Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Pa.: Dunkin Donuts, Baskin-Robbins denied injunction against franchisee’s use of trademarks, (Aug 12, 2014)

By John W. Arden, J.D., LL.M.

Dunkin Donuts and Baskin-Robbins were not entitled to a preliminary injunction against a Pennsylvania franchisee’s continued operation under the franchisors’ trademarks, since the franchisee’s failure to timely remodel its store did not constitute irreparable harm to the franchisors, according to the federal district court in Pittsburgh (Dunkin Donuts Franchising LLC v. Claudia III, LLC, August 11, 2014, McHugh, G.).

Dunkin Donuts Franchising LLP is a limited liability company, with its principal place of business in Canton, Massachusetts. Baskin-Robbins Franchising is a Delaware company with its principal place of business in Canton, Massachusetts. Collectively, they operate a large franchise system across the U.S., licensing their well-known trademarks and other intellectual property and selling food and beverage products they develop. Claudia III, LLC is a limited liability company, operating a Dunkin’ Donuts/Baskin-Robbins franchise in Pennsylvania.

In 2009, the parties executed a franchise agreement in which Claudia received a license to operate a store, selling the franchisors’ food products and using their intellectual property. In return, Claudia accepted obligations to pay franchise and advertising fees, participate in training, and adhere to bookkeeping and reporting standards. The franchise agreement outlined notice and cure procedures through which the franchisors may terminate the agreement upon the franchisee’s breach.

This dispute focused on the renovation requirement in the agreement, which required the franchise to “refurbish the Store in accordance with [Dunkin’s] then-current standards” by June 5, 2013. Claudia had the obligation to pay for and complete the renovation. The franchisors retained significant control over how the franchisee could accomplish the renovation.

The renovations began in the spring of 2013. The franchisors provided a design concept and the franchisee hired an approved architect. The project was held up in the fall of 2013, when the township required further information and approval by the Department of Health before issuing a building permit. The Department of Health required some changes in the plans regarding the placement of a bathroom and a drinking water well. The court found that parties on all sides contributed to the delays holding up the remodeling, which is not yet completed.

While the franchisors argued that it was the franchisee’s responsibility to renovate the store according to the franchisor’s schedule, the court found that the franchisors maintained a significant amount of control over critical phases of remodeling projects and had an independent relationship with the architectural firm on the project. Moreover, the court noted that the drinking water well caused a delay that was not reasonably foreseeable.

Based on these renovation problems, the franchisors issued a notice of termination and currently insist that Claudia is no longer a franchise. Thus, its continued use of the franchise trademarks and trade dress allegedly constituted infringement of the franchisors’ intellectual property. Claudia responded that it complied with the franchise agreement to the extent possible, meeting all obligations but the remodeling. It continued to operate as a franchise and pay fees, which the franchisors continue to accept.

Preliminary Injunction

The franchisors sought a preliminary injunction against the franchisee’s continued use of their intellectual property. In analyzing the issuance of a preliminary injunction, a court must consider (1) the likelihood that the moving party will succeed on the merits of its claim; (2) the extent to which the moving party would be irreparably harmed without an injunction; (3) the extent to which the non-moving party would suffer irreparable harm if the injunction were issued; and (4) the public interest. In this instance, the court found that the franchisors were likely to succeed on the merits of the termination and trademark infringement claims, but that the franchisors would not suffer irreparable harm absent the injunction, the franchisee would suffer irreparable harm if the injunction were to issue, and the public interest did not favor the granting of the injunction.

Likelihood of success on merits. In order to prove that a franchisee is engage in the unauthorized use of intellectual property, a franchisor must show that the franchise agreement was properly terminated. In this instance, it was reasonably likely that the franchisors will be able to show that they properly terminated the franchise agreement, based on the franchisors’ sending of multiple notices to cure the default of late remodeling. It was not clear to the court that Claudia would be able to prove that its failure to perform was based on failures by the franchisors. Even a successful counterclaim would not mean that the agreement was not “properly terminated,” the court observed.

Irreparable harm to franchisors. Even with a finding of likelihood on the merits, the court was not persuaded that the franchisors would suffer irreparable harm without a preliminary injunction. While the Third Circuit has applied a presumption of irreparable harm from a trademark infringement, a growing number of courts have recognized that the U.S. Supreme Court decision in eBay v. MercExchange, 547 U.S. 388 (2006), appears to have prohibited them from applying an automatic presumption to circumvent the traditional equitable test for issuing a preliminary injunction. “Given the reasoning of the Supreme Court in eBay, I conclude that it prohibits me from presuming irreparable harm in this case,” the judge held. Independently evaluating the issue of irreparable harm, the court noted that Claudia continued to operate its store as before and there was “no indication that sales suffered in any way.” The only deviation was the remodeling that the franchisors required. “Because Claudia is operating in conformity with Dunkin’s rules, other than the delayed remodel, I find that any damages Dunkin may be suffering are compensable with damages.”

Irreparable harm to franchisee. The franchisors did not carry their burden of showing that their benefits from a preliminary injunction were not outweighed by irreparable injury to the franchisee. “For Claudia, entry of an injunction would be a death knell,” the court found. “An injunction would deprive Claudia of any income and leaves them with the costs of maintaining the store. A closure would also drive customers to competitors, and the customer base may not return if the store reopens.”

Public interest. The public interest did not weigh in favor of granting the preliminary injunction, according to the court. The franchisors did not allege that the franchisee was operating the franchise in a fraudulent manner or that there were any safety hazards present at the franchise.

Balancing the equities, the court concluded that the franchisors failed to carry their burden. Thus, the status quo was to be maintained and the preliminary injunction was denied.

The case is Civil Action No. 14-2293.

Attorneys: Craig R. Tractenberg (Nixon Peabody LLP) for Dunkin' Donuts Franchising, LLC and Baskin-Robbins Franchising, LLC. Ayesha Krishman Hamilton (Hamilton Law Firm PC) for Claudia III, LLC.

Companies: Dunkin' Donuts Franchising, LLC; Baskin-Robbins Franchising, LLC; Claudia III, LLC

Cases: FranchisingDistribution PennsylvaniaNews