Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. S.D.: Blizzard of reasons found for enjoining former franchisees from operating restaurant as a Dairy Queen, (Sep 8, 2015)

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

Two former franchisees were enjoined from continuing to operate their restaurant as a Dairy Queen (DQ) after their right to do so had been terminated by the franchisor, American Dairy Queen Corporation (ADQ). The federal district court in Pierre, South Dakota granted the franchisor’s motion for preliminary injunction after determining that: (1) ADQ would suffer irreparable harm if the franchisees were allowed to continue to use ADQ’s trademarks; (2) the balance of harms favored ADQ because any harm suffered by the couple if the injunction was granted was self-inflicted; (3) based on the record, ADQ had a fair chance to prevail on its breach of contract claim; and (4) the public interest in being able to rely on a franchisor’s marks favored granting the injunction (American Dairy Queen Corporation v. Wardlow, September 4, 2015, Lange, R.).

Background. Amy and Gregory Wardlow accepted assignment of a DQ Operating Agreement in May 2001. The operating agreement granted them the license and right to display the DQ marks at their restaurant; as well as to identify their restaurant as part of the DQ franchise system. The agreement provided that: (1) the DQ marks belonged solely to ADQ; (2) the franchisees only had a limited license to display those marks; and (3) the marks could be displayed only in a manner approved by ADQ. The agreement further provided that: (1) the couple was required to provide monthly sales reports and pay certain fees to ADQ; (2) the failure to submit those reports or pay those fees would constitute a breach of the agreement; and (4) ADQ could terminate the couple’s franchise rights if they failed to cure their defaults within seven days of written notice from ADQ.

After the couple failed to submit the required reports and fees owed, in January 2015, ADQ issued a formal of Notice of Default. The couple failed to cure the default and ADQ issued a Confirmation of Termination with an effective date of May 25, 2015. After a period of negotiation, the parties signed a Mutual Cancellation and Release Agreement that: (1) gave the couple until December 1, 2015, to sell their restaurant to another DQ franchisee; (2) required the couple to comply with the operating agreement as they attempted to sell the restaurant; (3) gave ADQ the right to terminate the couple’s franchise rights if they failed to comply with the terms of the agreement; and (4) upon termination of their franchise rights, the couple would take all steps necessary to de-identify their restaurant from the DQ system.

After the franchisees failed to submit all required monthly reports and fees, ADQ notified them in July 2015 that they must immediately close their DQ restaurant. However, the couple ignored the notice and continued to operate their restaurant as a DQ. ADQ filed a complaint that asserted claims for trademark infringement, false designation of origin, breach of contract, and unjust enrichment. ADQ also moved for a preliminary injunction to enjoin the franchisees from: (1) using or displaying the DQ trademark or other similar marks; (2) selling or distributing any DQ products; and (3) operating their restaurant until all DQ trademarks had been removed from the restaurant’s premises.

Preliminary Injunction. The court noted the factors set forth in Dataphase Systems, Inc. v. C L Systems, Inc., 640 F.2d 109 (1981) for determining whether to grant a preliminary injunction: (1) the threat of irreparable harm to the movant; (2) the state of balance between the harm and the injury that granting the injunction would inflict on other parties litigant; (3) the probability that the movant would succeed on the merits; and (4) the public interest. Applying this factors, the court determined that ADQ was entitled to preliminary relief.

The court determined that ADQ would suffer irreparable harm because, without a franchise agreement, it lacked the ability to ensure that the couple was selling authentic DQ products, preparing the products appropriately, and meeting the ADQ’s standards for cleanliness and sanitation. The court reasoned that if customers had an unsatisfactory experience at the couple’s restaurant, they might attribute this experience to the entire DQ franchise system and decline to visit an authentic DQ restaurant in the future.

The court acknowledged that the couple would suffer some harm if the preliminary injunction were entered because they would need to rebrand their restaurant and would likely lose profits as a result of no longer being able to use ADQ’s marks. However, the court determined that any harm suffered by the couple was self-inflicted because they breached the agreement by failing to submit required reports and fees and to cure their breach.

The court noted that, under South Dakota law, the elements of a breach of contract claim are: (1) the enforceable promise; (2) a breach of that promise; and (3) resulting damages. The court determined that ADQ had a fair chance to prevail on it breach of contract claim because: (1) the Mutual Cancellation agreement established that, in exchange for the opportunity to sell their restaurant, the couple promised to submit monthly reports and fees and to de-identify their restaurant once their franchise rights ended; and (2) the couple failed to submit the required reports and fees, as well as failed to de-identify their restaurant upon termination of their franchise rights.

Finally, the court determined that the public interest favored granting the preliminary injunction because: (1) the public has an interest in being able to rely on a franchisor’s marks when choosing whether to buy a certain product; and (2) the public interest disfavors those who act beyond their contractual rights and hold themselves out as something they are not.

The case is No. 4:15-CV-04131-RAL.

Attorneys: Meredith A. Moore (Cutler Law Firm, LLP) for American Dairy Queen Corp.

Companies: American Dairy Queen Corp.

Cases: FranchisingDistribution SouthDakotaNews