducted an eight day bench trial during which several witnesses testified in person or through their depositions. In addition, numerous documents were received in evidence. At trial, the plaintiffs proved only two of their claims. First, the defendants breached the parties' Letter of Intent, described below, when they rejected the application submitted by the plaintiff Matterhorn Group, Inc. ("Matterhorn") to open a store in Vail, Colorado. Second, the defendants violated the New Jersey Franchise Practices Act when they terminated two of the four license agreements on fifteen instead of sixty days notice. Any damage award, however, must await further proceedings. The plaintiffs failed to prove any of their other claims, and except as just noted, the defendants are entitled to judgment dismissing the third amended complaint.

BACKGROUND² A. The Parties

2 The following conventions are used in citing to the trial record. "Tr.," followed by a date, (e.g., Tr. 11/26/01), refers to the transcript of that day's proceedings. "PX" refers to the plaintiffs' exhibits, and "DX" refers to the defendants' exhibits.

At all relevant times, the defendants were engaged in the business of promoting and distributing the Swatch brand of watches and watch products. SMH (U.S.) Inc. is a Delaware corporation that changed its name to The Swatch Group (USA) Inc., (see Undisputed Facts³ ¶ 1), and Swatch U.S.A. Inc. is a division of SMH (U.S.) Inc. (Id. ¶ 2.) They are both now known as The Swatch Group (USA) Inc., (id.), and unless otherwise indicated, are referred to collectively as "Swatch." Swatch is a wholly-owned subsidiary of the Swatch Group Ltd. ("Swatch Group"), a Swiss holding company for a group of companies engaged primarily in assembling, marketing, distributing and selling watches throughout the world. Swatch Group's principal place of business is located in Bienne, Switzerland. (Id. ¶¶ 3-4.)

3 "Undisputed Facts" refers to the "Undisputed Facts" section in § 5 of the Joint Pre-Trial Order.

The plaintiffs were formed for the purpose of selling Swatch watches and watch products in the United States. Matterhorn is a New York corporation which, at all relevant times, maintained its principal place of business at 161 Maiden Lane, New York, New York 10038. (Id. ¶ 11.) It was formed as a holding company to own the shares of the other plaintiffs, Matterhorn's four operating subsidiaries: The Matterhorn Group Harbor Place, Inc. ("Matterhorn/Harbor Place"), The Matterhorn Group Woodbridge, Inc. ("Matterhorn/Woodbridge"), The Matterhorn Group King of Prussia, Inc. ("Matterhorn/KOP") and The Matterhorn Group Freehold, Inc. ("Matterhorn/Freehold"). (Id. ¶ 12.) The operating subsidiaries were formed under New York law, maintained offices at the same location as Matterhorn, and maintained their principal places of business, respectively, at The Gallery at Harbor Place, 200 East Pratt Street, Baltimore, Maryland, Woodbridge Center, 289 Woodbridge Center Drive, Woodbridge, New Jersey, The Plaza at King of Prussia, 160 North Gulph Road, King of Prussia, Pennsylvania, and The Freehold Raceway Mall, 3710 Route 9, Freehold, New Jersey. (Id. ¶¶ 13-16.)

B. Events Leading to the Letter of Intent

In January 1995, Martin Grossenbacher, the president of Swatch, announced retail expansion plans for Swatch in the United States. (Id. ¶ 18.) The announcement coincided with Swatch's Market Week meetings in New York City that were attended by the retailers that were already engaged in the business of selling Swatch products. The latter group included Gerard Nally. Nally was a principal of the Andejo Corporation, and Andejo operated a Swatch store in the South Street Seaport in New York City. (Id. ¶ 8.)

The plan was an ambitious one, and coincided with Swatch's designation as the official timekeeper at the 1996 Summer Olympic Games in Atlanta. Grossenbacher stated that Swatch intended to open approximately 100 to 200 independent retail locations in the United States over the next few years. (Tr. 11/26/01, at 60, 68; Tr. 2/4/02, at 24.) He introduced Scott Fenton as the new Director of Retail Operations for Swatch in the United States, (Tr. 11/26/01, at 59), and stated that Fenton would act as the principal liaison between the Swatch retailers and Swatch regarding the retail expansion plan. (Tr. 11/26/01, at 64; Tr. 11/30/01, at 70-71, 239-40; Tr. 2/4/02, at 26.)

Existing Swatch store owners, including Nally, would get the first opportunity to open the new Swatch stores. (Tr. 11/26/01, at 61); Tr. 2/4/02, at 23.) Swatch was very image conscious, and insisted on the best retail locations. Many of the proposed stores and kiosks⁴ were destined for malls which were classified based on the amount of revenue generated per square foot. (Tr. 2/4/02, at 31.) In addition, the store site within the mall was important, and the center location within the mall was the best spot, i.e., the "A" location within the mall. Fenton told Nally that he wanted the stores situated in center court locations in "A" malls, but would accept off-center or "B" locations in "A" malls, and "A" locations in "B" malls. (Tr. 11/26/01, at 72-73.) Swatch identified the "A" and "B" malls for the retailers. (Id. at 73.)

4 The term "kiosk," as used in this case, referred to the small, "portable" store often found in the middle of a mall. It was generally between 160 square feet and 200 square feet, and was surrounded on all sides by glass counters. (Tr. 11/26/01, at 84-85.) Unless otherwise indicated, the use of the term "stores" in this opinion also includes "kiosks."

Following the announcement, Nally met with Swatch to discuss researching potential store locations,(see Undisputed Facts ¶ 19), and in March 1995, Nally formed Matterhorn with Bruno Niklaus and Peter Heusler to pursue the venture. (Tr. 11/26/01, at 100-01; Undisputed Facts ¶ 10.) Between February and May 1995, Nally and Niklaus began examining these locations. (Id. ¶ 20; Tr. 11/26/01, at 79, 81; Tr. 11/29/01, at 131-34.) At times, Swatch personnel, including Fenton and Grossenbacher, accompanied them, (Tr. 11/26/01, at 81-82; Tr. 11/29/01, at 135-36; Tr. 2/4/02, at 34), and attended meetings with Matterhorn and real estate leasing representatives at some locations. (PX 9; Tr. 11/26/01, at 141, 177-78; Tr. 2/4/02, at 35; Tr. 2/5/02, at 7-8.) Through these efforts, Matterhorn developed a list of thirty-one locations for possible stores or kiosks. (See PX 29) (the "Rollout List" or "Rollout Plan.") With three exceptions, the Rollout List identified a mall but no specific store location, and in some cases, only a city where Matterhorn considered opening a store.

The Rollout Plan faced an immediate obstacle. Fenton had originally intended to limit each retailer to only two or three Swatch stores, (Tr. 2/4/02, at 30, 38), significantly less than the thirty-one proposed by Matterhorn. Fenton told Nally that the proposal would require the approval of Grossenbacher and Swatch Group. (Id. at 38.) Peter Peterson, a high-ranking representative of Swatch Group, was coming to New York, and Fenton suggested that Nally present his proposal to Peterson. (Id.)

The meeting with Peterson took place on May 8, 1995.

According to Matterhorn, Peterson approved Matterhorn's Rollout List, and gave Matterhorn the "green light" to proceed with the Rollout Plan and open stores at the malls and sites on Matterhorn's location list.⁵ (See Plaintiffs' Post-Trial Proposed Findings of Fact and Conclusions of Law, dated Apr. 5, 2002, at ¶ 76) ("Matterhorn's Proposed Findings.") In addition, they agreed that Swatch would prepare a profit and loss projection for each store site that Matterhorn was able to procure at the approved locations, and Matterhorn would prepare its own internal break-even projections for each site. (Tr. 11/26/01, at 156-58; PX 43.)

5 Matterhorn's contention diverges approximately 180 degrees from Nally's trial testimony that neither Peterson nor any other Swatch official approved the opening of any specific store by Matterhorn during the May 8, 1995. (Tr. 11/26/01, at 159.)

Nally also told Fenton that Matterhorn needed a letter of intent from Swatch to prevent other possible Swatch partners from competing with Matterhorn for the same mall locations and driving up the retail cost of the space. (Undisputed Facts ¶ 21.) Swatch agreed to provide the letter of intent, and Matterhorn prepared a draft for Swatch. (Id. ¶ 22.) Matterhorn sent the draft to Fenton on or about May 11, 1995, together with the Rollout List. (Tr. 2/4/02, at 52.) The draft letter of intent stated:

This letter of intent gives exclusive authorization to Mr. Gerard Nally, President of the Matterhorn Group Inc. a New York State Corporation in the following matters:

1. To research and negotiate Swatch kiosk and/or Swatch store leases for thirty-one locations listed.

2. That upon final approval of these locations that Swatch USA Inc. will design, build and allow the Matterhorn Group Inc. to operate retail Swatch outlets at those locations.

3. That these locations will operate under the terms outlined in Swatch license or franchise agreements as necessary, for the term of the specified lease.

(Undisputed Facts ¶ 23.)

Fenton executed the Letter of Intent, (PX 40), on or about May 11, 1995. (See Tr. 2/4/02, at 47-48.)

C. The Application and Approval Process

Both sides understood that the Letter of Intent contemplated a further approval process, but dispute what it entailed. According to Matterhorn, if the specific site within a pre-approved location met Fenton's criteria, Matterhorn merely had to submit a two-page pro forma application; it was not required to provide any financial information in order to obtain approval of a store site. (Tr. 2/4/02, at 53-54.) Initially, the decision to approve a store site rested with Scott Fenton. (Id. at 58.) Swatch was supposed to forward the pro forma Swatch store application to Swatch Group, (Id. at 54), but the applications for the approval of kiosk sites could be approved by Grossenbacher without submission to Swatch Group. (Tr. 11/30/01, at 89.)

According to Swatch, the process was far more demanding, and the outcome less certain. Matterhorn had to finalize negotiations on a lease, and then submit a store application to Swatch together with a credit application and an internal projection relating to the profitability of the proposed store. Swatch would then forward this information to its headquarters in Switzerland, where management would make a decision as to whether to approve the store location. (See Third Amended Complaint, dated Oct. 17, 2000, at ¶ 72 (ECF Doc. No. 53); Tr. 11/28/01 at 32, 46-48, 112-14, 160-61, 181; Tr. 11/30/01 at 54-55, 126-27, 313-15; Tr. 2/4/02, at 145, 150-52; Tr. 2/5/02, at 70-75, 78-79, 92; PX 43; DX CY, Bates No. 003750 (approval process checklist); PX 269, Bates No. 002206; PX 203.) In the event that the proposed location was a kiosk, Swatch could approve the store location on its own authority. (Tr. 11/30/01, at 89.)

Swatch's view reflected Peterson's concern that a failed store would hurt its image, as had once happened in Europe. (Tr. 2/4/02, at 46.) Fenton testified that he did not want

Matterhorn (or any licensee) to engage in an unprofitable deal doomed to failure. Thus, he would not allow Matterhorn to pay an exorbitant rent, and the deal had to be reasonable, be high profile, and generate profitable sales. (Id. at 146-47.)⁶ Matterhorn never submitted an approval application for the majority of the thirty-one locations on the Rollout List. After the Letter of Intent was signed, Matterhorn submitted applications to open stores only at the following eleven locations: (1) Vail, Colorado, (2) The Westchester Mall, New York, (3) Garden State Plaza Mall, New Jersey, (4) King of Prussia Mall, Pennsylvania, (5) The Gallery at Harbor Place, Maryland, (6) Woodbridge Center Mall, New Jersey, (7) World Trade Center, New York, (8) Christiana Mall, Delaware, (9) Danbury Fair Mall, Connecticut, (10) Freehold Raceway Mall, New Jersey, and (11) Soho, New York. (See Undisputed Facts ¶ 25.)

6 Matterhorn interpreted Peterson's concern as an implied commitment to Matterhorn's success. (See Matterhorn's Proposed Findings ¶ 76) ("Mr. Peterson also assured Nally that Swatch would never allow a Swatch store to close as had once happened in Scotland.") Fenton's testimony made clear that Peterson was expressing his concern about a Matterhorn failure on Swatch. In other words, Peterson wanted to be sure that a Matterhorn store would help Swatch, and not vice versa.

One of the factors that limited Matterhorn's ability to achieve its Rollout Plan was the substantial construction costs. The stores were being designed in Europe according to high standards set by Swatch. (Tr. 11/26/01, at 67.) Fenton and Grossenbacher had estimated that it would cost $125,000.00 to $150,000.00, or approximately $125.00 to $150.00 per square foot, to build a typical Swatch store, (Tr. 11/26/01, at 91-92.) Early on, however, Matterhorn recognized that it would cost much more. During June 1995, Matterhorn told several landlords and leasing agents that the actual build out costs would be twice Swatch's estimate, or between $250.00 and $300.00 per square foot. (See DXX AI, AJ, AS, AT; Tr. 11/28/01, at 88-93.) Nally asked Swatch to finance the construction costs, (see Tr. 11/26/01, at 120; PXX 21, 23, 27, 31, 32, 33), but Swatch refused.⁷ (DX AE.)

7 Subsequently, Swatch granted a construction allowance of $50,000.00 for the Woodbridge store, (Undisputed Facts ¶ 41), and $25,000.00 for the Freehold kiosk. (Id. ¶ 43.)

D. Matterhorn Opens Four Stores or Kiosks

The Matterhorn operating subsidiaries and Swatch eventually entered into license agreements for all of the stores that actually opened — Harbor Place (on October 26, 1995), King of Prussia (on November 2, 1995), Woodbridge Center (on July 26, 1996), and Freehold Raceway, a kiosk (on September 20, 1996). (Undisputed Facts ¶ 26.) The plaintiffs assert a variety of claims under different legal theories relating to product supply, the availability of credit, marketing and advertising. It is worthwhile to take the time to review how the provisions of the license agreements affected these matters.

1. Product supply

Swatch released two seasonal collections each year, (Tr. 11/26/01, at 31), along with various limited edition special Swatch watches. (Undisputed Facts ¶ 6.) A seasonal collection might have as many as 180 different styles. (See Tr. 11/29/01, at 58-59.) A limited edition special watch might commemorate a holiday or event, such as the Olympics, or the work of a particular artist. (Tr. 11/27/01, at 150.) After one year, the watches in the collection were considered "vintage" or "Evergreen" watches.⁸ (Tr. 11/27/01, at 45-46.)

8 Swatch used "vintage" and "Evergreen" synonymously, but Matterhorn contends that the two terms mean different things. A "vintage" watch is over one year old, but an "Evergreen," according to Matterhorn, "is more of a classic style watch which does not necessarily age and retains its popularity from season to season." (Plaintiffs' Reply Post-Trial Proposed Findings of Fact and Conclusions of Law, dated June 24, 2002, at ¶ 28, p. 10.) Matterhorn asserts that although the retailers were not set up to carry vintage watches, they were set up to carry Evergreens as well as the current collection. (Id.) This statement lacks evidentiary support, and moreover, contradicts the evidence, discussed in the immediately succeeding text, that the retailers could only sell the current collections.

Schedule B of each license agreement identified the "Contract Products" or "Swatch Products"⁹ that Matterhorn could sell. It listed various types of watches and a few accessories, limited to batteries, watch bands and watch guards. It did not include hats, tee shirts or other promotional items. Under paragraph 7.2 of the license agreements pertaining to Harbor Place, (PX 122, Bates no. PL 009767), and King of Prussia, (PX 123, Bates no. PL 009720), and paragraph 7.3 of the license agreements for Woodbridge, (PX 224, Bates no. PL 009902), and Freehold, (PX 225, Bates no. PL 009816), Matterhorn could not sell any services or products that were not listed on Schedule

9 The Harbor Place and King of Prussia license agreements used the phrase "Contract Products" rather than "Swatch Products," the term used in the Woodbridge and Freehold license agreements. (Compare PX 122, Bates no. PL 009767 (Harbor Place) and PX 123, Bates no.PL009720 (King of Prussia) with PX 224, Bates no. PL 009901 (Woodbridge) and PX 225, Bates no. 009815 (Freehold).) The different phrases referred to the same thing, to wit, the merchandise that Matterhorn was authorized to sell.

B.

Although Schedule B in the license agreements did not distinguish between the current collection and vintage watches, Matterhorn knew that it was limited to selling the current collection. While Nally disagreed with this approach, he understood from the outset that Matterhorn's stores would not carry vintage or Evergreen watches, and would be limited to the current collections. (Tr. 11/29/01, at 57-58, 77.) The vintage and the Evergreen watches would be sold in Swatch's outlet stores.¹⁰ (See id., at 76-77; Tr. 11/30/01, at 254; Tr. 2/6/02, at 40.)

10 Swatch nevertheless provided vintage watches from time to time as a special accommodation to Matterhorn, once Swatch was able to obtain the product from Europe. (See Tr. 2/6/02, at 44.)

Product supply was governed by ¶ 5.1 of the license agreements. It stated that the "Retailer shall carry an assortment of Swatch Products in inventory in an amount determined by the Retailer and Swatch as sufficient to meet the Retailer's reasonable business needs."¹¹ (PX 122, Bates no. PL 009767; PX 123, Bates no. PL 009720; PX 224, Bates no. PL 009901; PX 225, Bates no. PL 009815.) Swatch's obligation to supply product was further limited by ¶ 5.3:

11 As noted, the two older license agreements pertaining to Harbor Place and King of Prussia used the phrase "Contract Products" instead of "Swatch Products."

The supply of Swatch Products may be restricted or limited based upon an inability by Retailer to pay or the unavailability of particular items.

(PX 122, Bates no. PL 009767; PX 123, Bates no. PL 009720; PX 224, Bates no. PL 009901; PX 225, Bates no. PL 009815.)

During the course of the trial, Matterhorn identified a handful of items that it did not get or did not get in sufficient quantity. Matterhorn's specific contentions are discussed below.

2. Credit

The license agreements did not mention credit. The application package, however, included a credit application. (Tr. 2/5/02, at 70-73, 78-79; DX CY, Bates No. 003750.) As a general practice, Swatch based its credit decision on the three "Cs" of credit decision making — character, capacity and capital. (Deposition of Joseph F. Schneider, Jr., held Feb. 25, 1999, at 131-32) ("Schneider Dep.") Swatch considered the product that the store was going to sell, relevant financial information and payment history, if any, and the identity of the principals. (Id. at 124.) In Matterhorn's case, Swatch considered the credit histories of Nally's two non-Matterhorn stores. (Id. at 98.)

Every account had to post a letter of credit unless the credit department concluded it was unnecessary because of guarantees, substantial net worth or the established nature of the business. (Id. at 54-55.) When an account went into default, Swatch's general practice was to attempt to collect the money from the retailer first. If that failed or the retailer refused to bring itself current, the situation was deemed serious, and Swatch drew down on the letter of credit. (Deposition of Joseph A. Mella, held Nov. 17, 1998, at 193-94 ("Mella Dep."); Schneider Dep., at 90, 91.)

Swatch's credit department considered Matterhorn a high risk account, and Joseph Schneider, Swatch's director of credit and collections, (see id. at 10-11), computed Matterhorn's net worth at $15,000.00. (Id. at 42; accord Mella Dep., at 115-16.) Swatch nonetheless granted Matterhorn Swatch's customary 30 day payment terms. (Schneider Dep., at 113.) In addition, when Swatch changed its company policy to permit 90 day payment terms for the initial order, Matterhorn also received the new terms. (Id. at 113-14; see DX DF.) Finally, Matterhorn had to post two $50,000.00 letters of credit when it opened its first two stores at Harbor Place and King of Prussia. (Schneider Dep., at 43.)

Matterhorn had payment problems from the start. Within one month of the Fall 1995 grand opening of the stores at Harbor Place and King of Prussia, Swatch placed Matterhorn on credit hold because Matterhorn had failed to pay for its initial orders within thirty days. (Tr. 11/27/01, at 36.) Swatch would not release an order to a retailer on credit hold until Swatch's credit department had approved the release. (Mella Dep., at 98.) Barbara Khouri, Grossenbacher's successor, described the problem of Matterhorn's nonpayment as continuous, forcing Swatch's financial management to look at Matterhorn's account every time Matterhorn placed an order. (Tr. 2/6/02, at 58.) Swatch released the credit hold only after Peter Heusler paid $100,000.00 toward the account. (Tr. 11/27/01, at 38.)

In the summer of 1996, Matterhorn was once again placed on credit hold. Swatch drew down on one of Matterhorn's letters of credit, and removed the credit hold only after Matterhorn agreed to replenish the amount of the draw down over a three week period. (PX 250.) Swatch put Matterhorn on credit hold again in the fall of 1996, and terminated the license agreements three months later.

3. Marketing and Advertising

Paragraph 9 of the license agreements covered advertising and marketing. Swatch could but was not required to provide advertising, sales promotion and public relations materials at no cost to Matterhorn. Paragraph 9.1 expressly stated that "no advertising is required under this agreement." (PX 122, Bates no. PL 009768; PX 123, Bates no. PL 009721; PX 224, Bates no. PL 009903; PX 225, Bates no. PL 009816.) Pursuant to ¶ 9.1, however, Matterhorn could prepare its own advertising materials, but the advertising materials prepared by Matterhorn were subject to Swatch's approval. (PX 122, Bates no. PL 009767; PX 123, Bates no. PL 009720; PX 224, Bates no. PL 009903; PX 225, Bates no. PL 009816.)

Although Swatch did not advertise particular stores, it nonetheless spent a substantial amount to advertise and promote the Swatch brand. This included $40 million to become an Olympic sponsor, (see Tr. 11/26/01, at 63), and an additional $30 million on advertising in 1996. (See Tr. 2/6/02, at 48.)

E. The Matterhorn Stores Close

Swatch had consistently projected store sales of between 20,000 and 25,000 units per year during the first three years of operation, and kiosk sales ranging between 10,000 and 12,000 units per year. (Tr. 2/4/02, at 65.) Matterhorn made more conservative projections for the King of Prussia store, (PX 83), but Swatch's projections matched Nally's own experience at his South Street Seaport store. (Tr. 11/29/01, at 95.) In addition, Niklaus, Nally's partner in Matterhorn and a former Swatch employee, had seen Swatch stores sell multiples of the projections. (Id. 139-40.)

Notwithstanding the parties' optimism, the stores never made their projections. The record suggests several reasons. The parties apparently bought into the idea that the demand for Swatch watches would grow significantly as a result of Swatch's increased visibility and marketing efforts in the United States prior to and during the 1996 Summer Olympics.

Despite these efforts, the Swatch product never captured the United States public's imagination, at least not to the degree that the parties had hoped. While Swatch has opened over 25 company-owned retail stores during the last several years, (Undisputed Facts ¶ 46), it has closed all of its outlet stores, (id. ¶ 47), and it does not appear that it ever established the wide franchisee network that it had envisioned. Matterhorn placed all the blame on Swatch, constantly complaining about deficient product support, marketing and advertising, competition from company-owned stores and unreasonable credit terms.

It appears, however, that while Matterhorn understood the riskiness of its Rollout Plan, it ignored that risk. In early 1995, Nally wrote that the Swatch business was struggling, the sales were down trending, product supplies were dangerously low and Swatch's United States management was unstable. (DX A, Bates no. PL 011909-10.) Swatch's only hope was to open Swatch stores in important locations. (Id., Bates no. PL 011909.) Matterhorn had already approached many of the high end mall developers in the United States, and was prepared to proceed with the Rollout Plan. (Id.)

Nally recognized the expense and risk to Matterhorn. He said that Matterhorn needed $2 million on a non-recourse basis, which Matterhorn would pay back over a three year period if its sales were sufficient.¹² (Id., Bates no. PL 011910.) In addition, full time financial support was "urgent and crucial," as were reasonable building costs per square foot, "special support" for product availability and "special support" for marketing activities. (Id.)

12 I assume Nally intended a non-recourse loan. His exact words were: "In order to build these stores we need 2 mio dollars. We want to pay back over a period of three years as a percentage of sales, this way, if we are successful you will get all the money back, if not, fuck you." (DX A, Bates no. 011910.)

Matterhorn never received the type of construction or financial support that Nally considered crucial to Matterhorn's success. Furthermore, Swatch did not promise "special support" regarding product availability or marketing. Matterhorn nevertheless proceeded with an ambitious Rollout Plan that plainly exceeded its means. Joseph Mella, Swatch's Vice-President for Finance and Administration, testified that when he learned about the Rollout List in April 1996, he had serious concerns about Matterhorn's ability to open and pay for thirty-one stores. (Mella Dep., at 81-84.) Simply put, Matterhorn was too thinly capitalized to build and operate four stores, much less the thirty-one on its Rollout List.

The problems with the Rollout List were obvious at an early stage. As noted, Matterhorn was aware of the high cost of construction, but proceeded anyway even after Swatch refused to finance the construction costs. The operating stores could not pay their bills on time, and Swatch was continually forced to put Matterhorn on "credit hold," restricting or eliminating the delivery of new product. By October 1996, Matterhorn was predicting its own demise unless, according to Matterhorn, Swatch stopped competing with Matterhorn, and started improving product and advertising support. (PX 287.) At a November 14, 1996 meeting with Swatch, Matterhorn reported meager sales for the preceding month. Swatch again put Matterhorn on credit sold, and Matterhorn talked about going out of business. (See PX 302.) Matterhorn also proposed that Swatch buy the Matterhorn stores. (PX 313, Bates no. 001544.)

The 1996 sales results for the four stores fell well short of projections. (See PX 339, Bates no. 004855.) The parties met and talked throughout January and early February 1997, and on February 10, 1997, Matterhorn presented a business proposal that dramatically changed the parties' relationship. (See PX 363, Bates nos. PL 014042-46.) Although Matterhorn termed it a "joint venture," the unrealistic proposal shifted the entire risk to Swatch. Swatch would construct the stores — at a minimum, the thirty-one listed in the Rollout List — and turn them over to Matterhorn to manage. Swatch would supply all merchandise on a consignment basis. In exchange for building and stocking the stores, Swatch would receive 50% of the net income before taxes. Matterhorn would receive a management fee plus the other 50%. Finally, Swatch would waive all amounts due and reimburse Matterhorn for all amounts spent.

The proposal was apparently the last straw, and Swatch wrote to Matterhorn on February 12, 1997, rejecting the proposal as unacceptable. (PX 362.) After referring to Matterhorn's "frequent and continuing delinquency in the payment of invoices which have been outstanding for several months," Swatch informed Matterhorn that all product shipments were being halted, and unless all of the invoices were paid within fifteen days, all four license agreements would terminate on that date. (Id.) Matterhorn failed to pay the outstanding invoices or submit a satisfactory proposal. Accordingly, by letter dated February 27, 1997, Swatch terminated the four license agreements.(PX 376.)

F. The Bankruptcy and the Prior Proceedings

The plaintiffs filed their chapter 11 petitions on February 27, 1997, (Undisputed Facts ¶ 60), the date that the license terminations became effective, and filed this adversary proceeding in March 1997. (Id. ¶ 61.) The parties thereafter engaged in substantial motion practice. Swatch moved for summary judgment, but I denied the motion following a lengthy hearing. (See Transcript of hearing, held Jan. 18, 2000, at 87-90.)¹³ Next, Swatch moved to dismiss parts of the second amended complaint for legal insufficiency, including the tenth claim (fraudulent inducement), the twelfth claim (violations of New York franchise law) and the thirteenth claim (violations of Maryland franchise law). I granted the motion with leave to replead portions of the tenth claim. See The Matterhorn Group v. SMH (U.S.) Inc. (The Matterhorn Group), A.P. No. 97-8273, 2000 WL 1174215 (Bankr.S.D.N.Y. Aug. 17, 2000).

13 The January 18, 2000 transcript is filed electronically in this adversary proceeding. (See ECF Doc. No. 44.)

The dismissal of the franchise law claims was based on Matterhorn's failure to plead the payment of a franchise fee. Id., 2000 WL 1174215, at *9-10. Following the decision, Swatch moved in limine to exclude proof on three other claims that asserted violations of the New York franchise laws. That motion was denied with the observation that the issue raised by the motion was more appropriately tested by either a motion to dismiss under Fed.R.Civ.P. 12(b)(6) or a motion for summary judgment. (See Memorandum Decision and Order Denying Motion In Limine to Exclude Proof Pertaining to New York Franchise Act Claims, dated September 26, 2001, at 8-9) (ECF Doc. No. 81.)

Swatch thereafter made a motion for summary judgment to dismiss the remaining New York Franchise Act claims. The motion was returnable on the same day that the trial was scheduled to begin. I declined to consider motion, and instead, started the trial.

By separate motion, Swatch also moved in limine to exclude the plaintiffs' testimony relating to lost profits, and to bifurcate the trial. Swatch's bifurcation motion overlapped with my request that the parties focus on the possibility of separate trials on specific issues. (See Memorandum Decision and Order Bifurcating the Trial of the Liability and Damages Issues, dated Sept. 26, 2001, at 3) (ECF Doc. No. 80.) Swatch recommended first trying the contract claims relating to the Letter of Intent. (Id.) I declined the invitation, but with the plaintiffs' agreement, bifurcated the issues of liability and damages. (Id. at 5-6.) As a result, I did not decide the second in limine motion regarding proof of lost profits.

DISCUSSION A. Introduction

The twelve claims alleged in the plaintiffs' Third Amended Complaint fall into three categories — contract, tort (primarily fraud) and franchise-related. With the exception of the claims asserted under the New Jersey Franchise Practices Act, both sides' memoranda assume that New York law controls, and this is sufficient to establish New York as the governing law. See Krumme v. WestPoint Stevens, Inc., 238 F.3d 133, 138 (2d Cir. 2000); American Fuel Corp. v. Utah Energy Dev. Co., 122 F.3d 130, 134 (2d Cir. 1997); Wm. Passalacqua Builders, Inc. v. Resnick Developers South, Inc., 933 F.2d 131, 137 (2d Cir. 1991).

B. The Contract Claims

Although the allegations spill over into non-contract theories, this is primarily a breach of contract case. The contract claims include breach of the Letter of Intent (1st claim), breach of the implied covenant of good faith and fair dealing (2nd claim), breach of the license agreements (7th claim) and promissory estoppel (9th claim). Both sides agree that the principal contract claims involved the Letter of Intent, and it is to these issues that I turn.

1. Breach of the Letter of Intent a. Background

The meaning of the Letter of Intent was hotly disputed throughout the case. According to the plaintiffs, the Letter of Intent granted Matterhorn the exclusive right to open and operate thirty-one Swatch stores or kiosks, designed by Swatch, at the locations on the Rollout List. The defendants, on the other hand, contend that it was merely an accommodation to enable Matterhorn to negotiate leases. I had denied summary judgment because the Letter of Intent was ambiguous, but through the trial, its meaning became clear. Its import falls somewhere between the varying interpretations argued by the parties.

To establish a claim for breach of contract under New York law, a plaintiff must prove: (1) the existence of an agreement; (2) the defendant breached its obligation; (3) the plaintiff performed its obligations; and (4) the plaintiff suffered damages as a result of the defendant's breach. See Cleveland Wrecking Co. v. Hercules Constr. Corp., 23 F. Supp.2d 287, 292 (E.D.N.Y. 1998), aff'd, 198 F.3d 233 (2d Cir. 1999); Coastal Aviation v. Commander Aircraft Co., 937 F. Supp. 1051, 1060 (S.D.N.Y. 1996), aff'd in unpublished op., 108 F.3d 1369 (2d Cir. 1997). The plaintiff has the burden of proving his breach of contract claim by a preponderance of the evidence. See PPX Enters., Inc. v. Fredericks, 94 F. Supp.2d 477, 483 (S.D.N.Y. 2000), aff'd in unpublished op., 2001 WL 224078 (2d Cir. 2001).

The issue, as framed by the parties, is whether the Letter of Intent was a binding preliminary agreement or an unenforceable agreement to agree under the analytical framework established in Teachers Ins. Annuity Ass'n of Am. v. Tribune Co., 670 F. Supp. 491 (S.D.N.Y. 1987), and subsequently applied in Arcadian Phosphates, Inc. v. Arcadian Corp., 884 F.2d 69, 71-72 (2d Cir. 1989) and Adjustrite Sys., Inc. v. GAB Business Servs., Inc., 145 F.3d 543 (2d Cir. 1998). Ordinarily, if the parties "contemplate further negotiations and the execution of a formal instrument, a preliminary agreement does not create a binding contract." See Adjustrite, 145 F.3d at 548; Rappaport v. Buske, No. 98 Civ. 5255, 2000 WL 1224828, at *4 (S.D.N.Y. Aug. 29, 2000). Nonetheless, in some rare instances, preliminary agreements may create binding obligations.

Adjustrite, 145 F.3d at 548; Rappaport, 2000 WL 1224828, at *4; Gorodensky v. Mitsubishi Pulp Sales (MC) Inc., 92 F. Supp.2d 249, 254 (S.D.N.Y.), aff'd in unpublished op., 242 F.3d 365 (2d Cir. 2000).

The primary focus is on the parties' intent as evidenced by their objective manifestations. Adjustrite, 145 F.3d at 548-49 ("The key, of course, is the intent of the parties: whether the parties intended to be bound, and if so, to what extent."). A contract requires mutual assent, and mere participation in negotiations and discussions does not create a binding obligation. See Teachers Ins. Annuity, 670 F. Supp. at 497.

But regardless of the parties' intention, "if the agreement is too fragmentary, in that it leaves open terms of too fundamental importance, [the agreement] may be incapable of sustaining binding legal obligation." Teachers Ins. Annuity, 670 F. Supp. at 497. "A primary concern for courts in such disputes is to avoid trapping parties in surprise contractual obligations that they never intended." Teachers Ins. Annuity, 670 F. Supp. at 497; accord Adjustrite, 145 F.3d at 548.

There are two types of binding preliminary agreements. A "type 1" agreement arises when the parties reach agreement on all of the issues that "require negotiation (including whether to be bound) but agree to memorialize their agreement in a more normal document." Adjustrite, 145 F.3d at 548; Teachers Ins. Annuity, 670 F. Supp. at 498 ("Such an agreement is preliminary only in form — only in the sense that the parties desire a more elaborate form Ialization of the agreement."). A "type 1" CAreement binds the parties "to their ultimate contractual objective in recognition that the contract has been reached, despite the anticipation of further formalities." Teachers Ins. Annuity, 670 F. Supp. at 498; accord Adjustrite, 145 F.3d at 548.

A "type 2" agreement, or binding preliminary commitment, arises when parties "agree on certain major terms, but leave other terms open for further negotiation." Adjustrite, 145 F.3d at 548 (internal quotation marks omitted); accord Teachers Ins. Annuity, 670 F. Supp. at 498. The parties are not bound to enforce the proposed contract, but only to "negotiate the open issues in good faith in an attempt to reach the alternate objective within the agreed framework." Teachers Ins. Annuity, 670 F. Supp. at 498; accord Adjustrite, 145 F.3d at 548. A "type 2" agreement does not guarantee that the parties will reach an agreement, and "the parties may abandon the transaction, as long as they have made a good faith effort to close the deal and have not insisted on conditions that do not conform to the preliminary writing." Missigman v. USI Northeast, Inc., 131 F. Supp.2d 495, 507 (S.D.N.Y. 2001). In deciding whether a preliminary agreement is "type 1," "type 2," or not binding at all, "[t]here is a strong presumption against finding binding obligation in agreements which include open terms, call for future approvals and expressly anticipate future preparation and execution of contract documents." Teachers Ins. Annuity, 670 F. Supp. at 499. See Arcadian Phosphates, 884 F.2d at 73. Courts will generally consider (1) the language of the agreement; (2) whether there has been partial performance; (3) the existence of open terms; and (4) whether the agreement is the type that is usually committed to writing. See Adjustrite, 145 F.3d at 549.

In deciding whether a "type 2" agreement exists, courts will also consider the context of the negotiations. See Adjustrite, 145 F.3d at 549 n. 6; Gorodensky, 92 F. Supp.2d at 255.

b. The Nature of the Parties' Agreement

Matterhorn's contention that the Letter of Intent was a "type 1" binding agreement, which granted Matterhorn the absolute right to open thirty-one stores, lacks merit. With three exceptions, the Rollout List identified a mall but no specific store site, and in some cases, merely named a city where Matterhorn planned to open a store. The actual site was an important consideration to Swatch, and the Letter of Intent required additional approvals and agreements only after Matterhorn identified a site.

Furthermore, the terms of the future license or franchise agreement were unresolved. At the time that the Letter of Intent was signed, Matterhorn was still trying to convince Swatch to finance the construction costs. In addition, there was no agreement relating to product supply, (see Tr. 11/28/01, at 15; DX AO), marketing, advertising, or credit, (see DX AO), the duration of the Letter of Intent (Nally believed it was perpetual), (Tr. 11/29/01, at 86-87), or whether new locations could be added to the Rollout List or substituted for listed locations. (See id. at 44.) The Letter of Intent contemplated a future agreement that would address these matters.

On the other hand, the Letter of Intent was more than the simple accommodation suggested by Swatch, because it contained some binding contractual language. The first paragraph clearly granted Nally the exclusive right to research and negotiate leases on behalf of Matterhorn at the thirty-one locations on the Rollout List. In this limited sense, the Letter of Intent created rights and obligations that were not subject to further conditions, negotiation or memorialization.

Except for the commitment regarding exclusivity, the Letter of Intent was akin to an offer to enter into a "type 2" contract. Matterhorn could accept the offer by submitting an application to open a store at a specific site and location.

The Letter of Intent did not guarantee that the parties would ever enter into a license or franchise agreement with respect to that site and location. The Letter of Intent did not even guarantee that Swatch would approve the application.

Nevertheless, the Letter of Intent did commit Swatch to review the application in good faith.

The approval process, in this regard, was not the pro forma exercise that Matterhorn suggested, but the more rigorous and less certain one described by Swatch. Swatch had to satisfy itself that the store location met Fenton's location criteria, that the store would operate profitably and that it would operate in a manner consistent with Swatch's image. Matterhorn had to provide financial statements containing pro forma projections. Fenton had to be convinced that the rent expense was reasonable and consistent with his expectations for a profitable location. (Tr. (2/4/02), at 72.) In addition, the rent was an important component of the income projections, and Swatch had to know a store's future rent expense to estimate its future profitability.

If the application satisfied these criteria, Swatch was obligated under the Letter of Intent to approve it. Fenton had the initial say, but all applications had to be approved by Grossenbacher, and store applications, as opposed to kiosk applications, also required the assent of Swatch Group. Once Swatch (or in the case of a store, Swatch Group) approved a site, the final step was the execution of a license or franchise agreement. Aside from the length of the term, the parties had not negotiated much less agreed on any of the material terms of such an agreement.

This interpretation of the Letter of Intent is consistent with a memorandum that Nally prepared a few days after the Letter of Intent was signed. On May 18, 1995, Nally wrote to Peterson, summarizing the May 8th meeting. (See PX 43.) Nally's memorandum did not reflect any firm agreement on the locations, and referred to the Rollout List as "proposed Swatch franchise locations." Nally stated that Harbor Place was on a "tight timeline," and Grossenbacher was going to visit the site. He said that Matterhorn was working on a "workable proposal" for Soho. He observed that Swatch would prepare a profit and loss analysis on Matterhorn's "proposed locations." Finally, he acknowledged that Matterhorn would submit internal projections for each location, a practice that it subsequently and religiously followed.

Remarkably, the May 18th letter did not refer to the Letter of Intent. If the Letter of Intent had already granted Matterhorn the right to open stores at the thirty-one locations on the Rollout List, the May 18th letter would not have called them "proposed" locations, or implied that Harbor Place and Soho had not yet been approved. Similarly, if the approval process envisioned by the Letter of Intent did not require Matterhorn to submit financial projections, the May 18th letter would not have confirmed Matterhorn's agreement to supply them. In fact, the failure to mention the Letter of Intent confirmed Nally's contemporaneous understanding that the Letter of Intent did not affect the discussions and commitments made three days earlier at the May 8th meeting.

c. The Acts Constituting the Breach

Matterhorn's proposed findings of fact and conclusions of law identified, with varying degrees of specificity, twelve alleged breaches of the Letter of Intent. According to Matterhorn, Swatch

(1) refused to permit Matterhorn to open Swatch stores in, among other places: Vail, Colorado; Faneuil Hall, Boston, Massachusetts; The Bayside Mall, Miami, Florida; and Atlanta Airport, Atlanta, Georgia, locations that Swatch had approved as part of Matterhorn's rollout plan;

(2) failed to provide Matterhorn with an interim license agreement or franchise agreement for the term of the specific lease for each Matterhorn store;

(3) failed to use its best efforts to support the stores and kiosk opened by Matterhorn;

(4) failed to timely process Matterhorn's pro forma applications to facilitate the opening of Matterhorn stores and kiosks at sites at locations approved by Swatch as part of Matterhorn's rollout plan, including, without limitation, the planned locations at the World Trade Center; the Garden State Plaza Mall; the Danbury Mall; and two of the locations Matterhorn was able to open at The Gallery at Harbor Place and the Freehold Mall;

(5) failed and refused to proceed with the agreed upon Matterhorn store in Soho;

(6) prevented Matterhorn from continuing (i) with the execution of its rollout plan approved by Swatch and (ii) with opening additional Swatch stores or kiosks at sites in the locations identified in the rollout plan approved by Swatch;

(7) opened outlet stores in locations that unfairly competed with and undercut Matterhorn's stores and kiosk, including in one instance, opening an outlet in Franklin Mills that was admittedly in to close of proximity to the Matterhorn store in King of Prussia. The outlet stores also denigrated the Swatch image that was an essential component of Matterhorn's marketing;

(8) failed and refused to provide Matterhorn with a comprehensive franchise agreement, as promised;

(9) permitted discounting of Swatch merchandise in department and other stores, thereby unfairly competing with and undercutting the Matterhorn stores and kiosk and damaging the Swatch image;

(10) failed and refused to supply the Matterhorn stores and kiosk with Swatch watches and merchandise otherwise available in stores operated by Swatch;

(11) failed and refused to permit Matterhorn to open a store(s) or kiosk(s) in Atlanta during the 1996 Olympic Games, and instead attempted to divert that opportunity to another party and, eventually, diverted that lucrative opportunity to itself by opening Swatch stores in Atlanta;

(12) opened the Timeship Store in midtown Manhattan, New York City, and supplied that store on a preferred basis with watches, merchandise and promotional materials that were not made available, or not timely made available, to Matterhorn's stores and kiosk.

(Plaintiffs' Post-Trial Proposed Findings of Fact and Conclusions of Law, dated Apr. 5, 2002 ("Matterhorn's Proposed Findings"), at pp. 64-65.)¹⁴

14 Matterhorn used paragraph numbers to designate its proposed factual findings but not its proposed conclusions of law. As a result, this opinion will use the paragraph number when citing to Matterhorn's proposed factual findings and the page number when referring to its proposed legal conclusions. On the other hand, the Defendants' Proposed Findings of Fact and Conclusions of Law,, dated June 3, 2002 ("Swatch's Proposed Findings") used paragraph numbers to designate both its proposed factual findings and its proposed legal conclusions. This opinion will refer to Swatch's proposed findings as "Fact" followed by a paragraph number, and its conclusions as "Conclusion" followed by the corresponding paragraph number.

Several of these allegations relate to operational issues that do not apply to the stores that Matterhorn never opened.

These allegations included the failure to support the stores, opening outlet stores that competed with Matterhorn, price discounting and other forms of unfair competition and complaints regarding product supply. The operational issues were covered, if at all, by the license agreements. Furthermore, the Letter of Intent did not address these issues.

Turning to the Letter of Intent, the common thread running through the majority of Matterhorn's allegations is Swatch's failure to negotiate or cooperate with Matterhorn, or its affirmative interference with Matterhorn's efforts to open stores on the Rollout List. It must be borne in mind that Matterhorn submitted applications for only eleven of the thirty-one stores, and opened stores or kiosks at only four of those locations. The first question, therefore, is whether Swatch did something to hinder Matterhorn's efforts to submit applications for the remaining twenty locations. Matterhorn has named only two locations that fall into this category: Faneuil Hall in Boston and Bayside Mall in Miami.

Faneuil Hall

Matterhorn did not identify any specific instances of wrongdoing by Swatch relating to Faneuil Hall. Nally testified that he looked at an available space at this location, but never negotiated lease terms. (Tr. 11/29/01, at 46.) Furthermore, Nally did not disapprove of the local Swatch licensee getting the location. (Id.)

Bayside Mall

Matterhorn also contends that Swatch refused to allow it to open a Swatch store at the Bayside Mall, gave the location to Joe Tagliola, the owner of Tag Time, another watch retailer, and after it terminated its relationship with Tagliola, put the Bayside location "on hold." (Matterhorn's Proposed Findings ¶ 307.) The "Tagliola issue" arose nearly eleven months after the execution of the Letter of Intent. On April 4, 1996, Tagliola met with Swatch to discuss opening stores in several states, including Florida. Tagliola gave Swatch a proposal, (DX DJ, Bates no. 000909-14), that misrepresented a strong business connection between Tag Time and Matterhorn, (see id., Bates no. 000909) ("[Matterhorn] will be available as needed to assist in developing Tag Time managers in the areas of product knowledge, merchandise mix, sales techniques and the like"), and listed Nally and Heusler as advisors to Tag Time. (Id., Bates no. 000911.) Of greater concern to Swatch, the proposal identified Scott Fenton, Swatch's own director of retail, as one of Tag Time's key executives, (id., Bates no. 000909-10), and a member of its board of directors. (Id., Bates no. 000911.)

On April 9, 1996, Roland Streule, the president of Swatch, wrote to Tagliola, pointing out the "many misrepresentations and inaccuracies which should be denounced by [Swatch]." Streule concluded that it would be inappropriate to proceed with Tag Time until Tagliola had reviewed and discussed the matter with Mr. Hayek.¹⁵ (Id.) Swatch never "gave" the Bayside location to Tagliola; to the contrary, Swatch advised Tagliola five days after the April 4th meeting that it would not do business with Tag Time until Tagliola clarified the matter with Mr. Hayek. The evidence did not reflect any further efforts made by any party to open a store at Bayside.

15 Nick Hayek essentially owned and ran Swatch, and his son, Nick Hayek, Jr., also worked for Swatch. (See Tr. 11/27/01, at 144.) It is not clear which Hayek was the subject of the reference.

It is true that the Tagliola issue caused Swatch to place the Bayside lease negotiations on hold in April 1996 pending a clarification of the Tagliola issue. (PX 196.) The record does not indicate, however, how long this lasted, or whether it affected Matterhorn's decision or ability to open a store at Bayside. Matterhorn never finalized lease negotiations or submitted an application or internal projections for Bayside during the eleven months before the April 4, 1996 meeting, or at anytime thereafter. (See Undisputed Facts ¶ 25.) In addition, there is no evidence that Matterhorn was ever ready, willing or able to negotiate a lease or submit a completed application and financial projections.

Vail

Matterhorn also alleges that Swatch violated the Letter of Intent by refusing to permit Matterhorn to open a store in Vail, Colorado. Here, Matterhorn stands on firmer ground. Vail was on the Rollout List, and Matterhorn pursued a specific site. Even before the Letter of Intent, Matterhorn had sent Swatch a two page application for a 572 square foot store at Hanson Ranch Road in Vail. (PX 17, Bates nos. PL 014532-33.) However, the application was premature because Matterhorn had not yet negotiated a lease; nor, for that matter, had the property bee built. (See Tr. 11/29/01, at 4-5.)

Matterhorn and the agent for the landlord at the Hanson Ranch Road location continued to deal sporadically during the next twelve months. The parties eventually agreed to lease terms, and on or about April 23, 1996, Matterhorn sent Swatch a letter of intent signed by the landlord's agent though not by Matterhorn. (DX DT.) The financial information showed the rent expense. (See PX 215.)¹⁶ Swatch did not immediately respond to the completed application, and on May 8, 1996, Matterhorn wrote to Swatch urging action. (See PX 221.) Swatch ultimately rejected Matterhorn's Vail application in August 1996.¹⁷ (Tr. 11/29/01, at 18-21; PXX 258, 271.)

16 The Vail letter of intent specified a base rent of $110.00 per square foot, while the profit and lost projections indicated $105.00 per square foot. No explanation was given for the difference.

17 When Matterhorn protested the rejection and advised Swatch that the location was covered by the Letter of Intent, Joe Mella responded that the Letter of Intent did not bind Swatch because it had not been signed either by him or Roland Streule. (Tr. 11/27/01, at 130-31; Tr. 11/29/01, at 2; Mella Dep. at 113-14, 121.) Swatch did not contend in its post-trial submissions that Fenton lacked the authority to sign the Letter of Intent. In any event, Fenton had at least apparent authority to do so. Grossenbacher had introduced him to Nally during the January 1995 market week as the Director of Retail and the liaison between Swatch and the retailers.

According to Barbara Khouri, Grossenbacher's successor, Swatch rejected Matterhorn's Vail application because of a concern that Vail was located too far away from Matterhorn's northeastern stores, and Matterhorn would not be able to manage it effectively. (Tr. 2/6/02, at 20-21, 116-17.) This represented Swatch's new "cluster approach," (see PX 269, Bates no. 002206), under which all of the stores opened by a licensee had to be located within relatively close geographical proximity to the licensee. (See Tr. 2/6/02, at 117.)

The rejection of the Vail application violated the Letter of Intent. The Letter of Intent granted Matterhorn the exclusive right to negotiate a lease in Vail despite Vail's geographical distance from Matterhorn's base of operation in the Northeast. Furthermore, it required Swatch to review the Vail application in good faith, and in a manner consistent with the criteria discussed above. The "cluster approach" unilaterally rescinded the exclusivity that the Letter of Intent had granted,¹⁸ and Swatch's reliance on the "cluster approach" to reject the Vail application was improper.

18 As a matter of fact, Khouri said that under the "cluster approach," there no longer would be exclusivity. (PX 269, Bates no. 002206.)

To counter this conclusion, Swatch argues that it could have disapproved the Vail location for any number of legitimate reasons. Matterhorn never completed lease negotiations for Vail, (Swatch's Proposed Findings Conclusion ¶ 82), or signed the Vail letter of intent. (Id., Fact ¶ 58.) In addition, Matterhorn had been placed on credit hold and lacked the financial resources to build and operate numerous store locations, including Vail. (Id., Fact ¶ 84; Conclusion ¶ 82.) Finally, the proposed store location had not yet been built.¹⁹ (DX DT.)

19 Swatch also maintained that it offered Matterhorn two other locations in the Northeast — Roosevelt Field, Long Island and Tyson's Corner, Virginia — but Matterhorn turned the new locations down. The Letter of Intent and the attached Rollout List were a contract that could only be modified by mutual consent. Matterhorn was not obligated to accept a substitute location, and Swatch's offer could not affect Matterhorn's exclusivity rights under the Letter of Intent.

The short answer is that Swatch did not reject the Vail application for any of these reasons. Further, the reasons were contradicted by Swatch's own conduct. For example, notwithstanding Matterhorn's financial problems, Swatch "approved" the Roosevelt Field and Tyson's Corner locations for Swatch as a quid pro quo for taking Vail away. (See PX 271, Bates no. 002460.) In addition, at the same August 1996 meeting when Swatch announced that it would not go forward with Vail, it urged Matterhorn to provide demographic and mall information about Garden State Plaza, and continued to review and discuss other proposed store locations. (See PX 258, Bates no. 001766.)

In addition, Matterhorn sent the Vail letter of intent in late April 1996. (DX DT.) It showed that the landlord's agent had signed it but Matterhorn had not. It also showed that the property was still under construction. Swatch took four months to complete its processing of the application. During that period, it never asked Matterhorn to sign the letter of intent (an obstacle Matterhorn could have easily overcome), and never raised the status of the construction as an issue.

Accordingly, Swatch breached the Letter of Intent by rejecting the Vail application for improper reasons. Matterhorn is entitled to recover its out of pocket costs incurred after the execution of the Letter of Intent in investigating Vail. Matterhorn is not, however, entitled to recover lost profits. Because of its financial problems, and as discussed in more detail below, Matterhorn declined to open stores at several other sites that Swatch had approved, and there is no guarantee that it would have opened a store in Vail. Goodstein Constr. Corp. v. City of New York, 604 N.E.2d 1356, 1360-62 (N.Y. 1992) (plaintiff cannot recover lost profits based on the defendant's failure to negotiate in good faith the prospective terms of a nonexistent contract; there is no certainty that the parties would have ever entered into that contract, there was no evidence that the parties contemplated liability for lost profits in that situation, and an award would be too uncertain, speculative and conjectural); see Schonfeld v. Hilliard, 218 F.3d 164, 172 (2d Cir. 2000); Kenford Co. v. County of Erie, 493 N.E.2d 234, 236 (N.Y. 1986).

Atlanta

Matterhorn contends that Swatch approved Atlanta as part of the Rollout Plan but then refused to permit it to open a Swatch store there. Furthermore, Swatch refused to allow Matterhorn to open stores or kiosks in Atlanta during the 1996 Olympic Games, attempted to divert the opportunity to another party, and eventually took the opportunity for itself. Nally's trial testimony referred to three locations that Swatch prevented Matterhorn from opening: two temporary, Olympic locations and a proposed Airport location. (Tr. 11/29/01, at 41.)

During the January 1995 market week meeting, Grossenbacher announced that Swatch intended to open stores in Atlanta for the Olympics. (See Tr. 11/26/01, at 65.) The stores would be temporary, except for a permanent airport kiosk, and each Swatch retailer would get two locations. (Tr. 11/29/01, at 41.)

Unlike Swatch's general expansion plan, Swatch would build and own the Atlanta retail locations, and the existing Swatch store owners, like Nally, would manage them. (Tr. 11/26/01, at 65.) Atlanta did not interest Matterhorn, and no Atlanta locations appeared on the original Rollout List. (See PX 29.)

In July 1995, however, Niklaus went to Atlanta at Fenton's request to scout potential locations at the Atlanta airport. (Tr. 11/27/01, at 47.) He met with Sean Keenan, a representative of the Atlanta airport, and found a space he liked. (PX 74; see Tr. 11/29/02, at 164-66.) Thereafter, in August 1995, Matterhorn sent a revised rollout list to Swatch that included two Atlanta locations — the airport and the mall at Peachtree Street. (PX 82, Bates no. 007206.) The revised rollout list did not include any locations in the Olympic Village.

Atlanta was not on the original Rollout List, and Matterhorn did not prove that Swatch consented to a revised rollout list. But even if the Atlanta locations were covered by the Letter of Intent, Matterhorn failed to prove a breach. Fenton testified that the airport required that the location go to a member of a minority group, which it did. (Tr. 2/4/02, at 86, 162.) Furthermore, Matterhorn did not negotiate a lease or submit an application for any other Atlanta location. Lastly, Swatch did not divert an opportunity for an Atlanta location from Matterhorn to itself. With the possible exception of the airport location, the parties understood that Swatch would build and own the Atlanta stores; the retailers would merely operate them on a short term basis while the stores were open during the summer of 1996.

Failure to Process Pro Forma Applications

Matterhorn contends that Swatch failed to process its pro forma applications in a timely manner. It points specifically to the applications to open stores at the World Trade Center, the Garden State Plaza Mall, and the Danbury Mall, as well as two locations that Matterhorn eventually did open: The Gallery at Harbor Place and Freehold Mall. I have already rejected Matterhorn's argument that the applications were pro forma. To the contrary, Matterhorn had to provide Swatch with sufficient information to show that the site satisfied Swatch's criteria, and that the store could operate profitably. Matterhorn could not provide the requisite financial information until it had negotiated lease terms, and knew the amount of rent for the proposed location.

The World Trade Center

Matterhorn intended to open a kiosk at the World Trade Center. It submitted an initial, incomplete application for the World Trade Center, without financial information, on or about July 10, 1995 (PX 64.) The record does not indicate when Matterhorn completed the application, but Swatch subsequently sent a proposed license agreement, (PX 147), signifying its approval, on or about January 10, 1996. Matterhorn signed the license agreement on or about February 27, 1996, (PX 158), but Matterhorn never opened the kiosk because the Port Authority rejected the kiosk design. (Tr. 11/27/01, at 54; Tr. 11/29/01, at 29-30.)

Since Matterhorn failed to show when it submitted an application ripe for consideration, it did not carry its burden of proving that Swatch failed to process the World Trade Center application in a timely manner.

Garden State Plaza

As with the World Trade Center, Matterhorn submitted an incomplete application for a store at the Garden State Mall on or about June 16, 1995, (PX 57), and resubmitted the same application on or about April 17, 1996. (PX 203, Bates no. 001247-48.) The accompanying letter promised profit and loss statements as soon as lease proposals were finalized. (Id., Bates no. 001244.) Matterhorn eventually sent the income projections to Swatch around June 24, 1996. (DX EB.) Swatch approved the proposal, (Undisputed Facts ¶ 45), although the record does not reflect the precise date. Matterhorn declined to sign the lease, and in October 1996, decided not to proceed with Garden State Plaza, primarily because the construction costs were too high, (Tr. 11/27/01, at 104-06; Tr. 2/5/02, at 80; PX 291, Bates no. 001755), and Swatch refused to provide any financial assistance. (Tr. 11/27/01, at 137-38; Tr. 11/28/01, at 168-69.)²⁰

20 Matterhorn had also declined to sign the lease tendered by Garden State Plaza because Swatch refused to provide a license agreement with a term that matched the lease term as required by the Letter of Intent. (Tr. 11/27/01, at 104-05; PX 331.) I nevertheless find that the decision to withdraw from Garden State Plaza was due solely to the costs. The high costs and the request for assistance from Swatch were recurrent themes. In addition, Matterhorn had executed several other license agreements despite the fact that the term, in each case, was shorter than the corresponding lease term.

The record does not reflect the specific date that Swatch approved the Garden State Plaza application. However, less than four months passed between Matterhorn's submission of profit and loss projections and its decision to withdraw from Garden State Plaza. Furthermore, the decision not to proceed was not based on a delay in processing the application. Accordingly, Matterhorn failed to prove this aspect of its claim that Swatch breached the Letter of Intent.

Danbury

In July 1995, Matterhorn submitted an application without financial information for a Swatch store at a site at the Danbury Mall. (PX 69.) Matterhorn provided the projected profit and loss statement on or about April 4, 1996, (PX 69A; Tr. 11/28/01, at 177-79), and Swatch approved the application on April 11, 1996. (Id., at 180.) Swatch sent a license agreement to Matterhorn for execution on or about May 3, 1996, (PX 220), and Matterhorn signed the license agreement on May 10, 1996. (See PX 226, Bates no. PL 009873.) Nally thanked Swatch for its "quick work" on Danbury. (PX 221.) Matterhorn eventually decided not to open a Danbury store, again primarily for financial reasons, (Matterhorn's Proposed Findings ¶ 268), but the record amply demonstrated that Swatch processed Matterhorn's Danbury application in a timely manner.

Harbor Place

Matterhorn sent Swatch an incomplete application lacking financial information for a store at the Gallery at Harbor Place on or about May 5, 1995. (PX 34.) Matterhorn completed its lease negotiations on July 24, 1995, (see DX BD; Tr. 11/28/01, at 124), and sent Swatch the profit and loss projections the next day. (See PX 73.) Swatch approved the application, and Matterhorn completed construction, signed a license agreement, (see PX 122), and opened the store three months later. Under the circumstances, Matterhorn failed to prove that Swatch did not process this application in a timely manner.

Freehold Mall

Matterhorn submitted an incomplete application to open a kiosk at the Freehold Mall on or about September 15, 1995. (PX 104.) It followed up with the profit and loss analysis on or about April 4, 1996, (PX 104A), and Swatch approved the application within two weeks. (See PX 214.) As with Danbury, Nally thanked Swatch for the "quick work." (PX 221.) Matterhorn signed a license agreement on May 10, 1996, (PX 225, Bates no. PL 009830), and following the completion of construction, opened the store on September 29, 1996. Again, Matterhorn failed to prove that Swatch failed to process the Freehold application in a timely manner.

Refusal to Proceed With the Soho Store

During 1995, and prior to the execution of the Letter of Intent, Matterhorn had attempted to locate a site in the Soho area of Manhattan with a view toward opening an 8,000 square foot mega store. (Tr. 11/26/01, at 108-14; Tr. 11/29/01, at 33.) In April 1995, Matterhorn made a proposal to Swatch regarding a site at 588 Broadway. The proposal called for Swatch to sublease a portion of the space, and share the build out, rent and occupancy expenses equally with Matterhorn. (PX 27, Bates no. PL 005195.) Matterhorn included the site on its Rollout List, (see PX 29), but Peterson rejected the proposal at the May 8, 1995 meeting. (Tr. 11/26/01, at 155.) According to Grossenbacher, Swatch was "not convinced about their site and about the size and look of the location." (Tr. 11/30/01, at 309.)

Matterhorn continued to look for other locations in Soho, but rejected four proposals because the rents were too high. (Tr. 11/29/01, at 33-39.) According to Nally, Fenton said that Swatch would find the real estate space for the Matterhorn store in Soho. (Id., at 34.) Nally testified that Matterhorn stopped looking for Soho locations by July, 1995, leaving it to Swatch, (id., at 36-37), but also testified that at the end of 1995, Matterhorn was looking for locations in Soho. (Tr. 11/27/02, at 46-47.) Matterhorn contended that "[d]espite commitments from Swatch to quickly proceed with the opening of a store at this location, Swatch refused to proceed with opening a store at a site at this location and Matterhorn therefore lost the opportunity to open a Swatch store at this location." (Matterhorn's Proposed Findings ¶ 174.)

Matterhorn did not prove that Swatch failed to act in good faith or that it prevented Matterhorn from opening a Soho store in violation of the Letter of Intent. Initially, Swatch rejected the mega store proposal before the Letter of Intent was even signed. Moreover, the proposal differed substantially from the idea of opening a 1,000 square foot store, and required Swatch to share the costs involved in building and operating the store.

Matterhorn rejected four other proposals in the Soho neighborhood on its own, and failed to adduce evidence concerning the efforts made by Swatch to find a Soho location. I cannot presume that Swatch failed to make reasonable efforts merely because it did not bring an acceptable location to Matterhorn before it terminated its relationship with Matterhorn in February 1997. Similarly, although the parties stipulated that Swatch opened a company-owned store in Soho, (Undisputed Facts ¶ 46), the record did not reflect when this occurred, or the circumstances under which it occurred.

Interim License Agreements

Under the Letter of Intent, Swatch agreed to provide a license or franchise agreement that was coterminous with the lease agreement corresponding to the location. Swatch unquestionably failed to do so. Matterhorn signed license agreements for the four stores that it actually opened, (see Undisputed Facts ¶ 26), and in each case, the license agreement contained a shorter term (three or five years) than the corresponding lease (ten years). (Id. ¶ 28.)

Matterhorn's breach claim nevertheless faces several hurdles. By its own admission, Matterhorn voluntarily signed license agreements with shorter terms than the corresponding leases. Furthermore, each license agreement contained a merger clause. Paragraph 29 stated that the license agreement was "the entire agreement between the parties with respect to the subject matter thereof, superseding all earlier arrangements, communications and agreements, whether written or oral." (PX 122, Bates no. PL 009778; PX 123, Bates no. PL 009731; PX 224, Bates no. PL 009914; PX 225, Bates no. PL 009829.)

Finally, Matterhorn failed to prove that it was damaged by the shorter license term. It still signed the license agreements and never rejected a license agreement because the term was too short. When Swatch terminated the license agreements, the corresponding leases were still in effect. In other words, Matterhorn never faced a situation in which it was stuck with a lease but no license agreement.

Failure to Provide a Franchise Agreement

Matterhorn argues that Swatch failed to provide a comprehensive franchise agreement. The Letter of Intent did not require Swatch to offer a franchise agreement, at least not before the franchise program was ready and Swatch could legally do so.²¹ Until then, Swatch would offer a license agreement.

21 Many states, including New York, have enacted anti-fraud laws that prohibit the sale of unregistered franchises.

The evidence demonstrated that the franchise program was not ready in time to offer a franchise agreement to Matterhorn. Furthermore, and except for Vail, Swatch offered a license agreement in every instance in which Matterhorn submitted a completed application, including for several sites that Matterhorn decided not to open.

Matterhorn's General Breach Claims

Aside from the specific breach claims discussed above, Matterhorn also makes the general charge that Swatch interfered with the execution of the Rollout Plan and the opening of additional stores. The claim is difficult to address. The Court has already discussed the specific claims of interference relating to Swatch's refusal to allow Matterhorn to open stores in Vail, Boston, Miami, Atlanta and Soho, or to process applications relating to the World Trade Center, Garden State Plaza, Danbury, Harbor Place or Freehold. If there were other, similar claims, Matterhorn failed to identify them or direct my attention to the evidence in the record that supported them.

In summary, and with two exceptions, Matterhorn performed its obligations under the Letter of Intent. Swatch respected the exclusivity it granted to Matterhorn, processed the few applications Matterhorn submitted in a timely fashion, and permitted Matterhorn to open every store it wanted to open. Although it tendered license agreements with shorter terms than the corresponding leases, Matterhorn failed to prove that it was damaged by this breach. Finally, Swatch breached the Letter of Intent through its rejection of the Vail application, and Matterhorn is entitled to recover its out-of-pocket expenses, incurred after May 11, 1995, on account of this breach.

2. Breach of the License Agreements

Matterhorn contends that Swatch breached ¶ 5.1 of the license agreements in two ways. First, Swatch did not provide an assortment of Swatch Products sufficient to meet Matterhorn's "reasonable business needs." Second, Swatch failed to provide inventory necessary to operate the stores and kiosk in a timely manner.²² (Matterhorn's Proposed Findings, at pp. 65-66.)

22 Swatch makes the threshold argument that Matterhorn failed to preserve its breach of license agreement claims by omitting them from the Joint Pre-Trial Order. (Swatch's Proposed Findings, Conclusions ¶¶ 136-38.) The statement is perplexing. The Joint Pre-Trial Order is replete with references to the license agreements and contentions that are relevant to a breach claim (e.g., product supply, marketing, advertising, credit). Further, the Court received a substantial amount of evidence on these issues without objection. In any event, the dispute is immaterial in light of my ultimate conclusion that Matterhorn failed to prove that Swatch breached the license agreements.

Matterhorn's breach claim falls short in several ways. Paragraph 5.1 of the license agreements did not require Swatch to supply every watch or accessory that Matterhorn ordered; it left the matter to the parties' mutual agreement. From the outset, Matterhorn knew that the licensed stores would sell the current collections but would not sell the older, vintage watches. Matterhorn failed to prove that Swatch refused to deliver any product that the parties mutually agreed Swatch would provide. Matterhorn also failed to identify those specific items that Swatch agreed to provide but then failed to provide in a timely manner.

Moreover, Swatch's obligation to supply product was limited by product availability and Matterhorn's ability to pay for it. Both factors played a role in restricting the product that Matterhorn complained it did not receive. Olympic product presented a glaring example. Swatch was the official timekeeper of the 1996 Summer Olympics held in Atlanta. It operated a company-owned pavilion in the Olympic Village, and at least two other stores in Atlanta. During the summer of 1996, it released watches with Olympic themes. Matterhorn contends that it did not receive a sufficient and/or proportionate share of Olympic product, while at the same time, Swatch stocked its company-owned stores in the Olympic Village. (Matterhorn's Proposed Findings ¶ 282.)

The proof demonstrated that the Olympic product was in relatively short supply. During the Olympics, a substantial portion was allocated to the stores in Atlanta, and was made available to retailers outside of Atlanta after the Olympics. Swatch allocated its Olympic product among hundreds of licensees, department stores and its own stores. (See Tr. 2/5/02, at 156-57; Tr. 2/6/02, at 16.) Swatch had placed Matterhorn on credit hold during the summer of 1996, and Swatch's financial problems limited the amount of Olympic product that Swatch was willing to allocate to Matterhorn. (See Tr. 2/5/02, at 158-59) (discussing Woodbridge.)

The Annie Leibowitz Olympic Portrait watches provided another example. In June 1996, Matterhorn planned and hosted a pre-Olympic special event for its Harbor Place Swatch store at the Parrot Club in Baltimore. (PX 236; Tr. 11/29/01, at 194-200.) The event promoted a special Olympic Swatch Watch by Annie Leibowitz called the Olympic Portrait Watch.²³ (Tr. 11/29/01, at 196-200.) In preparation for the event, Matterhorn ordered approximately 400 to 500 Annie Leibowitz Olympic Portrait watches. Swatch did not have 400 watches to send to Matterhorn. Instead, Matterhorn received between fifty to 100 watches several weeks before the event, and sold them out by the time of the event.²⁴ Matterhorn tried to order more, but Swatch had no more to ship.²⁵ (Id., at 198-99.)

23 The Annie Leibowitz project was a special album of Olympic photographs by Annie Leibowitz and commissioned by Swatch. (Tr. 11/30/01, at 265.)

24 During all of July and August, 1996, Swatch sold approximately 1,100 Olympic Portrait watches at the Rhodes-Haverty store in Atlanta. (PX 411, Bates no. 007113, 007117.) Swatch sold the bulk of the Olympic Portrait watches — 5,123 — at the Olympic Pavilion during these two months. (Id., Bates no. 007147.)

25 Matterhorn obtained another thirty-four Annie Leibowitz watches from a watch store in New York City, and also sold these out. (Tr. 11/29/01, at 199-200).

In summary, Matterhorn failed to show that Swatch breached its supply obligations under the license agreements. Swatch did not commit itself to produce or supply every watch that Matterhorn ordered or could have sold. In addition, it bears repeating that Matterhorn received hundreds of watch styles, apparently in a timely fashion, except when the credit hold caused a delay.

3. Breach of the Covenant of Good Faith and Fair Dealing

Matterhorn next contends that Swatch breached the covenant of good faith and fair dealing which New York law implies in every contract. Times Mirror Magazines, Inc. v. Field Stream Licenses Co., 294 F.3d 383, 394 (2d Cir. 2002); Carvel Corp. v. Diversified Mgmt. Group, Inc., 930 F.2d 228, 230 (2d Cir. 1991); Dalton v. Educational Testing Serv., 663 N.E.2d 289, 291 (N.Y. 1995). The covenant encompasses "any promises which a reasonable person in a position of the promisee would be justified in understanding were included," Times Mirror Magazines, 294 F.3d at 394 (citation omitted), "a pledge that `neither party shall do anything which will have the effect of destroying or injuring the right of the other party to receive the fruits of the contract,'" Dalton, 663 N.E.2d at 291 (citation omitted) (quoting Kirke La Shelle Co. v. Armstrong Co., 188 N.E. 163, 167 (N.Y. 1933), and "[w]here the contract contemplates the exercise of discretion, this pledge includes a promise not to act arbitrarily or irrationally in exercising that discretion." Dalton, 663 N.E.2d at 291.

The covenant is not, however, boundless. A duty of good faith cannot be implied that "`would be inconsistent with other terms of the contractual relationship,'" id. at 291-92 (quoting Murphy v. American Home Prods. Corp., 448 N.E.2d 86, 91 (N.Y. 1983); accord Times Mirror Magazines, 294 F.3d at 394, or create independent obligations beyond those set forth in the contract. See Warner Theater Assocs. Ltd. P'ship v. Metropolitan Life Ins. Co., No. 97 Civ. 4914, 1997 WL 685334 at *6 (S.D.N.Y. Nov. 4, 1997), aff'd in unpublished opinion, 149 F.3d 134 (2d Cir. 1998); CIBC Bank Trust Co. Cayman Ltd. v. Banco Cent. Do Brasil, 886 F. Supp. 1105, 1118 (S.D.N.Y. 1995) ("Although the obligation of good faith is implied in every contract, it is the terms of the contract which govern the rights and obligations of the parties.") (citation omitted).

Matterhorn makes twelve specific claims involving the breach of the covenant of good faith and fair dealing. The following is taken verbatim from Matterhorn's Proposed Findings, at pp. 68-69:

1. Swatch failed to honor its repeated verbal and written representations to Matterhorn that Swatch would not unfairly compete against the Matterhorn stores through the operation of the Timeship Store, through the operation of the Swatch outlet stores, and through the operation of its retail locations in Atlanta during the Summer Olympics;

2. Swatch failed to set up a program to support the Matterhorn stores as it had promised to do, such as warehousing of product and dedication of a sales support team to assist Matterhorn;

3. Swatch failed to institute and maintaining a coordinated large scale national advertising campaign as promised;

4. Swatch unreasonably prohibited Matterhorn from selling Swatch accessories such as hats and T-shirts;

5. Swatch refused to allow Matterhorn to operate a commercial web-site while it allowed other Swatch retailers (i.e., the Borseit Group) to sell Swatch products on the Internet;

6. Swatch failed to act in a timely manner in facilitating the opening of the Matterhorn stores and placed certain Matterhorn locations "on hold";

7. Swatch failed to honor its representation to Matterhorn to provide favorable credit terms, and unreasonably placed the Matterhorn accounts on "credit hold", particularly when Swatch was holding sufficient letters of credit to satisfy the outstanding balance then owed by Matterhorn;

[There is no paragraph 8]

9. When making credit decisions with respect to the Matterhorn stores, and in assessing or analyzing the credit terms or line of The Matterhorn Group, the

Swatch Credit Department would take into consideration the credit history and status of Seaport Swatch store and the Vincent Gerard store of Gerry Nally and never looked into their business background or finances of Matterhorn's other two principals when making credit decisions regarding Matterhorn;

10. Swatch did not present Matterhorn with a written franchise agreement, as promised, nor did Swatch institute a franchise program, as promised;

11. Swatch did not provide Matterhorn with a retroactive construction allowance for the Harbor Place and King of Prussia Swatch stores, as promised;

12. Swatch did not make reasonable efforts to reduce the exorbitant construction costs for the build-out of Swatch stores, as promised; and

13. As set forth in the Letter of Intent, and as confirmed by Swatch on many occasions, Swatch agreed that the contractual relationship between Matterhorn and Swatch with respect to each approved Swatch store or kiosk location would match the terms of Matterhorn's negotiated leases for such Swatch stores or kiosks. Yet, Swatch failed and refused to present Matterhorn with license or franchise agreements matching the terms of the underlying leases.

At the outset, many of Matterhorn's contentions ignore its legal theory. Matterhorn identified just two sets of contracts from which the implied covenant of good faith and fair dealing could flow: the Letter of Intent and the license agreements. (See Matterhorn's Proposed Findings, at p. 66.) Matterhorn's allegations, however, seem to refer to other agreements. For instance, paragraph 1²⁶ refers to verbal and written representations regarding competition. Paragraph 2 mentions promises to set up a product and store support program. Paragraph 3 states that Swatch made promises regarding a national advertising campaign. Paragraph 7 alludes to a promise regarding credit. Paragraph 11 states that Swatch promised construction allowances. Finally, paragraph 12 attributes to Swatch a promise to reduce exorbitant construction costs.

26 This and the immediately succeeding "paragraph" references relate to the twelve paragraphs, quoted in the preceding text, in which Matterhorn set out its claims for breach of the implied covenant of good faith and fair dealing.

To succeed under its theory, Matterhorn had to demonstrate the breach of an implied obligation arising out of the Letter of Credit or the license agreements, not the breach of an express obligation arising under a different agreement. This distinction is particularly important in the case of the license agreements because they contained merger clauses. If, for example, Swatch made an earlier promise regarding advertising or product supply, those promises would have been superseded by the specific terms of the license agreement. I will, therefore, limit my consideration of this claim to whether the obligations identified above may be implied in either or both of these contracts in a manner consistent with the principles of good faith and fair dealing.

The Unfair Competition Claims

Matterhorn opens with the charge that Swatch breached the implied covenant of good faith and fair dealing by competing unfairly with Matterhorn in three ways: (1) the operation of the Timeship Store, (2) the operation of the outlet stores, and (3) the operation of the retail locations in Atlanta during the 1996 Summer Olympics. I treat these contentions as directed at the license agreements since Swatch's operations did not compete with stores that Matterhorn never opened.

The license agreements were silent regarding competition by Swatch, and they did not imply an absolute ban on competition, either by Swatch or the other retailers. Matterhorn knew it was not receiving the exclusive right to sell watches in the United States. At the January 1995 meeting, Grossenbacher stated that the existing Swatch store owners — Nally, Victor Pahuskin, Raman Handa and John Simonian — would get the first opportunities to open new Swatch Stores. (Tr. 11/26/01, at 61; Tr. 2/4/02, at 23.) The Rollout List identified locations in geographical regions, such as New England, where other licensees operated. Matterhorn had to recognize that these retailers might open Swatch stores at nearby sites. Furthermore, Matterhorn knew in early 1995 that Swatch intended to open a Timeship Store in New York City where there were already Swatch stores, including Nally's own store at the South Street Seaport. On the other hand, Matterhorn was planning to invest a substantial amount of effort and capital in each store, and the license agreements implied some limitation on Swatch's right to compete. Swatch could not, for example, destroy the value of the license or Matterhorn's investment by opening a company store in direct competition across the street from a Matterhorn store. Similarly, it could not divert all of its inventory from Matterhorn to a company-owned store leaving Matterhorn with nothing to sell. Except for these extreme situations, however, it is difficult to draw the line between fair and unfair competition.

Matterhorn failed to prove that Swatch crossed that line, wherever it might reasonably have been drawn, when Swatch operated the Timeship Store. The Timeship Store opened at 57th Street in midtown Manhattan on or about December 10, 1996. (Undisputed Facts ¶ 50; Tr. 2/5/02, at 47-48; Tr. 11/27/01, at 146.) This occurred only two months before the Matterhorn stores closed. The Timeship Store was intended to serve as a marketing tool to promote Swatch's brand image. (See Tr. 11/27/01, at 147; Tr. 11/29/01, at 56; Tr. 11/30/01, at 310; Tr. 2/6/02, at 41; PX 345, Bates no. 002641.) At the grand opening and during the first several weeks of its operation, the Timeship Store sold items that had not been made available to the Matterhorn stores, including T-shirts, baseball hats, certain types of vintage watches and promotional watch specials. (Tr. 11/27/01, at 167-71; PXX 438, 439; Tr. 11/29/01, at 57; see Undisputed Facts ¶¶ 51-53.).

There is no evidence that the Timeship Store competed for the same customers as the Matterhorn stores. Only two months before the Timeship Store opened, Nally declared that it was situated in "a tourist and collector location only" while "American consumer's heart is in the malls." (PX 287, Bates no. 001761.) The closest Matterhorn stores were in malls located in Freehold, New Jersey and Woodbridge, New, Jersey.²⁷

27 Matterhorn made a great deal of the fact that the local Swatch people estimated that the Timeship Store would sell 60,000 watches during its first year of operation, (see PX 269), and Swatch Group predicted 110,000 sales. (See PX 282.) The projections seemed high compared to the projections for the Matterhorn stores, but the Timeship Store was located in the middle of one of Manhattan's busiest shopping areas. In addition, it opened two weeks before Christmas. No evidence was received regarding the amount of the Timeship Store's sales during the approximate two month period that its operations overlapped with Matterhorn's.

In fact, Matterhorn's chief complaint was not that the Timeship Store sold the same merchandise to the same or different customers, but that Swatch stocked the Timeship Store with different merchandise that was not made available to Matterhorn. However, the only merchandise that Matterhorn identified in this category was the promotional packaging and items that came with the Orocolo watch.²⁸ The Orocolo was a specially packaged promotional watch that Swatch shipped from Europe to the Timeship Store in late 1996. The special packaging included a watch, ceramic tea cup, tarot cards, metal pendulum and a small crystal ball, (PX 439-A; see DX FJ), and retailed for $90.00. (Tr. 11/27/01, at 170-71.) The Matterhorn stores received an allocation of Orocolo watches without the special packaging. (Tr., 11/29/01, at 60.) Once Nally brought this to Swatch's attention, Swatch allocated the specially packaged Orocolo to the Matterhorn stores and kiosks as well as to the stores of other licensees. (See DX FJ.)²⁹

28 Matterhorn also adduced evidence that the Timeship Store was selling hats and T-shirts, but the Matterhorn stores were not. Swatch was not in the business of selling hats and T-shirts; these items were sold as part of the promotional efforts during the opening of the Timeship Store. Swatch was not making any money on their sale, and stopped selling them after Matterhorn complained. (Tr. 2/6/02, at 93-94.) Furthermore, the license agreements did not permit Matterhorn to sell hats and T-shirts.

29 Nally testified that he was "pretty sure" that Matterhorn never received this allocation. (Tr. 11/29/01, at 62.) Nally's general recollection of his dealings with Swatch was sometimes wrong but never in doubt. His equivocation about the receipt of the specially-packaged Orocolo watches suggests that he was speculating.

At most, the record reflects an isolated failure to supply current merchandise to Matterhorn stores at the same time that the merchandise was supplied to the Timeship Store. Under the circumstances, Matterhorn failed to prove that Swatch's operation of the Timeship Store breached an obligation of good faith or fair dealing implied in the license agreements.

For many of the same reasons, Matterhorn failed to prove that Swatch breached an implied covenant of good faith and fair dealing in the operation of the Atlanta stores. Swatch's Atlanta stores were geographically distant from the Matterhorn stores, and catered to the people attending the Olympics. The real thrust of Matterhorn's complaint is that the Atlanta stores received more of the better selling Olympic Product while the Matterhorn stores received less.

During July and August 1996, Swatch sold over 9,900 watches at its Rhodes-Haverty store in Atlanta, (PX 411, Bates no. 00711-18), and over 46,300 watches at its Olympic Pavilion location. (Id., Bates no. 0071145-49.) (Matterhorn's Proposed Findings ¶ 285.) The Atlanta Swatch stores were very busy, and saw a substantial amount of consumer traffic. (Tr. 11/29/01, at 200-01.) Without doubt, the traffic in the Olympic Village and Atlanta was considerably greater than the traffic at Harbor Place or the King of Prussia Mall, the two Matterhorn locations that operated during all of July and August 1996.

Given the substantial differences in demographics and anticipated traffic between Swatch's Atlanta locations and Matterhorn's mall locations, Swatch was not obligated to deliver an equal number of Olympic watches to the Olympic Pavilion and the Matterhorn stores. It was entitled to allocate more Olympic product during the Olympics to the stores that were likely to realize the greatest concentration of people interested in buying products with an Olympic theme. Furthermore, Matterhorn's credit problems hampered its ability to obtain inventory during the summer of 1996.

The outlet stores present a closer question. In the Fall of 1995 — just prior to the opening of Matterhorn's King of Prussia Swatch store — Swatch opened an outlet store in Franklin Mills, Pennsylvania. (Undisputed Facts ¶ 32.) The two stores were approximately twenty miles apart. (Tr. 11/27/01, at 40.) Matterhorn's King of Prussia sold the current collections, while Swatch's Franklin Mills outlet store was supposed to sell vintage watches. However, the evidence showed that the outlet store also sold a few items that Matterhorn was entitled to sell, including the current collection of Irony watches, the six foot high maxi Swatch Watch, (Tr. 11/27/01, at 43-44), and after the Olympics, the Olympic watches.³⁰ (Tr. 2/6/02, at 127-28.)

30 At the time, the Olympic inventory was less than one year old, but presented a unique situation. Khouri testified that there was a lot of unsold Olympic inventory in the United States, and it was rapidly becoming obsolete. (Tr. 2/6/02, at 165-66.)

Neither the opening of the outlet store within twenty miles of Matterhorn's retail store nor the sale of a few of the same items breached the implied covenant of good faith and fair dealing. Nally testified that when he was planning the rollout, he thought that a reasonable distance between two retail stores would be twenty to thirty miles. (Tr. 11/29/01, at 77-78.) A kiosk could be even closer. (Id. at 78.) In fact, the distance between Matterhorn's Woodbridge store and Freehold kiosk was approximately the same as the distance between Matterhorn's King of Prussia store and the Swatch outlet store in Franklin Mills. (Tr. 11/29/01. at 74-75.) If Matterhorn's Woodbridge and Freehold stores — selling the same Swatch products — did not compete with each other, a Swatch outlet, separated by the same distance from the King of Prussia store — and selling primarily different products — did not compete with that Matterhorn store either. Finally, Matterhorn speculated that the Franklin Mills outlet store drew sales from Matterhorn/KOP, but did not offer any credible evidence that this ever happened.

Product and Store Support

Matterhorn contends that Swatch breached the implied covenant of good faith and fair dealing by failing to set up a program to support the stores (e.g., product warehousing, a dedicated sales support team). Under paragraph 2 of the license agreements, Swatch agreed to make "Swatch Know-How" available to Matterhorn. (PX 122, Bates no. PL 009765; PX 123, Bates no. PL 009718; PX 224, Bates no. PL 009899; PX 225, Bates no. PL 009812-13.) This included regular information and advice about fashion trends, new products, planning and placing orders with regard to product mix and quantities, inventory management, sales trends and completed and planned sales campaigns. (PX 122, Bates no. PL 009765; PX 123, Bates no. PL 009718; PX 224, Bates no. PL 009899; PX 225, Bates no. PL 009812-13.) How Swatch would do this was not spelled out, but the license agreements did not imply an obligation to establish a "dedicated sales force," whatever that means. Similarly, while Swatch had an express contractual obligation to supply product, this did not imply an obligation to warehouse product. Nevertheless, Swatch maintained a warehouse in Lancaster, Pennsylvania. (See Tr. 11/30/01, at 29.)

Advertising

Next, Matterhorn contends that Swatch breached the implied covenant of good faith and fair dealing by failing to institute and maintain a large scale national advertising campaign. No such obligation can be implied because it would directly contradict paragraph 9.1 of the license agreements which stated that "no advertising is required under this Agreement." (PX 122, Bates no. PL 009768; PX 123, Bates no. PL 009721; PX 224, Bates no. PL 009903; PX 225, Bates no. PL 009816.) In any event, Swatch spent $70 million to become an Olympic sponsor and promote the Swatch brand in 1996.³¹

31 After the Olympics, Swatch imposed a temporary freeze on the spending of additional advertising dollars. (See Tr. 2/5/02, at 33.) The freeze was lifted in October 1996. (See PX 288.)

Internet Sales

Matterhorn contends that Swatch breached the implied covenant of good faith and fair dealing by refusing to allow Matterhorn to operate a commercial web site while allowing another retailer (the Borseit Group) to sell Swatch products over the Internet. Under paragraph 7.1 of the license agreements, Matterhorn could only make in-store sales to customers who appeared in person. Under paragraph 7.2 of the license agreements for Woodbridge, (PX 224, Bates no. PL 009902), and Freehold, (PX 225, Bates no. PL 009816), Matterhorn could sell Swatch products through other means, such as catalogs and the Internet, but only with the written authorization of Swatch.

The license agreements reflected a corporate policy that promoted face-to-face in-store sales, and frowned on Internet transactions. (See Tr. 2/6/02, at 92-93.) Consistent with that policy, Swatch rejected Matterhorn's request to sell Swatch products over the Internet. When Nally brought the unauthorized Internet sales by another retailer to Khouri's attention, she asked the retailer to stop all Internet sales. (Id. at 93.) Swatch applied its policy even-handedly, and did not act in bad faith or deal unfairly.

Opening stores

Matterhorn contends that Swatch breached the implied obligation of good faith and fair dealing by failing to act in a timely manner to facilitate the opening of Matterhorn stores, and by placing certain locations "on hold." This claim implicates the Letter of Intent, and has been dealt with above.

Credit Issues

Matterhorn argues that Swatch breached the implied covenant of good faith and fair dealing in connection with several decisions and actions relating to Matterhorn's credit. First, Swatch failed to provide favorable credit terms. Second, it unreasonably placed Matterhorn on credit hold. Third, it improperly considered the credit history and status of two of Nally's non-Matterhorn stores and failed to consider the business background or finances of Matterhorn's other principals, Niklaus and Heusler.

The evidence showed that Swatch provided Matterhorn with the same credit terms that it accorded its other retailers, and treated Matterhorn's defaults in conformity with Swatch's general policies and procedures. Matterhorn's claim suggests that Swatch had an implied obligation to give it special treatment, but no such obligation can be implied.

Matterhorn also argues that Swatch improperly placed the Matterhorn stores on credit hold. Matterhorn notes that the Swatch credit department treated Swatch-only stores the same as a multi-brand jewelry stores, and gave no consideration to the impact that a credit hold would have on a single product store that relied exclusively on the sale of Swatch watches.

While a credit hold had a more serious effect on a single product store, Swatch was not obliged to ship to a retailer that did not pay. Matterhorn never contested the fact or serious nature of its defaults. The implied covenant of good faith and fair dealing did not require Swatch to make a special exception for Matterhorn, and continue to ship products when it had not been paid for the products that had already been shipped.

In response, Matterhorn points out that the letters of credit that Swatch was holding provided ample security, and Swatch should have continued shipping. In addition, Barbara Khouri testified that if Matterhorn had the letters of credit in place, Swatch would have drawn down on the letters of credit and shipped the goods. (Tr. 2/6/02, at 139-40.) Khouri, however, was not fully familiar with Swatch's credit policies. While she was a credible witness, I give greater weight to the deposition testimony of Mella and Schneider, Swatch's credit people, who testified regarding Swatch's business procedures. Swatch only drew down on the letter of credit as a last resort, and first tried to induce the retailer to become current.

Moreover, the letter of credit was for the benefit of Swatch, not Matterhorn, and a draw down would not have solved the problem that led to the credit hold. Swatch drew down on Matterhorn's letter of credit during the summer of 1996, but did not release the credit hold until Matterhorn agreed to replenish the diminished letter of credit. The draw down solved the immediate past due bill but increased the risk to Swatch in the event of a future default. Swatch was unwilling to assume that risk, and accordingly, insisted that Matterhorn replenish the letter of credit. In other words, whether the retailer paid the old invoice directly or replaced the collateral following a draw down, it had to spend new money to release the credit hold.

Next, Matterhorn also complains that Swatch improperly considered the performance of Nally's non-Matterhorn stores but ignored the business and financial backgrounds of Heusler and Niklaus. Swatch was entitled to consider whatever information its business judgment dictated it should consider in extending credit. Nally was an experienced Swatch retailer. He operated a store at the South Street Seaport, and was the one primarily responsible for overseeing the operations of the Matterhorn stores. It was, therefore, appropriate to weigh his track record in making credit decisions about Matterhorn.³² Furthermore, there is no credible evidence that Swatch placed Matterhorn on credit hold because Nally's other stores were slow payers.³³

32 For this reason, it is difficult to find fault with Swatch's decision to place Woodbridge on credit hold during the summer of 1996, at the same time that it placed Harbor Place and King of Prussia on credit hold, even thought the Woodbridge store had not yet opened. (See PX 250.) The credit problems were Matterhorn problems, not individual store problems. Swatch was entitled to take Matterhorn's chronic financial woes into account in making decisions regarding the extension of credit to any particular store.

33 Grossenbacher thought that the fall 1995 credit hold was due to a problem with Nally's South Street Seaport store rather than a Matterhorn store. (Tr. 11/30/01, at 260-61.) However, his general recollection was less than perfect, and his speculation was not supported by the testimony of either Mella or Schneider.

Finally, it is true that Swatch failed to consider the business and financial backgrounds of Niklaus and Heusler when it made its credit decision. Schneider testified that the credit application completed by Matterhorn did not identify Matterhorn's other principals. As a result, when he reviewed the credit application and made the initial credit decision he did not even know who Heusler or Niklaus were. (Schneider Dep., at 133-35.)

Although Matterhorn has pointed to the omission, it has not explained its materiality. Niklaus had been a Swatch employee for many years prior to his association with Nally, (see Undisputed Facts ¶ 17), and Heusler owned a large collection of Swatch watches. (Tr. 11/26/01, at 101.) There was no evidence that either ever ran a business — much less a watch business — and Matterhorn failed to articulate why Swatch would or should have granted different or better credit terms to Matterhorn if it had considered Niklaus's and Heusler's financial and business backgrounds in making its credit decisions.

Construction costs and allowances

Matterhorn contends that Swatch breached the implied covenant of good faith and fair dealing in connection with the costs of building new stores. First, it did not provide Matterhorn with a retroactive construction allowance for the Harbor Place and King of Prussia stores. Second, it failed to reduce the exorbitant construction costs for the build out of the Swatch stores.

The license agreements imposed these costs on Matterhorn. Paragraph 3.1 stated that Matterhorn

desires to and may install the interior space of the Business Facility, at its own cost and expense, through architects and contractors not affiliated with Swatch, in accordance with the Swatch Store Trade Dress . . . .

(PX 122, Bates no. PL 009765; PX 123, Bates no. PL 009718; PX 224, Bates no. PL 009899-900; PX 225, Bates no. PL 009813.) Accordingly, there is no basis to imply an obligation on Swatch's part to pay any part of the cost.

Furthermore, if Swatch had an implied obligation to keep the construction costs as low as possible, it satisfied that obligation. Initially, Nally knew going in that Swatch intended "to set very high standards for the stores; that there was some new design they were working on from Europe . . ." (Tr. 11/26/01, at 67.) In addition, by late May 1995, Nally knew that Matterhorn would have to pay those costs without any assistance from Swatch. Lastly, only one month after the execution of the Letter of Intent, Matterhorn was telling prospective landlords that the per square foot cost of construction would fall between $250.00 and $300.00, (see DXX AS, AT, AI, AJ), or twice the $125.00 to $150.00 that Nally and Swatch had discussed.

Even though Swatch did not promise construction relief, it was aware that the costs were high, and worked to reduce them. (See Tr. 2/4/02, at 170.) First, it developed a temporary program to pay a construction allowances on a going forward basis. Although the program did not apply to the stores in Harbor Place and King of Prussia which had already been built, Swatch contributed $50,000.00 to defray Matterhorn's costs in constructing its Woodbridge store, (Undisputed Facts ¶ 41), and another $25,000.00 toward the cost of building the Freehold kiosk. (Id. ¶ 43.)

Second, the cost of the casework, an expensive element of the construction, was reduced. Triangle Woodworks, a company selected by Swatch, had built the casework for King of Prussia and Harbor Place stores. (Tr. 11/27/01, at 5-7.) The price for the casework alone — without installation — was $85,000.00 for one store and $102,000.00 for the other store. (Id., at 8.) After the first two stores, Matterhorn was able to use a less expensive casework supplier. (Tr. 11/28/01, at 101.)

Written Franchise Agreement

Matterhorn argues that Swatch breached the implied covenant of good faith and fair dealing by not presenting it with a written franchise agreement or instituting a franchise program. Swatch was developing a franchise program, and intended to offer a franchise to Matterhorn (as well as the other licensees) when it was completed. (Tr. 11/30/01, at 112-13, 170, 241-42.) Although Fenton and others spent a good deal of time working on the program, Swatch did not promise to complete it by a specific date. The program was finalized in the spring of 1997, (see DXX FQ, FR), after Swatch had terminated the license agreements and its relationship with Matterhorn.

The Letter of Intent recognized that the completion date was an open issue. Paragraph three stated that Matterhorn would operate stores under a license agreement or a franchise agreement, intimating that the franchise program might not be complete by the time that Matterhorn opened stores. The record reflects that Swatch worked on a franchise program in good faith, and eventually developed one only after the Matterhorn licenses had been terminated. Under the circumstances, Matterhorn failed to prove that Swatch breached the Letter of Intent by failing to offer a comprehensive franchise agreement prior to the time that the license agreements were terminated, and Matterhorn filed for chapter 11.

Coterminous license agreements and leases

Finally, Matterhorn argues that Swatch breached the implied covenant of good faith and fair dealing by refusing to provide license agreements with terms that matched the corresponding leases. Swatch made this express promise in the Letter of Intent, and the breach of that promise was discussed above. Since the promise was express, the implied covenant doctrine would not (and need not) apply.

In summary, Matterhorn has failed to sustain its burden of proving that Swatch breached the implied covenant of good faith and fair dealing with respect to either the Letter of Intent or the license agreements.

4. Promissory Estoppel

Matterhorn maintains that it established a claim of promissory estoppel at trial. Under New York law, promissory estoppel requires proof of three elements: (1) a clear and unambiguous promise, (2) reasonable and foreseeable reliance on that promise, and (3) injury to the party asserting estoppel as a result of reliance on the promise. Kaye v. Grossman, 202 F.3d 611, 615 (2d Cir. 2000); Arcadian Phosphates, 884 F.2d at 73. Each element must be proven by a preponderance of the evidence. MacDraw, Inc. v. CIT Group Equip. Fin., 157 F.3d 956, 961 (2d Cir. 1998). According to Matterhorn, Swatch made the following "unequivocal promises:"

(a) The license agreements that Swatch demanded be signed by Matterhorn were temporary interim agreements and would be replaced by a formal franchise agreement in the next few months that Swatch was finalizing and which would then be made available to Matterhorn;

(b) The Matterhorn stores would be part of a franchise program in the United States that was close to being finalized;

(c) That Swatch would waive any franchise fees for existing Swatch licensee stores/kiosks upon the imminent conversion to franchise status;

(d) Swatch would provide the Matterhorn stores with timely delivery of a broad range and variety of Swatch watches and other Swatch products on reasonable credit terms;

(e) A construction allowance would be provided by Swatch to defray the substantial costs that would incurred by Matterhorn in connection with the design and construction of the Matterhorn stores and that it would be applied retroactively;

(f) Swatch promised to set up a support program for the opening and operation of Matterhorn stores. This support program was to include: warehousing of product specifically for the Matterhorn stores; the dedication of a sales support team to assist Matterhorn; coordinated, organized and effective local, regional and national advertising campaigns, marketing strategy and public relations; in-store employee training; in-store visual merchandising; and in-store promotions and special events;

(g) Except for the Timeship Store and a few discount outlet stores, no other company owned and operated retail Swatch stores would be opened in the United States, and that such stores would not compete with the independently owned Swatch stores; and

(h) The planned Timeship Store would be a "marketing tool" which would used to enhance the Swatch brand name, trademark and service mark and would not compete with the Matterhorn stores; further, the Timeship Store would not be given preferential treatment and Matterhorn would continue to be provided with the same Swatch watches and other Swatch products that would be available at the Timeship Store, and that all merchandise would first be delivered to Matterhorn at least two weeks prior to being made available to the Timeship Store.

(Matterhorn's Proposed Findings, at pp. 78-79.)

The Franchise Program

The franchise-related allegations do not support a claim of promissory estoppel. Swatch did state, on several occasions, that it would offer franchises to its licensees, including Matterhorn, when the franchise program was completed. Swatch never made a clear and unequivocal promise that the franchise program would be offered by a date certain. (See Tr. 11/30/01, at 328.) Swatch worked in good faith to complete it, but terminated the Matterhorn license agreements before the franchise program was ready in the spring of 1997.

Store and Product Support

Matterhorn also failed to prove a claim of promissory estoppel with respect to its allegations pertaining to product and store support. Initially, the general statements attributed to Swatch regarding (1) the timely delivery of a broad range and variety of Swatch merchandise (2) reasonable credit terms, (3) a dedicated sales support team, (4) coordinated, effective advertising campaigns, marketing strategy and public relations, and (5) in-store promotions and special events, were too ambiguous. Hence, they could not form the basis for a promissory estoppel claim. See Marilyn Miglin, Inc. v. Gottex Indus., Inc., No. 90 Civ. 2915 (DNE), 1992 WL 170673, at *13 (S.D.N.Y. 1992) (general commitment by licensor to cooperate with and provide support to licensee was insufficient to support claim of promissory estoppel).

Matterhorn also failed to prove that Swatch made many of the "promises" that Matterhorn attributed to Swatch. For example, Matterhorn failed to show that Swatch made a promise to establish a dedicated sales support team or a program for in-store or special events or in-store employee training. Swatch never promised to warehouse product "specifically for the Matterhorn stores." (See Matterhorn Proposed Findings, at p. 78.) Swatch may have stated that it would warehouse product for its licensees, and it did maintain a warehouse for that purpose in Lancaster, Pennsylvania. In addition, Swatch provided Matterhorn with adequate product supply in accordance with the express terms of the license agreements; it did not supply Matterhorn with everything Matterhorn demanded, but Swatch was not required to do so, particularly in light of Matterhorn's credit problems. Swatch did, in this regard, provide Matterhorn with reasonable credit terms — the same credit terms it provided to everyone else. Matterhorn doubtless would have preferred more generous terms, but this was not something Swatch ever promised.

Finally, the allegations relating to advertising, marketing and public relations are contradicted by the license agreements. The license agreements expressly state that no advertising is required, and Matterhorn could pay for its own advertising provided the advertising was approved by Swatch. In any event, Swatch provided substantial marketing, advertising and public relations support. It paid a $40 million fee to become an Olympic sponsor, and another $30 million to advertise in 1996. All these steps were taken to improve overall brand image which would inure to the benefit of the licensees.

Construction Allowances

As discussed above, Swatch never promised a construction allowance, except with respect to two stores. It provided the construction allowances that it promised, and Matterhorn failed to prove this aspect of its promissory estoppel claim.

Competition

Matterhorn makes two claims regarding competition. First, except for the Timeship Store and a few discount outlet stores, Swatch would not open any other retail company stores that competed with the independently owned stores. Initially, Matterhorn failed to offer credible evidence that Swatch ever made such a promise. In addition, prior to the time that the Matterhorn license agreements were terminated, Swatch had opened only the Timeship Store and a few outlet stores. Lastly, Matterhorn failed to prove, for the reasons discussed above, that the outlet stores or the Timeship Store competed with the Matterhorn Stores.

Second, Matterhorn contends that Swatch promised to operate the Timeship Store as a "marketing tool" that would not compete with Matterhorn's stores, that the Timeship Store would not receive preferential treatment, and that Matterhorn would receive the same products as the Timeship Store two weeks earlier. The promise to operate the Timeship Store as a "marketing tool" is too ambiguous to support a promissory estoppel claim, although the evidence at trial demonstrated that Swatch ran the Timeship Store to enhance the Swatch brand image.

Similarly, the promise that the Timeship Store would not receive "preferential treatment" is too ambiguous, particularly since it was being run as a "marketing tool," conducting promotional events and selling accessories (e.g., hats and T-shirts) that were not being sold under the license agreements.

Further, Swatch never promised Matterhorn that it would receive the same Swatch products as the Timeship Store but two weeks earlier. Nally requested special treatment, and Khouri promptly rejected it, telling him that it was not fair to ship to anyone early; Swatch would ship to everyone at the same time.³⁴ (Tr. 2/6/02, at 17.)

34 The "special treatment" request, like Nally's request for construction financing, is an example of Nally's tendency to treat his request to Swatch as a promise by Swatch, even though Swatch rejected the request.

Finally, Matterhorn failed to prove that it relied on the Timeship-related promises or suffered any injury as a result of the operation of the Timeship Store. Matterhorn knew before it signed the Letter of Intent that Swatch intended to open the Timeship Store. Matterhorn nevertheless proceeded to investigate locations and eventually opened four stores which closed only two months after the Timeship Store opened. While the Timeship Store was near Nally's South Street Seaport store, and may have competed with that store, there is no evidence that it encroached on the sales at the Matterhorn stores in New Jersey, Pennsylvania or Maryland.

C. The Tort Claims

Matterhorn's Third Amended Complaint asserts four claims that I have categorized as sounding in tort. They included fraud (3rd claim), negligent misrepresentation (4th claim), fraud in inducing Matterhorn to execute the license agreements (10th claim) and unfair competition (11th claim).

1. Fraud and Fraudulent Inducement

Matterhorn's fraud and fraudulent inducement claims recycle the promissory estoppel claim under a different theory, and rely on the same statements. Matterhorn contends that Swatch falsely stated that

(a) The planned Timeship Store would be a "marketing tool" which would be used to enhance the Swatch brand name, trademark and service mark and would not compete with the Matterhorn stores; further, the Timeship Store would not be given special treatment and Matterhorn would continue to be provided with the same Swatch watches and other Swatch products that would be available at the Timeship Store;

(b) A "team" would be provided to assist Matterhorn with marketing, advertising and operations and Swatch would continue to provide promotional and marketing materials for the benefit of the Matterhorn stores;

(c) An organized and effective national and regional advertising campaign and marketing strategy would be implemented;

(d) The Matterhorn stores would be provided with a timely delivery of a broad range of Swatch products on reasonable credit terms;

(e) Except for the Swatch-owned Timeship Store and discount outlets which would not compete with the Matterhorn stores, no company owned and operated retail Swatch stores would be opened in the United States.

(Matterhorn's Proposed Findings, pp. 72-73.)

The elements of fraud and fraudulent inducement are the same under New York law: "representation of a material existing fact, falsity, scienter, deception and injury". Channel Master Corp. v. Aluminum Ltd. Sales, Inc., 151 N.E.2d 833, 835 (N.Y. 1958); accord New York Univ. v. Continental Ins. Co., 662 N.E.2d 763, 769 (N.Y. 1995). The claim must be proven by clear and convincing evidence. Kaye v. Grossman, 202 F.3d at 614 (fraud); Computerized Radiological Servs. v. Syntex Corp., 786 F.2d 72, 76 (2d Cir. 1986) (fraudulent inducement). Matterhorn failed to show, under this standard, that Swatch made any statement to Matterhorn with knowledge of its falsity or with the intent to deceive. Nor would Swatch have had any motive to do so. The last thing Swatch wanted was for Matterhorn to open a store that failed.

In addition, the proof of the fraud and fraudulent inducement claims suffered from the same deficiencies as the promissory estoppel claim. Either Swatch never made the statements attributed to it, or it made the statements but they were true. Finally, the shortcomings in Matterhorn's proof of reliance and damage under the preponderance of the evidence standard, discussed in connection with the promissory estoppel claim and the negligent misrepresentation claim examined below, are magnified under the higher standard of proof of fraud by clear and convincing evidence.

2. Negligent Misrepresentation

Matterhorn contends that Swatch made numerous negligent misrepresentations:

(a) Swatch did not intend to imminently provide Matterhorn with a comprehensive franchise agreement (In fact, Swatch Franchising (USA) Inc. did not complete its Franchise Offering Circular until on or about April 21, 1997);

(b) Swatch did not intend to fully develop and implement a comprehensive franchise program and never intended to open over 100 independently-owned Swatch retail stores in the United States over the next few years;

(c) Swatch did not intend to provide Matterhorn with exclusive right to open Swatch stores or kiosks at locations identified in Matterhorn's rollout plan approved and accepted by Swatch and, instead, Swatch attempted to take several stores away from Matterhorn, prevented Matterhorn from opening several locations, and opened stores at certain of those locations and/or allowed others to open Swatch stores or kiosks at certain of those locations;

(d) Swatch did not intend to promptly act upon and process certain of the pro forma applications submitted by Matterhorn to facilitate the opening stores or kiosks at the sites at the locations identified in Matterhorn's rollout plan approved and accepted by Swatch and, instead, intended to obstruct the completion of Matterhorn's rollout plan;

(e) Swatch did not intend to reduce the costs of constructing the independently owned Swatch stores and kiosks;

(f) Swatch did not intend to defray or reimburse Matterhorn for a portion of the costs incurred by Matterhorn in opening the Swatch stores at The Gallery at Harbor Place, Baltimore or at The Plaza at King of Prussia; King of Prussia, Pennsylvania;

(g) Swatch did not intend to incur a portion of the costs incurred by Matterhorn over and above $125 to $150 per square foot in connection with the construction of the Swatch stores and kiosks identified in the Matterhorn rollout plan approved and accepted by Swatch;

(h) Swatch did not intend to support Matterhorn's stores and kiosks with an organized and effective marketing strategy and, instead, intended to undercut Matterhorn's marketing strategy by opening outlet stores and permitting other stores to sell Swatch products at steeply discounted prices;

(i) Swatch did not intend to support Matterhorn's stores by providing timely delivery of a broad range of Swatch products on reasonable credit terms and failed and refused to make certain Swatch products available to Matterhorn, failed and refused to provide Matterhorn with timely delivery of Swatch products, and failed and refused to provide Matterhorn with credit terms reasonable for a single product store;

(j) Swatch did not intend to protect Matterhorn from price undercutting and, instead, aggressively sought to undercut the Matterhorn pricing structure by opening Swatch owned discount stores and permitting other stores to discount Swatch merchandise also sold by Group and thereby denigrated the Swatch image; and

(k) Swatch did not intend to provide Matterhorn with an interim license agreement or franchise agreement for the term of the specific lease for each Matterhorn store.

(Matterhorn's Proposed Findings, pp. 75-76.)

The party asserting a claim of negligent misrepresentation under New York law must prove that (1) the defendant had a duty, as a result of a special relationship, to give correct information; (2) the defendant made a false representation with knowledge of the falsity; (3) the defendant knew that the plaintiff desired the information contained in the representation for a serious purpose; (4) the plaintiff intended to rely and act upon the representation; and (5) the plaintiff reasonably relied to his detriment on the false representation. Hydro Investors, Inc. v. Trafalgar Power, Inc., 227 F.3d 8, 20 (2d Cir. 2000).

The law imposes a duty to speak with care "when `the relationship . . . [is] such that in morals and good conscience the one has the right to rely upon the other for information.'" Kimmel v. Schaefer, 675 N.E.2d 450, 454 (N.Y. 1996) (quoting International Prods. Co. v. Erie R.R. Co., 155 N.E. 662, 664 (N.Y. 1927)). Under certain circumstances, a special relationship may exist in an arms-length commercial transaction. In Kimmel, a commercial case, the New York Court of Appeals explained that the existence of a special relationship, an issue intertwined with the justification for the plaintiff's reliance, is a factual question governed by three factors:

In determining whether justifiable reliance exists in a particular case, a fact finder should consider whether the person making the representation held or appeared to hold unique or special expertise; whether a special relationship of trust or confidence existed between the parties; and whether the speaker was aware of the use to which the information would be put and supplied it for that purpose.

Kimmell, 675 N.E.2d at 454; accord Suez Equity Investors, L.P. v. Toronto-Dominion Bank, 250 F.3d at 103.

Matterhorn's negligent misrepresentation claim suffers from obvious weaknesses. First, the negligent misrepresentations, quoted above, are not misrepresentations at all. Instead, they are a list of things that Swatch "did not intend" to do.

Second, to the extent that Matterhorn's list implies that Swatch made the representations but did not intend to honor them, they are too general to support a negligent misrepresentation claim.

Third, the negligent misrepresentation claim relied on the same allegations as the other claims already discussed, and suffered from the same deficiencies in proof, i.e., falsity, scienter, reliance and/or damages.

Franchise-Related Allegations

The evidence demonstrated that Swatch intended to establish a comprehensive franchise program, and at the beginning, planned to open between 100 and 200 independently owned stores.

Eventually, it pared down this goal because despite the Olympics, the demand for Swatch products never took off as hoped. Swatch did not represent, in this regard, that it would provide Matterhorn with a comprehensive franchise agreement "imminently." It represented that it would provide the comprehensive franchise agreement when the program was ready, and this was certainly true when made. Further, the evidence supports a finding that Swatch intended to provide Matterhorn with a comprehensive franchise agreement.

The Rollout Plan

The evidence showed that at the time that Fenton signed the Letter of Intent, Swatch intended to give Matterhorn the exclusive right to negotiate with the landlords at the thirty-one locations on the Rollout List, and submit applications for those locations. Swatch never gave Matterhorn an unconditional guarantee that it could open thirty-one stores. Matterhorn first had to submit a complete application which was then subjected to Swatch's review. Swatch promptly processed the few applications that Matterhorn submitted, and except in the case of Vail, never prevented Matterhorn from opening a store or kiosk in breach of any express or implied obligation imposed by the Letter of Intent.

Construction Costs

Swatch took steps to reduce the construction costs by permitting Matterhorn to use another vendor for the casework, and granting a construction allowance for the Woodbridge store and the Freehold kiosk. Swatch never represented that it would otherwise defray the construction costs or pay the portion of the costs that exceeded $125.00 to $150.00 per square foot. Moreover, Matterhorn knew that the construction costs would actually be twice that amount, and nonetheless proceeded with the Rollout Plan.

Store and Product Support

The store and product support claims are really contractual in nature, and rely on the same generalizations as the promissory estoppel, breach of the implied covenant of good faith and fair dealing and breach of license agreement claims.

The statements attributed to Swatch regarding marketing, product delivery and credit terms are too broad and ambiguous to support a negligent misrepresentation claim. In addition, Swatch did grant credit terms to Matterhorn, did deliver product commensurate with Matterhorn's ability to pay, and did provide marketing and advertising support through the promotion of the Swatch brand.

Consequently, I cannot conclude that Swatch should have known that these "statements" were false since Swatch actually provided, in one form or another, the support that Matterhorn contends that Swatch never intended to provide. Matterhorn may have been dissatisfied with Swatch's efforts, or more precisely, the results of those efforts, but this does not prove a negligent misrepresentation claim.

Unfair Competition

Matterhorn implies that Swatch negligently represented that it would not undercut Matterhorn by opening outlet stores or by permitting other stores to sell Swatch products at a steep discount. As stated previously, Matterhorn always knew that Swatch intended to open a few outlet stores. Furthermore, these stores did not compete with the Matterhorn stores.

Matterhorn also failed to offer any evidence of Swatch's involvement in store discounting. On the contrary, Barbara Khouri's unrebutted testimony indicated that Swatch expressed concern about retailers that discounted Swatch products, but Swatch had no control over whether these stores offered discounts on Swatch merchandise. (Tr. 2/6/02, at 38) ("we, as a manufacturer, could not control retail pricing".)

Coterminous Leases and License Agreements

Lastly, Matterhorn implies that Swatch never intended to provide a license or franchise agreement that ran for the same term as the corresponding lease. Swatch made this promise in the Letter of Intent, and breached it. However, Matterhorn failed to show that it relied on the representation or suffered an injury as a result of the breach. It still opened four stores, and the stores closed at a time when both the lease and the license agreement were in effect. In addition, Matterhorn did not offer credible evidence that the promise of a coterminous lease and license or franchise agreement was false at the time that it was made.

3. Unfair Competition

Matterhorn's twelfth claim alleges unfair competition. "The essence of unfair competition under New York common law is the bad faith misappropriation of the labors and expenditures of another, likely to cause confusion or to deceive purchasers as to the origin of the goods." Jeffrey Milstein, Inc. v. Greger, Lawlor, Roth, Inc., 58 F.3d 27, 34 (2d Cir. 1995) (internal quotation marks omitted); see Saratoga Vichy Spring Co. v. Lehman, 625 F.2d 1037, 1044 (2d Cir. 1980). In addition, the plaintiff must show bad faith. Genesee Brewing Co. v. Stroh Brewing Co., 124 F.3d 137, 149 (2d Cir. 1997); Jeffrey Milstein, Inc. v. Greger, Lawlor, Roth, Inc., 58 F.3d at 34-35.

Matterhorn's allegations fall into two categories — competitive advantage and misappropriation. In the former, Matterhorn charges that unlike its own stores, Swatch stores did not have allocation limitations, received a greater variety of Swatch merchandise, could return unsold merchandise without limitation and were not subject to credit hold. The latter category included the claims that Swatch used Matterhorn (1) as a "research and development" arm to develop the market, (2) to set standards for negotiated lease terms for other Swatch stores, and (3) to build and operate prototypical stores. (Matterhorn's Proposed Findings, pp. 81-82.)

Proof of a competitive advantage does not prove unfair competition. Matterhorn did not show the Swatch misappropriated any of Matterhorn's labor or expenditures or confused anyone into believing that he was dealing with Matterhorn instead of Swatch. Further, Matterhorn's corresponding "disadvantages" were contractual. I have already concluded that these same facts did not prove a breach of the covenant of good faith and fair dealing, and for the same reason, they did not show that Swatch acted in bad faith.

Finally, some of these allegations are nonsensical. Swatch is not going to put itself on credit hold or limit the unsold merchandise it can "return" to itself. Extrapolating this argument would lead to the conclusion that a franchisor or licensor competes unfairly whenever it operates a company-owned store.

Matterhorn also failed to prove its misappropriation claims. The essence of this claim was that Swatch used Matterhorn to develop a market or know how for the sale of Swatch products, and then discarded Matterhorn and stepped in to reap the benefits. Matterhorn failed to demonstrate that it developed any market, or that Swatch derived a benefit from anything that Matterhorn did. It was Swatch that spent $70 million on its Olympic sponsorship and advertising. There is no evidence that Matterhorn spent any money advertising or promoting its own stores aside from hosting opening parties and special events.

There was also no evidence to support the theory that Swatch used Matterhorn as a "guinea pig" to set standards for negotiated lease terms or test new store designs. Matterhorn did not introduce any store leases signed by other licensees or Swatch, or show that Swatch used the Matterhorn leases as a template for other leases. In addition, Matterhorn was aware that Swatch had developed a new store design. Matterhorn was anxious to open the stores as quickly as possible, and as a result, became the first to use the design.

The "guinea pig" claims are also inconsistent with Matterhorn's principal contentions. Matterhorn has repeatedly argued that Swatch delayed the processing of the applications and the opening of the stores. If Swatch wanted to use Matterhorn as a laboratory, it would not have impeded the experiment.

J. The Franchise Act Claims

The final four claims assert breaches of two franchise acts, but only one claim remains. The fifth, sixth and seventh claims allege that Swatch breached the New York Franchise Act, N.Y. GEN. BUS. LAW §§ 680, et seq., (McKinney 1996). I dismissed those claims at the close of Matterhorn's direct case based upon its failure to prove that Matterhorn had paid Swatch a franchise fee, (Tr. 2/5/02, at 250), an essential element under New York law. In re Matterhorn Group, Inc., 2000 WL 1174215, at *8-9. The remaining, twelfth claim alleges that Matterhorn violated the New Jersey Franchise Practices Act, N.J. STAT. ANN. §§ 56:10-1, et seq. (West 2001) (the "NJFPA" or the "Act")³⁵.

35 Matterhorn implies that all of the New Jersey locations on the Rollout List were subject to regulation under the NJFPA. (Matterhorn's Proposed Findings, at pp. 82-83.) This is not correct. Unlike the franchise laws of many other states, including New York, that regulate the sale of franchises, the New Jersey only applies to operating businesses. Matterhorn did not operate any stores in New Jersey except for Woodbridge and Freehold. Hence, stores Matterhorn never opened could not satisfy the last two of the three additional requirements discussed in the immediately succeeding text.

1. Introduction

The NJFPA was enacted to address the potential for abuse inherent in the franchisor-franchisee relationship. In particular, it protects the franchisee from arbitrary and indiscriminate actions by the franchisor who usually has vastly superior economic power. Instructional Sys., Inc. v. Computer Curriculum Corp., 614 A.2d 124, 132-33 (N.J. 1992) ("ISI"). The Act defines a "franchise" as

a written arrangement for a definite or indefinite period, in which a person grants to another person a license to use a trade name, trade mark, service mark, or related characteristics, and in which there is a community of interest in the marketing of goods or services at wholesale, retail by lease, agreement, or otherwise.

NJFPA § 56:10-3a.

The Act does not, however, apply to all franchises that meet this definition. It is limited to those franchises that meet three additional criteria: (1) the agreement contemplates or requires the franchisee to establish or maintain a place of business in New Jersey, (2) the gross sales between the franchisor and franchisee during the twelve months preceding the lawsuit exceeded $35,000.00 and (3) more than 20% of the franchisee's gross sales are intended to be derived or are actually derived from the franchise. Id. § 56:10-4a. The parties have not briefed or discussed these three additional criteria, and they do not appear to be in dispute. Hence, the initial question is whether Matterhorn proved the existence of a franchise, to wit, a license and a community of interest with respect to Freehold or Woodbridge, or both.

2. The License

Ordinarily, "license" is a broad term. It connotes permission to use something which one could not use without the license. Cooper Distrib. Co. v. Amana Refrigeration, Inc., 63 F.3d 262, 272 (3d Cir. 1995); ISI, 614 A.2d at 138. For example, an electronics store that sells Sony products may be allowed to use Sony's name in its advertisements. In this broad sense, the store has a "license" to use Sony's name.

"License," as used in the NJFPA, is much narrower. It signifies the right "to use as if it is one's own," and "implies a proprietary interest." See Cooper Distrib. Co., 63 F.3d at 272 (quoting Finlay Assocs., Inc. v. Borg-Warner Corp., 369 A.2d 541, 546 (N.J. Law Div. 1976), aff'd on other grounds, 382 A.2d 933 (N.J.App.Div.), cert. denied, 391 A.2d 483 (1978)). Most cases addressing the question have adopted the definition of "license" suggested by the court in Neptune T.V. Appliance Serv., Inc. v. Litton Microwave Cooking Prods. Div., Litton Sys., Inc., 462 A.2d 595 (N.J.App. Div. 1983) ("Neptune"):

the use of another's trade name in such a manner as to create a reasonable belief on the part of the consuming public that there is a connection between the trade name licensor and the licensee by which the licensor vouches, as it were, for the activity of the licensee in respect of the subject of the trade name.

Id. at 599; accord Cooper Distrib. Co., 63 F.3d at 272; Atlantic City Coin Serv. Co. v. IGT, 14 F. Supp.2d 644, 664 (D.N.J. 1998); ISI, 614 A.2d at 139.

Generally, a license exists where the licensee is required or entitled to hold itself out as an arm of the licensor. The relevant factors include whether the licensee uses the licensor's name and logo in its business and advertising, see Cooper Distrib. Co., 63 F.3d at 272; Atlantic City Coin Serv. Co. v. IGT, 14 F. Supp.2d at 665; Neptune, 462 A.2d at 599, whether the licensor trained the licensee's employees, ISI, 614 A.2d at 140, or licensee's employees strengthen the public's perception that the licensor vouches for the licensee's use of its name, Cooper Distrib. Co., 63 F.3d at 272, whether the licensor emphasizes the importance of the licensee's customer service as a means of distinguishing its product from others, Cooper Distrib. Co., 63 F.3d at 273, whether the license agreement requires the licensee to use its "best efforts" to promote the licensor's name or products, Cooper Distrib. Co., 63 F.3d at 273; ISI, 614 A.2d at 139, whether the licensee is barred from selling competitive products, ISI, 614 A.2d at 139, and whether the licensee is required to provide warranty service on the licensor's products. Cooper Distrib. Co., 63 F.3d at 272.

Here, the license agreements contained many of these provisions. Under ¶ 7.3, Matterhorn could only sell Swatch products, (PX 224, Bates no. PL 009902; PX 225, Bates no. PL 009816), and under ¶ 1.4, it was obligated to "promote the retail sale of Swatch Products . . . to the best of its ability." (PX 224, Bates no. PL 009898; PX 225, Bates no. PL 009812.) Paragraph 3.1 required Matterhorn to build the store in accordance with Swatch's common design and Store Trade Dress to look like other Swatch stores or kiosks. (See PX 224, Bates no. PL 009899-900.)³⁶ The Swatch Store Trade Dress included an interior Swatch sign and logo. (See PX 224, Bates no. PL 009920.) Paragraph 4 of the license agreement, which dealt with signage, required Matterhorn to post a similar sign on the exterior of the store, (PX 224, Bates no. PL 009925; PX 225, Bates no. PL 009836), and post signs inside and outside the store and state in all advertisements and communications with the public that Matterhorn was an "authorized Swatch Licensee." (PX 224, Bates no. PL 009901; PX 225, Bates no. PL 009814.) The store stationary and business cards bore the Swatch name and logo. (PX 224, Bates no. PL 009929-31; PX 225, Bates no. PL 009840-42.) Finally, under paragraph 9, Matterhorn could only use advertising approved by Swatch. (PX 224, Bates no. PL 009903; PX 225, Bates no. PL 009816-17.) The advertising provisions did not state that Matterhorn could use Swatch's name in the advertisements, but given the other provisions of the license agreement and Swatch's control over the advertising, they implied this right.

36 For some reason, the appendices attached to the Freehold license agreement, (PX 225), were incomplete and did not include pictures of the design or trade dress.

The license agreements also reflected Swatch's concern about Matterhorn's interaction with the public, and its effect on Swatch's public image. For example, Matterhorn had to "tastefully" display the Swatch products, (¶ 1.4.1), service customers courteously and professionally, (¶ 1.4.2), and refrain from activities "which adversely affect the image or goodwill of Swatch or its products." (¶ 1.4.3) (PX 224, Bates no. PL 009899; PX 225, Bates no. PL 009812.) Under ¶ 8.1, its sales personnel were required to be courteous and knowledgeable. (PX 224, Bates no. PL 009902; PX 225, Bates no. PL 009816.) Lastly, under ¶ 6.1, Matterhorn had to provide warranty service. (PX 224, Bates no. PL 009901-02; PX 225, Bates no. PL 009815.)

Swatch points to several factors that, it argues, undercut a finding that a license existed. Woodbridge and Freehold had to disclose through signage and other written communications that they were separate legal entities from Swatch. They could only present themselves as Swatch licensees. Finally, they could not use Swatch's name in their business names. (Swatch's Proposed Findings, Conclusion ¶¶ 235-41.)

These factors do not militate against a finding that a license existed. The use of the licensor's name in the licensee's business name is not determinative. See ISI, 614 A.2d at 139. In addition, although Matterhorn was required to represent that it was not affiliated with Swatch other than as an authorized licensee, it was required to use its best efforts to promote the sale of its only product — Swatch merchandise — in a store that displayed the Swatch sign and logo. Further, if the watch broke, a customer could bring it to one of the Matterhorn stores for in-warranty service. Considering all of the evidence, Swatch induced the "consuming public to expect from [Matterhorn] a uniformly acceptable and quality controlled service endorsed by [Swatch] itself." Neptune, 462 A.2d at 599. In fact, the public perception fed Swatch's greatest fear — that a Swatch retailer would fail and hurt Swatch's image.

3. Community of Interest

"The community of interest requirement addresses the inequality of bargaining power between the parties and is critical in distinguishing franchises from other types of business relationships." ISI, 614 A.2d at 140. The party asserting a community of interest must demonstrate that he made investments that were "substantially franchise specific," and he was required to make those investments by the parties' agreement or the nature of the business. Cooper Distrib. Co., 63 F.3d at 269. The investment may be tangible, capital expenditures, or intangible expenditures like goodwill. ISI, 614 A.2d at 140. As the ISI court explained:

The Act's concern is that once a business has made substantial franchise-specific investments it loses all or virtually all of its original bargaining power regarding the continuation of the franchise. Specifically, the franchisee cannot do anything that risks termination, because that would result in a loss of much or all of the value of its franchise-specific investments. Thus, the franchisee has no choice but to accede to the demands of the franchisor, no matter how unreasonable those demands may be.

Id. at 141; accord New Jersey Am., Inc. v. Allied Corp., 875 F.2d 58, 62-63 (3d Cir. 1989).

In addition, courts will consider the interdependence between the licensor and the licensee. According to the Neptune court:

[T]he franchise relationship is one of continuing mutual advantage and interdependence. The franchisor utilizes the system to distribute his products or capitalize upon his service marketing scheme without the need of establishing his own related marketing divisions and thus utilizes the network to do his business or an essential aspect of it for him. The franchisee receives the benefit of the franchisor's know-how and reputation and contributes his own capital and labor. In a sense, therefore, the franchise relationship is akin to a partnership since both parties derive their respective incomes from the franchise. They are, obviously, however, not partners in the true sense of sharing profits and losses . . . .

Accordingly, the community of interest signaling the franchise relationship does not imply a sharing of profits. . . . Rather it is based on the complex of mutual and continuing advantages which induced the franchisor to reach his ultimate consumer through entities other than his own which, although legally separate, are nevertheless economically dependent upon him.

462 A.2d at 600-01 (citations omitted).

Matterhorn demonstrated the vulnerability and symbiosis that characterize the franchise relationship. Matterhorn was required under the license agreements to build a store at great expense that conformed to Swatch's design and bore Swatch's trade name and logo. No evidence was offered to show that the specially designed fixtures could be put to another use, such as in the sale of jewelry generally.

Matterhorn and Swatch were also interdependent. Swatch decided to expand through the licensing agreements with retailers rather than open its own stores to sell current Swatch merchandise. In essence, retailers like Matterhorn were the selling arm of Swatch, and Swatch had a substantial interest in the volume of Matterhorn's sales. Paragraph 13.1 of the license agreement required Matterhorn to submit sales reports, and ¶ 14.1 called for annual sales forecasts. (PX 224, Bates no. PL 009906; PX 225, Bates no. PL 009819-20.) Matterhorn, for its part, depended on Swatch to supply inventory that Matterhorn could sell.

The proof compels a finding of the existence of a license and a community of interest between Swatch on the one hand and Matterhorn/Woodbridge and Matterhorn/Freehold on the other. Accordingly, the parties stood in franchisor-franchisee relationships under New Jersey law. This conclusion necessarily rejects Swatch's argument that there was no franchise because the license agreements said there was no franchise. (See Swatch's Proposed Findings, Conclusion ¶ 242.) Such an interpretation would result in a waiver of the protections under the Act in violation of NJFPA § 56:10-7a, discussed below.

4. Violations of the NJFPA

Having concluded that the two New Jersey debtors were franchisees, I turn to whether Matterhorn proved that Swatch violated the NJFPA, and as a result, caused an injury to Matterhorn. See NJFPA § 56:10-10 (authorizing franchisee to sue for damages sustained "by reason of any violation of this act"). Matterhorn alleges four categories of violations. First, Swatch forced Matterhorn to waive liability under the Act. Second, Swatch attempted to prevent Matterhorn from contacting other franchisees. Third, Swatch imposed unreasonable standards of performance. Fourth, Swatch wrongfully terminated the license agreements. (Matterhorn's Proposed Findings, pp. 85-89.)

a. Waiver of Liability

A franchisor may not require a franchisee to assent to a release, waiver or estoppel, which would relieve the franchisor of liability under the NJFPA, at the time that the parties enter into the franchise arrangement. NJFPA § 56:10-7a. Neither side cited to any authority interpreting this provision. Matterhorn nonetheless charges that Swatch violated § 56:10-7a by seeking to protect itself against franchisor liability through the inclusion of ¶ 10.2 in each license agreement. Paragraph 10.2 stated:

Swatch and Retailer acknowledge and agree that the only fees or charges Retailer shall pay to Swatch or any of its affiliates in connection with this Agreement are for the purchase of the Swatch Products; that Swatch is developing a franchise program, but is currently unable to make any offer of a franchise to Retailer; and that neither Swatch nor any of its affiliates have offered a franchise to Retailer.

(PX 122, Bates no. PL 009769; PX 123, Bates no. PL 009722; PX 224, Bates no. PL 009904; PX 225, Bates no. PL 009817.)

Swatch offers two responses. First, it did not require Matterhorn to agree to anything. Matterhorn could have sought to renegotiate the provision, or simply declined to sign the license agreement. This argument is unconvincing since a prospective franchisee can always attempt to renegotiate or refuse to assent. Furthermore, there was evidence that Matterhorn had already spent substantial amounts researching and building these stores by the time that Swatch presented the license agreements for execution. Matterhorn had little leverage at that point to withhold its assent and forego its investment.

Second, Swatch maintains that ¶ 10.2 did not contain a waiver or release, but simply expressed the expectation of the parties. (Swatch's Proposed Findings, Conclusion ¶ 246.) This presents a closer question. The language does not explicitly waive, release or estop Matterhorn from anything. Nevertheless, Swatch relied on this very provision in earlier proceedings to defeat Matterhorn's claim that it had been fraudulently induced to sign the license agreements based upon representations that it would receive franchise agreements. See In re Matterhorn Group, 2000 WL 1174215, at *6. Thus, although Swatch did not literally require Matterhorn "to assent to . . . [an] estoppel," Swatch used this provision to estop Matterhorn from asserting part of its fraudulent inducement claim.

I nonetheless do not conclude that the inclusion of ¶ 10.2 violated the NJFPA. As noted, the literal language does not violate § 56:10-7a. Furthermore, if ¶ 10.2, was an illegal "assent to an estoppel," every factual statement in an agreement might be illegal since it could serve as a basis to estop the franchisee from asserting a contradictory fact.

In addition, the facts in ¶ 10.2 were true. Matterhorn was not required to pay any fees other than for the purchase of Swatch products. Swatch was developing a franchise program but had not yet formalized it, could not yet offer a franchise to Matterhorn and had not done so. Both parties understood that this referred to the formal franchise program, and even after the execution of the license agreements, Matterhorn pushed for an offer of a franchise. The Act cannot mean that a truthful statement of fact nonetheless violates § 56:10-7a.

Finally, the inclusion of ¶ 10.2 did not prevent a finding that Matterhorn held a franchise under New Jersey law for the two New Jersey locations, or limit Swatch's liability as a result of any violations. Accordingly, this aspect of Matterhorn's NJFPA claim must fall.

b. Free Association

The NJFPA prevents a franchisor from directly or indirectly prohibiting the right of free association among franchisees for any lawful purpose. NJFPA § 56:10-7b. According to Matterhorn, during the fall of 1996, (1) Khouri ordered Matterhorn not to speak with other Swatch licensees regarding business issues, and (2) Mella told Matterhorn that if it chose to communicate directly with Swatch Group on any issues, it should deal exclusively with Swatch Group in Switzerland and not deal with Swatch. (Matterhorn's Proposed Findings, pp. 87-88.)

Matterhorn failed to prove that these statements or policies interfered with its right to associate freely with other franchisees. First, as Swatch observed, Matterhorn did not identify any other franchisees with whom it could associate. "Franchisee" is a defined term under the Act, see NJFPA, § 56:10-3d, and as discussed, the Act does not apply to everyone who might fit its definition. In other words, although Swatch may have contracted with other licensees, Matterhorn failed to prove that they were "franchisees" within the meaning of the NJFPA. Furthermore, any restrictions imposed by Mella on direct communications with Swatch Group fell outside the purview of the statute; Swatch Group was not a "franchisee."

Second, Matterhorn mischaracterized the record. Khouri never said that Matterhorn could not discuss "business issues" with other licensees. Instead, at an August 13, 1996 meeting, Khouri told Nally that if licensees wanted to speak to each other and compare notes, their discussions should not be brought back to Swatch management. (PX 291, Bates no. PL 001754.) When questioned about this point, Khouri testified:

. . . I said that if the partners chose to speak to each other, which, obviously, they had the right to do, and compare notes, that I really didn't want to hear about it, because I considered anything that we discussed with our licensees to be confidential and I would not talk about Matterhorn matters with any other partner nor would I expect that kind of discussion to be brought to us to be talked about.

(Tr. 2/6/02, at 19.)

In other words, Swatch discussed confidential matters separately with each licensee. If Swatch told a licensee something in confidence, no one could stop that licensee from disclosing what Swatch said to another licensee. Nevertheless, Swatch would not discuss with one licensee what it had told another licensee. This may have limited communications between Swatch and its licensees, but it did not prevent licensees from associating with each other, or telling each other whatever they pleased.

Third, Matterhorn failed to show that Swatch's policy caused it to suffer an injury. It did not present any evidence that Swatch ever actually prevented it from speaking with other franchisees. Accordingly, this NJFPA claim also lacked factual and legal support.

c. Unreasonable Standards of Performance

The NJFPA prohibits a franchisor from imposing "unreasonable standards of performance upon a franchisee." NJFPA § 56:10-7e. Matterhorn contends that Swatch violated this provision in several different ways. As a result of Swatch's conduct, Matterhorn:

(1) confronted multiple instances of unfair competition posed by the corporate-owned outlet stores, the Timeship Store and the retail locations in Atlanta during the 1996 Summer Olympics;

(2) was treated by the Swatch Credit Department in the same manner as a multi-brand jewelry store account without any consideration of the fact that a Swatch only store is a single product store relying exclusively on the sale of Swatch watches.

(3) confronted unreasonable credit restrictions, including placing all Matterhorn accounts on credit hold in the Summer of 1996 — including the Woodbridge Swatch store which had not even opened yet and was not in arrears which resulted in the Woodbridge store not being able to obtain many of the better selling watches when it opened.

(4) was confronted with unreasonable restrictions on Matterhorn's ability to return poorly selling or unsold merchandise even though Swatch routinely permitted department store accounts to return much greater percentages of unsold inventory.

(5) was expected to achieve profitable sales levels even though Swatch stopped advertising and marketing efforts on behalf of the Matterhorn stores after the Olympics for the remainder of 1996.

(Matterhorn's Proposed Findings, pp. 88-89) (citations to record omitted.)

The Act does not define "unreasonable standards of performance," and except for the last violation, Matterhorn's claims do not implicate "standards of performance." Instead, they rehash Matterhorn's unfair competition claims based on Swatch's performance. In addition, Matterhorn never explained why these "standards of performance" were unreasonable as they generally related to making sales and paying for inventory.

Furthermore, the factual premises underlying the charges are unsupported or contradicted outright by the evidence. As discussed above, the Timeship Store and the outlet stores did not compete unfairly with Matterhorn's New Jersey stores.³⁷ Matterhorn's complaint that it received the same treatment as the multi-product stores was self-defeating; the Act did not require Swatch to provide non-uniform treatment to Matterhorn.

37 Matterhorn never claimed much less proved that the Franklin Mills outlet store competed with the New Jersey stores. Matterhorn alleged that the outlet store competed with the King of Prussia store.

Similarly, Matterhorn enjoyed the same credit terms as all other Swatch retailers, and when it failed to pay, it suffered the same consequences — future credit was restricted.

In addition, the statement that department stores secured a more favorable return policy was false. The department stores and licensees had the same return authorization — 1% (Tr. 2/6/02, at 123.) As a special accommodation, Swatch increased Matterhorn's return authorization from 1% to 2%. (Id., at 25-26, 123; DX DF.)

Finally, while sales expectations fit the description of a "standard of performance," the claim that Swatch stopped advertising after the 1996 Olympics was untrue. Following a brief freeze after the Olympics, Swatch committed to spend an additional $2.6 million for the approximate two months remaining in 1996. In addition, the license agreements did not require Swatch to advertise, and moreover, permitted Matterhorn to advertise.

Accordingly, Matterhorn failed to prove that Swatch violated the NJFPA by imposing unreasonable standards of performance.

d. Wrongful Termination

Matterhorn's last claim under the Act involves the termination of the franchise. The Act imposes two requirements. The franchise cannot be terminated on less than sixty days notice, NJFPA § 56:10-5, and can only be terminated for "good cause." Section 56:10-5 states:

It shall be a violation of this act for a franchisor to terminate, cancel or fail to renew a franchise without good cause. For the purposes of this act, good cause for terminating, canceling, or failing to renew a franchise shall be limited to failure by the franchisee to substantially comply with those requirements imposed upon him by the franchise.

Id.

Consequently, it is not sufficient that a franchisor may have a contractual right to terminate a license agreement without cause, or that the termination is made in good faith or for substantial business reasons. Under the Act, the franchisor must demonstrate that the franchisee committed a substantial breach of its obligations. See General Motors Corp. v. Gallo GMC Truck Sales, Inc., 711 F. Supp. 810, 816 (D.N.J. 1989); Westfield Ctr. Serv., Inc. v. Cities Serv. Oil Co., 432 A.2d 48, 57 (N.J. 1981). Conversely, the franchisor may defend an action brought by the franchisee by showing that the franchisee "failed to substantially comply with requirements imposed by the franchise and other agreements ancillary or collateral thereto." NJFPA § 56:10-9.

Matterhorn contends that Swatch terminated the two New Jersey franchises on less than sixty days notice and that it lacked good cause. By October 1996, Matterhorn was predicting its own demise. (See PX 287.) It was reporting sales far short of expectations, and talked about going out of business. (See PX 302.) It had fallen behind in payment, and had been placed on credit hold. (See id.) When Matterhorn failed to come up with a payment plan, and instead, proposed a "joint venture" which included 100% debt forgiveness and 100% expense reimbursement, Swatch sent its 15-day cure notice. (PX 362.)

Matterhorn failed to cure its delinquencies, or present a plan to cure them, and as a result, Swatch sent its termination notice on February 27, 1997. (PX 376.)

Matterhorn is wrong when it argues that Swatch lacked "good cause" to terminate the license agreements.³⁸ Matterhorn never disputed that its unpaid Swatch invoices had been outstanding for more than 30 days. The delinquency was an event of default under ¶ 18.2.10 of the license agreements, (PX 225, Bates no. PL 009823),³⁹ and constituted a substantial breach of the license agreement. See Zaro Licensing, Inc. v. Cinmar, Inc., 779 F. Supp. 276, 286 (S.D.N.Y. 1991) (franchisee's failure to make royalty payments was a complete defense to claims against franchisor under the NJFPA).

38 Nally testified that as of Christmas 1996, Swatch was holding letters of credit in the sum of $100,000.00 to secure Matterhorn's obligations. (Tr. 11/27/02, at 37.) Pointing to Khouri's testimony that Swatch would have shipped product up to the amount of the letters of credit, (Tr. 2/6/02, at 139-40), Matterhorn implied that Swatch should have applied the letters of credit to the outstanding debt, and not terminated the license agreements. (Matterhorn's Proposed Findings, at p. 86.) The record did not reflect the amount owed by Matterhorn at the time of the termination. However, Matterhorn never suggested this course in response to Swatch's February 12, 1997 cure letter, suggesting that the letters of credit were insufficient to cure the delinquencies. Furthermore, as discussed previously, the letters of credit did not solve the delinquency problem. If Swatch drew down the proceeds of the letters of credit, Matterhorn would have to replenish them with fresh money before it could receive new product.

39 An incomplete copy of the Woodbridge license agreement, (PX 224), was received in evidence. The exhibit omitted page 14, the page on which ¶ 18.2.10 would have appeared. Based on the omission, Matterhorn argues that non-payment of invoices was not an event of default under the Woodbridge license agreement.
I disagree. Every other license agreement received in evidence included a clause (either ¶ 18.2.8 or ¶ 18.2.10) declaring non-payment to be an event of default. (See PXX 122, Bates no. PL 009774; 123, Bates no. PL 009727; 158, Bates no. PL 007461-62; 225, Bates no. PL 009823-24; 226, Bates no. PL 009867; DX FW, at pp. 11-12.) In fact, it would be remarkable if it were not. I infer that the clause was also in the Woodbridge agreement just where it should have been — on the missing page.

On the other hand, Matterhorn is correct that Swatch did not give sixty days notice of termination. It only gave fifteen. Matterhorn failed, however, to prove that it suffered any injury beyond the loss of the right to operate the two New Jersey stores for an additional forty-five days. Specifically, Matterhorn did not show that if it had been given sixty rather than fifteen days notice, either or both New Jersey stores could have cured the defaults and continued to operate. Accordingly, Matterhorn/Woodbridge and Matterhorn/Freehold are entitled to recover damages to the loss of the right to operate during the forty-five day period.

CONCLUSION

The defendants are entitled to judgment dismissing the Third Amended Complaint with the exception of two claims. Matterhorn is entitled to recover its out-of-pocket expenses incurred after May 11, 1995 in connection with its application to open a store in Vail, Colorado. In addition, Matterhorn/Woodbridge and Matterhorn/Freehold are entitled to recover damages incurred as a result of its loss of the right to operate for an additional forty-five days after February 12, 1997. The parties should contact chambers to arrange a conference to schedule further proceedings.

The foregoing shall constitute the Court's findings of fact and conclusions of law. Fed.R.Civ.P. 52(a).