Opinion
CIV. NO. 03-0283-E-BLW.
July 18, 2003.
MEMORANDUM DECISION AND ORDER
INTRODUCTION
The Court heard oral argument on a motion for preliminary injunction filed by McDonald's and a motion to dismiss filed by Leadership Systems. For the reasons expressed below, the Court will deny the motion to dismiss and issue an injunction.
ANALYSIS
Leadership operates three McDonald's restaurants in the Pocatello area under franchise agreement with McDonald's. The franchise agreements give McDonald's the right to inspect the restaurants at "all reasonable times."
When Leadership tried to sell the franchises, McDonald's allegedly interfered with the sales, prompting Leadership to file suit in state court against McDonald's. When Leadership refused to allow McDonald's to conduct inspections of its restaurants, McDonald's brought this suit to compel Leadership to allow the inspections.
On July 8, 2003, the Court issued a temporary restraining order (TRO) enjoining Leadership from blocking the inspections. The Court later stayed that TRO until the parties could be heard on McDonald's motion for preliminary injunction on July 18, 2003. The Court has now conducted that hearing and reviewed the briefing of the parties.
Before turning to the injunction issues, the Court must first resolve the challenge to its jurisdiction raised by Leadership's motion to dismiss. Steel Company v. Citizens For A Better Environment, 118 S.Ct. 1003 (1998) (holding that jurisdictional issues must be resolved before the Court may proceed to the merits). Leadership claims the Court lacks federal question jurisdiction because the sole federal claim, under the Lanham Act, should be dismissed. At most, Leadership asserts, this is a breach of contract action, and McDonald's has no Lanham Act case until it terminates the License Agreement.
The Court finds some merit in Leadership's argument but it makes no difference. Even without a federal question, the parties are diverse. Thus, the Court has subject matter jurisdiction. Leadership's counsel alleged at oral argument that the claims of McDonald's for inspections could not amount to the jurisdictional limit of $75,000, but the Court disagrees. The potential harm through a loss of business, caused by the blocked inspections, could easily exceed that sum.
Because the Court is assuming that there is no federal question, the Court need not resolve whether the Lanham Act claim should be dismissed at this time. Leadership is free to raise this issue at a later date when more consideration can be given to the briefing.
Leadership counters that if this Court bases its subject matter jurisdiction on diversity, then Erie and the franchise agreements require the application of Illinois law, specifically an Illinois statute that prohibits the filing of a second suit that duplicates issues already present in an existing action. See 735 ILCS § 2619(a)(3). That statute, Leadership contends, warrants dismissal of this suit because it duplicates issues in the state court action.
Leadership brings this argument under Rule 12(b)(6) rather than Rule 12(b)(1) because the argument is not challenging subject matter jurisdiction but rather alleges a failure to state a claim.
The Court disagrees. Even if Illinois law applies, the statute cited by Leadership only applies to an action "for the same cause." The Idaho state action, brought by Leadership alleging that McDonald's interfered with its sale of the franchises, is not the same as this case, brought by McDonald's seeking to inspect the franchises. Thus, the presence of the state court action does not warrant dismissal of this suit even if the Illinois statute applies.
The Court will assume, without deciding, that the Illinois statue is substantive and hence applicable here under Erie. In fact, the Court has serious questions about this assumption, but it is not necessary to answer those questions at this time.
The Court will therefore deny Leadership's motion to dismiss, and finds that it has subject matter jurisdiction over this case. Turning to the injunction issue, the legal standard for injunctive relief is well-established in this Circuit. McDonald's is entitled to a preliminary injunction if it demonstrates that it is likely to succeed on the merits and may suffer irreparable injury, or that serious questions exist on the merits and the balance of hardships tips in its favor. See Self-Realization Fellowship Church v. Ananda, 59 F.3d 902, 913 (9th Cir. 1995). The two tests are not separate but represent a sliding scale in which the required probability of success on the merits decreases as the degree of harm increases. Id "Under any formulation of the test, the plaintiff must demonstrate that there exists a significant threat of irreparable injury." Oakland Tribune, Inc. v. Chronicle Publishing Co., 762 F.2d 1374, 1376 (9th Cir. 1985).
McDonald's is exposed to irreparable harm. The inability to conduct inspections could lead to denigration of the brand, diminished goodwill associated with the brand, and fewer customers. Such damage is generally held to be irreparable. See Stuhlbarg International Sales Co. v. Brush and Co., 240 F.3d 832 (9th Cir. 2001). (holding that prospective loss of customers and goodwill supports a finding of irreparable harm).
The balance of hardships tips decidedly toward McDonald's. Without inspections to identify and cure problems, McDonald's reputation could suffer substantial damage. The corresponding harm to Leadership of having to endure unannounced inspections is much less — the element of surprise is largely gone, as Leadership is now on notice that an inspection could occur at any time. Moreover, Leadership has had over a month since the last inspection to remedy any problems.
The Court is not convinced by Leadership's argument that the franchise agreements are ambiguous on whether McDonald's is entitled to conduct unannounced inspections. Those agreements give McDonald's the right to conduct inspections at "all reasonable times," a phrase that is broad enough to encompass both announced and unannounced inspections.
For all of these reasons, the Court finds that it has jurisdiction to enter a preliminary injunction, prohibiting Leadership from blocking in any manner McDonald's inspections "at all reasonable times," announced or unannounced.
ORDER
In accordance with the Memorandum Decision set forth above,
NOW THEREFORE IT IS HEREBY ORDERED, that the motion for preliminary injunction (docket no. 2) is GRANTED.
IT IS FURTHER ORDERED, that defendant, and all those listed in Rule 65(d), are hereby enjoined from blocking or preventing in any manner inspections conducted by McDonald's at all reasonable times, announced or unannounced.
IT IS FURTHER ORDERED, that the preliminary injunction shall remain in effect until ordered by the Court, The injunction shall become effective upon the filing by McDonald's of a bond in the sum of $1,000 with the Clerk of the Court,
IT IS FURTHER ORDERED, that the motion to dismiss (docket no. 20) is DENIED.