Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.D. Ill.: Franchisee denied stay of injunction barring operation of IHOP franchise, (Nov 23, 2015)

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

A former franchisee was denied a stay of enforcement of a preliminary injunction, which enjoined him from using International House of Pancakes’ (IHOP) trademarks and system. The federal district court in Chicago denied a motion to stay because there was no evidence that the franchisee had a significant probability of success on the merits; the franchisee would face suffer irreparable harm absent a stay; the stay would not injure IHOP; and the stay would be in the public interest (Chaudhry v. International House of Pancakes, LLC, November 18, 2015, Darrah, J.).

Background. Azhar Chaudhry operated a franchised IHOP restaurant in Arlington Heights, Illinois. After Chaudhry failed four consecutive operational evaluations (OEs), IHOP terminated the franchise agreement.

Chaudhry, ARS Restaurant, Inc., and Lucky Star #5409, Inc. filed a suit against IHOP, alleging: (1) two counts of breach of contract; (2) discriminatory conduct, in violation of 42 U.S.C. § 1981; and (3) violations of the Illinois Franchise Disclosure Act. IHOP filed a counterclaim, alleging: (1) breach of contract; and (2) Lanham Act violations of trademark infringement and unfair competition.

Both parties filed motions for a preliminary injunction. The court denied Chaudhry’s motion. IHOP’s motion, to enjoin the plaintiffs from continuing to use IHOP’s trademarks and system, was granted. The plaintiffs moved to stay enforcement of the preliminary injunction pending interlocutory review.

Stay of preliminary injunction. A party seeking a stay pending appeal must show that: (1) it has a significant probability of success on the merits; (2) it will face irreparable harm absent a stay; (3) the stay will not injure the opposing party; and (4) the stay will be in the public interest, the court explained.

The court determined that the evidence submitted by Chaudhry, in support of his claim that there were questions of fact as to the integrity of the restaurant inspections and, thus, the legality of IHOP’s termination, was not sufficient to demonstrate a significant probability of success on the merits of the plaintiffs’ appeal. Whether the franchise agreement was legally terminated was not a defense to IHOP’s claim of trademark infringement, and allegations of bad faith were not relevant to a motion for a preliminary injunction to enforce contract termination based on a material breach of the parties’ franchise agreement.

Chaudhry presented no evidence to support his contention that the plaintiffs would be irreparably harmed absent a stay of the preliminary injunction. On the other hand, despite Chaudhry’s argument to the contrary, the court determined that IHOP could be irreparably harmed, due to customer confusion and potential injury to its goodwill, if Chaudhry continued to use of IHOP’s trademark.

Chaudhry also argued that the public interest would be served by allowing him to continue to operate his business because there was a strong public interest in protecting Illinois residents from abuse by unscrupulous franchisors. The court found this argument unpersuasive because there was no evidence of abuse or that IHOP was an unscrupulous franchisor.

The case is No. 15-cv-3504.

Attorneys: Carmen David Caruso (Carmen D. Caruso Law Firm) for Azhar Chaudhry, ARS Restaurant, Inc. and Lucky Star #5409, Inc. Michael David Hultquist (Dentons US LLP) for International House of Pancakes, LLC.

Companies: ARS Restaurant, Inc.; Lucky Star #5409, Inc.; International House of Pancakes, LLC

Cases: FranchisingDistribution IllinoisNews