Since the 1960’s, Rosati’s has built itself into a powerhouse in the pizza dine-in and take-out business. While it has long been a dominant player in the Chicago pizza market, it has also expanded into a national presence. While disputes have arisen throughout the years between family members regarding how to best run the business, those have largely been resolved with various fixes through the years.
In the late 1990’s, after a hotly contested decade, the family decided to establish a new holding company which would license the intellectual property of the Rosati’s brand to each of the ten shareholders. This license would allow for memhbers to sell the licensing to franchisees as they see fit, within their own region. Likewise, members also could open their own places with the licensing.
Evidently, some members had differing ideas as to what this intellectual property deal meant. According to the opinion issued by Judge Kness in the Northern District of Illinois, Michael and William Rosati were at a local grocery store when they saw frozen pizzas being offered with the Rosati’s name, branding, and even its recipe. Perplexed, they found out that two other shareholders and members of the family, Anthony and David Rosati, entered into an agreement to offer frozen pizza. Michael and William brought suit against Anthony and David, as well as against the pizza distributor. The plaintiffs sought injunctive relief, claiming the defendants did not have permission from the intellectual property holding company to offer the frozen pizzas. They sought injunctive relief to prevent further distribution of the pizzas, alleging a violation of the Langham Act, as well as other state law claims.
The court granted the preliminary injunction, stating that the licensing agreement permits intellectual property licensing in connect with operating a restaurant, the court reasons that this language does not create an open door to frozen pizza distribution to grocery or other stores. While this is a primary reasoning that the court offers, there is also an interesting additional layer. The licensing agreement is broken down into regions, each region has a five mile radius, and members of franchisees purchase the exclusive right to operate Rosati’s branding in said region. Some of these frozen pizzas though, were sold in areas outside the operating regions of the defendants. So while the court reasons that the licensing agreement does not allow for distribution of frozen pizzas without explicit authorization from the holding company, even if the court found otherwise, the defendants were still operating in violation of the agreement.
The defendants oppose the injunctive relief sought by the two shareholder plaintiffs for two primary reasons. First, they allege that the plaintiffs are first required to go forward with a shareholder demand to the holding company’s board, prior to initiating any court action. Second, they claim that the licensing agreement is broad and that is does allow for the sale and distirbution of frozen pizzas. The court rejects the first argument, primarily becuase bringing this demand would have been futile, given the role the defendants have with the board and company. The court rejects the second agreement, stating that the licensing agreement is not broad enough to include frozen pizza distribution.
Takeaway
I found this case interesting first, because it provides some intresting background into the operations of a popular pizza chain, which I frequent. Second, this case provides interesting insight into what happens when ideas diverge regarding a closely-held business. The background of this case also provide potentially useful information about how to structure a growing company while managing the diverse interests of different shareholders.