Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D.N.Y.: Franchisor entitled to preliminary injunction against operation of Caribbean restaurant in certain areas, (Jul 18, 2013)

By Tobias J. Gillett, J.D., LL.M.

A restaurant franchisor was entitled to a preliminary injunction against a former franchisee’s continued operation of a Caribbean restaurant within four miles of their former franchise location, or within two and one half miles of any other location, the federal district court in Brooklyn, New York has ruled (Golden Krust Patties, Inc. v. Bullock, July 16, 2013, Mann, R.). The injunction amounts to a partial enforcement of a non-compete provision in the franchise agreement. The franchisor must post a $20,000 bond before the injunction will issue.

On March 10, 2006, Marilyn Bullock and Marilyn’s Patties, Inc. entered into a franchise agreement with Golden Krust Franchising, Inc. to open a Golden Krust Caribbean Bakery & Grill Restaurant. The agreement prohibited the franchisees from using Golden Krust’s trademarks in ways not authorized by Golden Krust, and permitted Golden Krust to terminate the agreement if the franchisees engaged in “dishonest or unethical conduct” that could adversely affect the reputation of Golden Krust or the good will associated with its trademarks. It also contained a non-compete provision purporting to bar the franchisees from operating a “competitive business” within ten miles of the franchise location, or five miles of any other Golden Krust franchise.

In April 2013, Golden Krust representatives inspected the restaurant, and determined that the franchisees were selling a competitor’s food products using Golden Krust’s packaging. Golden Krust sent the franchisees a termination letter, but the franchisees continued to operate the franchise using the Golden Krust trademarks. Golden Krust filed suit, and sought a preliminary injunction against further use of the trademarks and to enforce the non-compete provision.

The parties agreed to a stipulated preliminary injunction as to the trademark issues, but not as to the non-compete provision. At an evidentiary hearing, it was revealed that, although the franchisees had removed the external trade dress containing Golden Krust’s trademarks, Bullock’s son had continued to manage a Caribbean restaurant at the location, and the franchisees had not adopted a new name or trademark for the restaurant.

The court observed “that there is confusion in [the Second Circuit] regarding the appropriate standard for assessing an application for a preliminary injunction,” but that a standard appeared to have emerged from recent cases. This standard required the court to consider “the strength of the plaintiff’s claims and the irreparable harm suffered by the plaintiff absent injunctive relief,” as well as “the public interest” and the balance of “the competing claims of injury.”

Irreparable harm. The court concluded that Golden Krust had met its burden of demonstrating irreparable harm based on a loss of good will or business relationships. The court noted that “there is a recognized danger that former franchisees will use the knowledge that they have gained from the franchisor to serve its former customers, and that continued operation under a different name may confuse customers and thereby damage the good will of the franchisor.” That danger was enhanced where, as here, the former franchisees continued to operate in the same location.

Moreover, the franchisees “brazenly sought to exploit [Golden Krust’s] good will” by displaying signs reading “Come in. We are Open. Nothing has Changed Only Our Name,” and “Open. Same Great Food, Same Great Service.” Further, although the franchisees had removed Golden Krust’s trademarks from the restaurant by the present stage of the litigation, they had continued to display the trademarks after the termination, and had made no attempt to post a new name or trademark. The court found there was “photographic evidence” that the franchisees had attempted to misappropriate Golden Krust’s customers.

However, the court found Golden Krust had not met its burden of demonstrating irreparable harm as to the franchisees’ misappropriation of Golden Krust’s trade secrets. Golden Krust had provided no evidence of specific trade secrets or confidential information that had been misappropriated. Even if they had, the court observed that there was no presumption of irreparable harm where a misappropriator only seeks to use trade secrets in pursuit of profit, without disseminating them or otherwise impairing their value. Here, the franchisees would have no incentive to disseminate Golden Krust’s trade secrets, since they “presumably would want to use that information and maintain its confidentiality for their own pecuniary benefit.”

Likelihood of success on the merits. Golden Krust had also established a likelihood of success on the merits, according to the court. The franchisees’ alleged conduct in selling food products from Golden Krust’s competitors in Golden Krust packaging went against the provisions in the franchise agreement prohibiting engaging in “dishonest or unethical conduct” that would affect Golden Krust’s reputation, and prohibiting the use of Golden Krust’s trademarks with unauthorized products, and therefore would constitute a breach of the agreement.

The court observed that New York law permitted a court to partially enforce a non-compete provision. Although Golden Krust had limited its preliminary injunction request to “owning or operating a Caribbean-style restaurant or food service business,” the court concluded that the geographic scope of the provision was still “somewhat overbroad.” The court noted “that most consumers in that region will not travel ten miles—or even five miles—to a fast-food establishment,” and concluded that “a four-mile restriction from the Franchise location is more appropriate.” Further, given “the close proximity between at least some Golden Krust locations,” the court limited the injunction as to other Golden Krust locations to two and one half miles from any other location.

Balance of equities. Although the former franchisees would suffer harm from having to either cease operating their restaurant or to convert it to an establishment that did not sell Caribbean food, the court concluded that “any harm appears to stem from defendants’ own wrongful conduct,” and therefore their harm did not outweigh the harm to Golden Krust.

Public interest. The court found that the former franchisees provided only their own self-serving assertions” that the public interest would be harmed by the injunction, and that “there is likely a greater harm to the public in the form of consumer confusion if defendants are not enjoined.” Therefore, Golden Krust had established that it was entitled to a preliminary injunction, in the court’s view.

Enforceability against franchisee’s son. The court rejected the former franchisees’ argument that Bullock’s son, who was currently operating the restaurant, was not a party to the action and was not a signatory to the franchise agreement, and therefore could not be bound by the non-compete provision. The court observed that Bullock had admitted at the evidentiary hearing that her son managed the restaurant as her agent. The assertion that Bullock would have no involvement in the operation of the restaurant if an injunction issued amounted to “mere attorney argument,” not evidence, and in any case the non-compete provision barred Bullock from having any “direct or indirect interest” in a competing business.

Bond. The court required Golden Krust to post a $20,000 bond before it would issue an injunction. The court determined that this amount would represent almost three months of payments under Bullock’s lease. Although the former franchisees would require a significant amount of time to transition to a non-Caribbean restaurant, the court declined to impose a bond amounting to the entire remainder of the lease because the franchisees would not require until the end of the lease to open a newer restaurant and mitigate their damages. Moreover, the franchise was unprofitable, and there was a “strong possibility” that the franchisees would have defaulted on their lease. In addition, Golden Krust was likely to succeed on the merits of its claims.

The case is No. 13-CV-2241 (RLM).

Attorneys: Vincent L. DeBiase (Corbally, Gartland and Rappleyea, LLP) for Golden Krust Patties, Inc. Jeffery A. Meyer (Kaufman, Dolowich, Voluck & Gonzo, LLP) for Marilyin Bullock.

Companies: Golden Krust Patties, Inc.; Marilyn’s Patties, Inc.

Cases: FranchisingDistribution NewYorkNews