Court Watch

Plaintiff notified the Denver franchisees that it was terminating the franchise agreements pursuant to a clause in the franchise agreement that allowed Steak 'n Shake immediately to terminate the agreement without notice or opportunity to cure if a franchisee knowingly failed to offer a mandatory promotion or knowingly sold products for a price in excess of any maximum prices established by Steak 'n Shake. The franchisor also terminated the development agreement, based on defendants' failure to open a third franchised store. Despite the termination, the franchisees continued to operate their Steak 'n Shake restaurants.

Steak 'n Shake filed suit, alleging that the former franchisees failed to comply with their post-termination obligations, which prohibited them from using any secret recipes, confidential and proprietary information, the Steak 'n Shake marks, Steak 'n Shake exterior and interior design, and a Steak 'n Shake telephone number and Web address. In addition, Steak 'n Shake sought to preliminarily enjoin the alleged trademark infringement and unfair competition claims, and to enforce defendant's post-termination obligations, including the non-compete agreement.

The court found the franchisor demonstrated substantial likelihood of success at trial because the franchisor had terminated the agreement as a result of the defendants' failure to participate in promotions. The former franchisees claimed that they had participated, arguing that it was sufficient to make the inserts available to customers who requested them, even if they did not provide the menu to every customer. The court disagreed, finding that this did not fulfill defendants' obligations, and was “rank resistance to the promotion hiding behind a mask of linguistic cooperation.” Further, the alteration of menu prices was an independently valid ground for terminating the franchise agreement. The court also found that the defendants were in default of the development agreement for failure to open the third restaurant.

Further, the defendants' continued operation of the Steak 'n Shake restaurants after termination was unauthorized and likely to cause confusion; this constituted trademark infringement and unfair competition under the Lanham Act. The court stressed that when a licensee continues to use a mark after authorization has been revoked, the potential for consumer confusion is greater than in the case of a random infringer. This harmed the goodwill in plaintiff's brands, causing irreparable injury.

The court ordered defendants to cease operating the restaurants, and instructed them to comply with all post-termination obligations, including the two-year covenant not to compete.

Noting New York City's Density, Court Enforces, But Limits, Restrictive Covenant

In Golden Krust Patties Inc. v. Marilyn Bullock, No, 13-cv-2241 (RLM), 2013 WL 3766551 (S.D.N.Y. July 16, 2013), the U.S. District Court for the Eastern District of New York recently issued a preliminary injunction, enforcing the non-compete provision in franchisor Golden Krust's franchise agreement with former franchisees, thereby enjoining the defendants from operating a Caribbean-style restaurant within four miles of the franchise location and two-and-a-half miles from other Golden Krust franchises.

Following the franchisor's discovery that the then-franchisees were selling competing products in Golden Krust packaging in violation of the parties' franchise agreement, the franchisor sent a termination letter. The franchisor then filed suit, asserting claims for breach of contract and misappropriation of trade secrets and sought a preliminary injunction enjoining the defendants from 1) using or displaying the franchisor's trademarks or otherwise engaging in actions that would cause confusion as to the franchisee's goods and services, and 2) operating a business within the geographical scope of the non-compete provision.

The court first endeavored to set forth the relevant test for a preliminary injunction, noting the confusion within the Circuit. The court next concluded that it must consider the balance of hardships even where a plaintiff demonstrates a likelihood of success on the merits. However, even if the plaintiff does not demonstrate a likelihood of success on the merits, he still may meet his burden for showing that an injunction is warranted by establishing 'sufficiently serious questions going to the merits to make them a fair ground for litigation' and that the balance of hardships 'tips decidedly' in his favor.

Regarding the franchisor's contention that it would suffer irreparable injury due to its loss of good will or business relationships, the court found significant photographic evidence showing that even though the former franchisees removed the Golden Krust trade dress, they brazenly sought to exploit the franchisor's goodwill by failing to adopt a new store name. In addition, the store also displayed signs declaring 'Come in. We are Open. Nothing has Changed Only Our Name,' and 'Open. Same Great Food. Same Great Service.' Thanks for Your Support!!! Come Again.' The court did not find, however, that the franchisor would suffer irreparable harm based on the franchisee's misappropriation of trade secrets, reasoning that the franchisor failed to provide any specific details as to what trade secrets or confidential information was misappropriated, and presented no evidence establishing the harm it would suffer absent an injunction.

As to the franchisor's likelihood of success on the merits, the court found the non-compete covenant was enforceable, but blue-penciled the agreement's restriction of barring the defendants from operating a competing business within 10 miles of the franchise for a two-year period and within five miles of another Golden Krust location. Taking judicial notice of the dense population of New York City, the court concluded that restricting the defendants from operating a Caribbean-style restaurant within a four-mile radius of the franchise location and a two-and-a-half-mile radius of other Golden Krust locations was reasonable.

Upon concluding that the balance of harms and public interest favored the issuance of an injunction, the court granted the franchisor's motion.

'

Presidential Executive Order Gives Ford Right to Terminate Syria Contract

The issue of whether President Obama's 2011 executive order instituting an embargo against Syria provided Ford the right to terminate its dealership agreement with a Syrian auto dealer, was recently addressed by the U.S. District Court for the Southern District of Michigan in Ford Motor Co. v. Ghreiwati Auto, No. 12-14313, 2013 WL 5954488 (S.D. Mich. Nov. 7, 2013). The court answered in the affirmative, finding that the parties' dealership agreement, which provided for payment, reimbursement and shipment of goods directly to Syria, would violate the executive order. It therefore granted Ford's motion for summary judgment on its declaratory judgment claim that it properly terminated the agreement and the auto dealer's counterclaims for breach of contract, promissory estoppel and unjust enrichment.

In 2003, the parties entered into the agreement, pursuant to which Ford would supply vehicles to the auto dealer and the auto dealer would sell the vehicles and use Ford's trademarks. However, in 2011, President Obama issued an executive order barring trade with Syria, and Ford terminated the agreement. The franchisee sued.

Pointing to federal and Michigan case law, the court found that agreements that violate executive orders are unlawful, and held that the executive order prohibited Ford's performance under the agreement. Thus, Ford had a right to discharge the contract without liability for breach of contract. Bolstering the court's conclusion was the fact that the agreement expressly allowed Ford to terminate if a law prohibited its performance.

'

Lauren Sullins Ralls is an associate in the Atlanta office of Kilpatrick Townsend & Stockton LLP. She can be contacted at 404-532-6967 or [email protected].

Preliminary Injunction Issued Against Franchisees That Disregarded Pricing Promotion

In a decision that demonstrates the ability of franchisors to enforce mandatory pricing promotions to maintain system-wide uniformity, two Denver Steak 'n Shake franchisees and affiliates were ordered to immediately cease operations after they failed to comply with national pricing and marketing policies. In Steak N. Shake Enterprises Inc. v. Globex Company, LLC, No. 13-cv-01751-RM-CBS (D. Colo. Sept. 3, 2013), the U.S. District Court for the District of Colorado granted franchisor Steak 'n Shake's motion for a preliminary injunction against franchisees who continued to operate after Steak 'n Shake terminated their franchises for failing to comply with system-wide uniform pricing for its meals and menu items.

In 2012, the defendants opened two franchised Steak 'n Shake restaurants in Colorado with the obligation to open a third franchise by June 2, 2013. In the summer of 2013, Steak 'n Shake rolled out several new promotions, including a new $4 meal that was promoted on a special menu insert. The franchisor also provided its franchisees with new menus and marketing materials, which franchisees were required to institute. Shortly thereafter, Steak 'n Shake learned that the defendants had not implemented the $4 menu. Indeed, instead of charging customers the discounted meal price, the defendants charged customers ' la carte prices for each individual item, which totaled more than the meal price. In addition, the defendants altered the official menus provided by Steak 'n Shake to increase prices. After Steak 'n Shake remotely disabled the a la carte functionality in the franchisees' point-of-sale (POS) systems, defendants began using the official menus but still did not provide customers with the $4 meal menu inserts unless specifically requested by a customer. The defendants later claimed that they were forced to charge higher prices since the uniform pricing was unprofitable in certain areas, including Colorado. Although the franchisor gave the defendants an opportunity to cure the breach, they did not do so, and also failed to open the third restaurant in violation of the development agreement.

Plaintiff notified the Denver franchisees that it was terminating the franchise agreements pursuant to a clause in the franchise agreement that allowed Steak 'n Shake immediately to terminate the agreement without notice or opportunity to cure if a franchisee knowingly failed to offer a mandatory promotion or knowingly sold products for a price in excess of any maximum prices established by Steak 'n Shake. The franchisor also terminated the development agreement, based on defendants' failure to open a third franchised store. Despite the termination, the franchisees continued to operate their Steak 'n Shake restaurants.

Steak 'n Shake filed suit, alleging that the former franchisees failed to comply with their post-termination obligations, which prohibited them from using any secret recipes, confidential and proprietary information, the Steak 'n Shake marks, Steak 'n Shake exterior and interior design, and a Steak 'n Shake telephone number and Web address. In addition, Steak 'n Shake sought to preliminarily enjoin the alleged trademark infringement and unfair competition claims, and to enforce defendant's post-termination obligations, including the non-compete agreement.

The court found the franchisor demonstrated substantial likelihood of success at trial because the franchisor had terminated the agreement as a result of the defendants' failure to participate in promotions. The former franchisees claimed that they had participated, arguing that it was sufficient to make the inserts available to customers who requested them, even if they did not provide the menu to every customer. The court disagreed, finding that this did not fulfill defendants' obligations, and was “rank resistance to the promotion hiding behind a mask of linguistic cooperation.” Further, the alteration of menu prices was an independently valid ground for terminating the franchise agreement. The court also found that the defendants were in default of the development agreement for failure to open the third restaurant.

Further, the defendants' continued operation of the Steak 'n Shake restaurants after termination was unauthorized and likely to cause confusion; this constituted trademark infringement and unfair competition under the Lanham Act. The court stressed that when a licensee continues to use a mark after authorization has been revoked, the potential for consumer confusion is greater than in the case of a random infringer. This harmed the goodwill in plaintiff's brands, causing irreparable injury.

The court ordered defendants to cease operating the restaurants, and instructed them to comply with all post-termination obligations, including the two-year covenant not to compete.

Noting New York City's Density, Court Enforces, But Limits, Restrictive Covenant

In Golden Krust Patties Inc. v. Marilyn Bullock, No, 13-cv-2241 (RLM), 2013 WL 3766551 (S.D.N.Y. July 16, 2013), the U.S. District Court for the Eastern District of New York recently issued a preliminary injunction, enforcing the non-compete provision in franchisor Golden Krust's franchise agreement with former franchisees, thereby enjoining the defendants from operating a Caribbean-style restaurant within four miles of the franchise location and two-and-a-half miles from other Golden Krust franchises.

Following the franchisor's discovery that the then-franchisees were selling competing products in Golden Krust packaging in violation of the parties' franchise agreement, the franchisor sent a termination letter. The franchisor then filed suit, asserting claims for breach of contract and misappropriation of trade secrets and sought a preliminary injunction enjoining the defendants from 1) using or displaying the franchisor's trademarks or otherwise engaging in actions that would cause confusion as to the franchisee's goods and services, and 2) operating a business within the geographical scope of the non-compete provision.

The court first endeavored to set forth the relevant test for a preliminary injunction, noting the confusion within the Circuit. The court next concluded that it must consider the balance of hardships even where a plaintiff demonstrates a likelihood of success on the merits. However, even if the plaintiff does not demonstrate a likelihood of success on the merits, he still may meet his burden for showing that an injunction is warranted by establishing 'sufficiently serious questions going to the merits to make them a fair ground for litigation' and that the balance of hardships 'tips decidedly' in his favor.

Regarding the franchisor's contention that it would suffer irreparable injury due to its loss of good will or business relationships, the court found significant photographic evidence showing that even though the former franchisees removed the Golden Krust trade dress, they brazenly sought to exploit the franchisor's goodwill by failing to adopt a new store name. In addition, the store also displayed signs declaring 'Come in. We are Open. Nothing has Changed Only Our Name,' and 'Open. Same Great Food. Same Great Service.' Thanks for Your Support!!! Come Again.' The court did not find, however, that the franchisor would suffer irreparable harm based on the franchisee's misappropriation of trade secrets, reasoning that the franchisor failed to provide any specific details as to what trade secrets or confidential information was misappropriated, and presented no evidence establishing the harm it would suffer absent an injunction.

As to the franchisor's likelihood of success on the merits, the court found the non-compete covenant was enforceable, but blue-penciled the agreement's restriction of barring the defendants from operating a competing business within 10 miles of the franchise for a two-year period and within five miles of another Golden Krust location. Taking judicial notice of the dense population of New York City, the court concluded that restricting the defendants from operating a Caribbean-style restaurant within a four-mile radius of the franchise location and a two-and-a-half-mile radius of other Golden Krust locations was reasonable.

Upon concluding that the balance of harms and public interest favored the issuance of an injunction, the court granted the franchisor's motion.

'

Presidential Executive Order Gives Ford Right to Terminate Syria Contract

The issue of whether President Obama's 2011 executive order instituting an embargo against Syria provided Ford the right to terminate its dealership agreement with a Syrian auto dealer, was recently addressed by the U.S. District Court for the Southern District of Michigan in Ford Motor Co. v. Ghreiwati Auto, No. 12-14313, 2013 WL 5954488 (S.D. Mich. Nov. 7, 2013). The court answered in the affirmative, finding that the parties' dealership agreement, which provided for payment, reimbursement and shipment of goods directly to Syria, would violate the executive order. It therefore granted Ford's motion for summary judgment on its declaratory judgment claim that it properly terminated the agreement and the auto dealer's counterclaims for breach of contract, promissory estoppel and unjust enrichment.

In 2003, the parties entered into the agreement, pursuant to which Ford would supply vehicles to the auto dealer and the auto dealer would sell the vehicles and use Ford's trademarks. However, in 2011, President Obama issued an executive order barring trade with Syria, and Ford terminated the agreement. The franchisee sued.

Pointing to federal and Michigan case law, the court found that agreements that violate executive orders are unlawful, and held that the executive order prohibited Ford's performance under the agreement. Thus, Ford had a right to discharge the contract without liability for breach of contract. Bolstering the court's conclusion was the fact that the agreement expressly allowed Ford to terminate if a law prohibited its performance.

'

Lauren Sullins Ralls is an associate in the Atlanta office of Kilpatrick Townsend & Stockton LLP. She can be contacted at 404-532-6967 or [email protected].