Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D.D.C.: Terminated donut shop franchisee enjoined from operating unauthorized franchise, (May 6, 2015)

By Michael Menzhuber, J.D., LL.M.

The federal district court in the District of Columbia preliminarily enjoined a donut shop franchisee from continuing to operate an unauthorized franchise after termination for nonpayment of fees (Dunkin’ Donuts Franchising, LLC v. 14th Street Eatery, Inc., May 5, 2015, Chutkan, T.).

Dunkin’ Donuts Franchising LLC entered into a franchise agreement with 14th Street Eatery, Inc., Mohammed Hoque, and Yasmin Parveen to operate a Dunkin’ Donuts franchise in the District of Columbia. The agreement required, among other things, that the defendants pay periodic franchising and advertising fees. When the defendants later failed to pay these fees, Dunkin’ Donuts terminated their franchise agreement.

Despite being contractually restricted from operating a competing eatery, the defendants continued to operate their eatery as a Dunkin’ Donut franchise. Dunkin’ Donuts filed suit for trademark infringement and breach of contract and moved for a preliminary injunction to enjoin the defendants from continuing to operate their eatery.

After determining that it had subject matter jurisdiction to decide the motion, the court determined that: (1) there was a likelihood that Dunkin’ Donuts would succeed on the merits; (2) Dunkin’ Donuts would suffer irreparable harm without injunctive relief; (3) the balance of equities favored an injunction; and (4) a public interest would be served by the issuance of the injunction.

Probability of success on merits. Dunkin’ Donuts’ first basis for a preliminary injunction was that the defendants were infringing its trademark by continuing to use those marks despite the termination of the franchise agreement. The court determined that Dunkin’ Donuts established its trademark infringement claim by showing that: (1) it possessed registered trademarks; (2) the defendants used these trademarks; (3) the trademarks were used at the defendants’ eatery; (4) the trademarks were used in the connection with the sale of the products at the eatery; and (5) consumers had no way of knowing that the defendants’ eatery was not an authorized Dunkin’ Donut franchise.

The court also determined that Dunkin’ Donuts was likely to prevail on its breach contract claims regarding the covenant not to compete. The terms of the agreement were governed by Massachusetts law and, under that law, covenants not to compete are permitted as long as the limits are reasonable and not aimed at restricting ordinary competition. The court determined that prohibiting the defendant from operating a competing business within a five-mail radius of its former franchise location for a period of two years was reasonable. The court then determined that, because it was likely the covenant not to compete would be upheld and it was uncontested that the defendants violated the franchise agreement and were no longer franchisees, Dunkin’ Donuts would likely succeed in enforcing its terms.

Irreparable harm if injunction not granted. The court determined that Dunkin’ Donuts showed that it was likely to suffer irreparable harm, absent the issuance of a preliminary injunction, because “trademark infringement raises a presumption of irreparable harm.” The likelihood of irreparable harm was established because the defendants were operating an unauthorized Dunkin’ Donuts location, depriving Dunkin’ Donuts from controlling the use of trademarks and assuring the quality control necessary to the protect the integrity of its goodwill and reputation.

For many of the same reasons, the court determined that Dunkin’ Donuts showed the likelihood of irreparable injury with respect to the covenant not to compete. According to the court, the defendants’ operation of an unauthorized location, in the exact same location as its former franchise, endangered Dunkin’ Donuts goodwill and reputation. If the preliminary injunction was not granted, other franchises might believe there are no adverse consequences to violating a covenant not to compete and consider disregarding their franchise agreements.

Balance of equities. The court determined that the balance of the equities favored granting the preliminary injunction. The court reasoned that granting the preliminary injunction would only reinforce what was already the case—that the defendants were not authorized to operate a Dunkin’ Donuts location absent a valid franchise agreement. The court also noted that it was the defendants’ fault that they didn’t have a valid franchise agreement because they failed to pay contractually obligated fees. Consequently, the court found that any harm to the defendants was outweighed by the harm to Dunkin’ Donuts if they were allowed to continue to operate an unauthorized franchise.

Public interest. The court found that granting the preliminary injunction would serve the public interest. The court determined that, if the injunction was not granted, the public could be hurt by the confusion over whether the defendants’ eatery was actually a Dunkin’ Donuts and, also, because the quality and integrity of the products served could suffer without the supervision of Dunkin’ Donuts.

The case is No. 15-cv-519 (TSC)

Attorneys: Chantelle M. Custodio (Pessin Katz Law, PA) for Dunkin' Donuts Franchising, LLC.

Companies: Dunkin' Donuts Franchising, LLC; 14th Street Eatery, Inc.

Cases: FranchisingDistribution DistrictofColumbiaNews