Little Caesar Enter. v. R-J-L Foods

Full title: LITTLE CAESAR ENTERPRISES, INC., a Michigan corporation, et al.…

Court: United States District Court, E.D. Michigan, S.D

Date published: Apr 2, 1992

796 F. Supp. 1026 (E.D. Mich. 1992)

Opinion

Civ. A. No. 92-CV-71185-DT.

April 2, 1992.

Alan C. Harnisch, Bingham Farms, Mich., for plaintiffs.

David Hess, Warren, Mich., for defendants.

MEMORANDUM OPINION AND ORDER

EDMUNDS, District Judge.

I.

This matter is before the Court on Plaintiffs' motion for a preliminary injunction and Defendants' motion for a temporary restraining order (TRO) and/or preliminary injunction. Having heard arguments of counsel, and upon consideration of the parties pleadings and written submissions, the Court hereby grants Plaintiffs' motion and denies Defendants' motion.

Plaintiff Little Caesar Enterprises (LCE) operates and grants franchises for pizza stores and restaurants. The grant of a franchise authorizes the franchisee to use various licensed rights; including the name "Little Caesar" and other registered trademarks, service marks, trade names, logos, commercial symbols and copyrights developed by LCE.

Defendants/Counter-Plaintiffs R-J-L Foods (RJL) and the other named Defendants (hereafter Defendants or RJL Franchisees), currently own and operate ten "Little Caesar" stores in the state of Connecticut. Defendants purchased a total of thirteen stores from 1987 to 1991. Three of the franchises are no longer active. The franchise agreements¹ between Plaintiffs and Defendants contain forum selection and choice of law provisions which provide that Michigan courts and Michigan law applies in disputes such as the one presently before the Court. Under the franchise agreements, Defendants acquired the right to use the licensed rights in connection with the advertising and sale of pizza and related food products of LCE. Among Defendants' obligations were the requirements that Defendants operate the franchises in conformance with required product specifications; and to pay royalty, product, and advertising fees. The franchise agreements further required the franchise owner to pay its debts in a timely manner.

1 For ease of reference, all citations to specific provisions in the franchise agreements (which the parties concede are the same for purposes of these motions) will be to the Franchise Agreement (Franchise Agreement) attached to Defendants' Brief in Support of Motion for TRO and/or Preliminary Injunction.

In late 1989/early 1990 LCE, through THE LITTLE CAESARS NATIONAL ADVERTISING PROGRAM (LCNAP), the other plaintiff in this case, commenced a new national advertising strategy for special or promotional products which included nationally advertised prices. LCNAP advertised in what Defendants describe as the RJL Franchisees "Area of Dominant Market Influence" (ADI) in Connecticut. Defendants conformed for a short time to LCE and LCNAP's first product and price promotion. Defendants claim that they suffered customer complaints due to the poor quality of the promotional goods, which they allege are inferior to LCE's standard products. The franchise owners further contend that they realized that they could not sell the allegedly inferior promotional products without suffering a loss of goodwill. RJL Franchisees therefore asked LCE to be exempted from the national advertising; or in the alternative, that the advertisements disclose to the customers that the "promotional" items were of lesser quality than LCE's standard goods. LCE apparently denied these requests. Defendants also requested that disclaimers be placed on the advertisements disclosing that the promotional items were not available in Connecticut at the price stated, such as was being done in Alaska and Hawaii. This request also was denied.

Defendants therefore decided to exercise their option under the franchise agreements to determine prices. ( See Franchise Agreement § VIII). For some period of time, their prices exceeded the nationally advertised price.

On October 8, 1991 LCE notified the RJL Franchisees of its intent to terminate the franchise agreements for allegedly:

1. failing to file required royalty reports;

2. failing to pay royalty fees;

3. failing to pay advertising fees;

4. failing to pay its debts in a timely manner; and

5. failing to operate in conformance with required product specifications.

( See October 8, 1991 letter from LCE, Charles P. Jones, Vice Chairman, attached as Exhibit G to the Verified Complaint). The franchise agreements provide that the effective date of termination is thirty day from the franchise owner's receipt of the Notice. ( See Franchise Agreement § XIX).

On November 14, 1991, the RJL Franchisees informed LCE of their intent to cure all arrearages. ( See November 14, 1991 letter from RJL counsel, Philip G. Jameson, attached as Exhibit 1 to Plaintiffs' Brief). That letter states in full:

I am writing to you regarding Mary Jo Teel's letter to RJL Foods, Inc., dated November 6, 1991.

Many of the operational modifications suggested by LCE at the October 29, 1992, meeting have been put into place. However, there are a number of items which are yet to be addressed. Specifically, we would like to move forward without further delay with Mike Shaub's suggestion that he speak with our Landlords in an attempt to lower our rental obligations and in abolishing RJL's present manager's bonus program in favor of LCE's.

The marketing people have met in Connecticut and have agreed that the advertising budget has been slashed to the bone and that the current vehicles being used are correct given the current availability. The only issue to be addressed is attempting to lower the assertion rate which Mike Deitz will be addressing shortly.

As for Mary Jo Teel's letter, Rich Cueny and I will be speaking shortly to finalize negotiations to cure the present arrearages. It is my understanding that Mr. Cueny and Frank Lombardo have been addressing this issue and have finalized the amounts due.

I am under the impression from our last conversation that so long as we are making continuous and regular progress with regard to curing the arrearages that LCE will not take any definitive action to terminate our franchise and will us allow ample time to resolve this issue.

RJL sincerely appreciates all of the efforts that LCE has made and we hope that we will be able to move forward in this continuing spirit of cooperation.

Subsequently, Defendants requested an extension until December 16, 1991, ( see Exhibit H to the Verified Complaint); which LCE granted. Defendants failed to cure on that date. Furthermore, the RJL Franchisees then informed LCE that although Defendants intended to make their food account current, they did not intend to pay their royalty or advertising accounts at that time. ( See December 10, 1991 letter from Anthony J. Caputo, attached as Exhibit 2 to Plaintiffs' Brief). After continued attempts to work out a plan for curing the default were unsuccessful, LCE terminated Defendants' franchise agreements and all licensed rights on March 4, 1992.

Defendants concede that they are in arrears but contend that the termination is in reality an attempt to "bring them back into line" for refusing to participate in the marketing scheme. The RJL Franchisees refer to a letter sent by LCE to the RJL Franchisees which Defendants allege "ma[kes] clear that they had a limited future with LCE. ( See September 17, 1991 letter from Mike Shaub, Regional Vice President, Northeast Franchise Development of LCE, to Frank Lombardo). This letter of course precedes the meetings and discussions in October and November where the defendant franchisees acknowledged the problem of their arrearages and expressed their appreciation with LCE's patience in working with them to cure the problem. In further support of this argument, Defendants point out that their termination immediately followed the election of Philip G. Jameson, an attorney and one of the RJL Franchisees, to the Board of Directors of the newly formed Association of Little Caesar's Franchisees, Inc.

In their motion for preliminary injunction, Plaintiffs request that this Court:

1. enjoin Defendants from using the "Little Caesar" name, trademarks, service marks, insignias or logos or any word or words confusingly similar to the licensed rights; from competing with LCE for a two year period after the effective date of terminations provided under section XVII. C. 3 of the Franchise Agreement; and diverting or attempting to divert any business or customer of LCE in accordance with section XVII. C. 1;

2. issue a mandatory injunction against Defendants, ordering them to remove immediately any and all indicia of the "Little Caesar" name and other registered trademarks and service marks; and further requiring Defendants to present an affidavit to the Court within thirty days of the order indicating any and all efforts taken to comply with the Court's order.

In contrast, Defendants seek a TRO and/or preliminary injunction ordering in principal part that:

1. the franchise agreements remain in full force and effect during the pendency of this matter;

2. LCE sell to RJL Franchisees food and trademark supplies from its affiliate Blue Line Distributing, Inc. under its standard terms previously extended To Defendants prior to the March 4, 1992 termination; and

3. LCE and LCNAP are restrained from placing within RJL's Franchisees' ADI any television, radio, or printed advertisements which promote any specific product or products of different specifications than the standard LCE specifications.

II.

Both parties have brought motions for a preliminary injunction. A court must consider four factors in deciding whether to issue a preliminary injunction:

1. whether the movant has shown a strong or substantial likelihood of success on the merits;

2. whether the movant has demonstrated irreparable injury;

3. whether the issuance of a preliminary injunction would cause substantial harm to others; and

4. whether the public interest is served by the issuance of an injunction.

Parker v. United States Dep't. of Agric., 879 F.2d 1362, 1367 (6th Cir. 1989). The foregoing are factors to be balanced, not prerequisites to be met. In re DeLorean Motor Co., 755 F.2d 1223, 1229 (6th Cir. 1985). Where the three factors other than the likelihood of success all strongly favor issuing the injunction, a district court is within its discretion in issuing a preliminary injunction if the merits present a sufficiently serious question to justify a further investigation. Id. at 1230. See also Friendship Materials, Inc. v. Michigan Brick, Inc., 679 F.2d 100, 105 (6th Cir. 1982). Alternatively, the court may also issue a preliminary injunction if the movant "at least shows serious questions going to the merits and irreparable harm which decidedly outweighs any potential harm to the defendant if an injunction is issued." Frisch's Restaurant, Inc., v. Shoney's Inc., 759 F.2d 1261, 1270 (6th Cir. 1985) (citations omitted).

A. Likelihood of Success

The first factor for an issuance of an injunction is whether the moving party is likely to succeed on the merits of his/her claim. In the instant case Plaintiffs have filed a Verified Complaint and Defendants have filed a Verified Counter-Complaint and Amended Verified Counter-Complaint. At the hearing conducted on Tuesday, March 24, 1992, both sides indicated that they were willing to stand on their pleadings unless the Court desired further testimony. The Court will therefore treat all allegations as true for purposes of deciding the motions before it today. Additionally, since both parties seek injunctive relief, both are movants in this case and must have met their burden of proof before the Court will grant the relief requested.

Plaintiffs' request for a preliminary injunction is based upon the fact the RJL Franchisees have continued to use the "Little Caesar" name and other licensed rights even though they have been terminated, in violation of Franchise Agreement section XIX. C. 2. The section provides in pertinent part that "[u]pon termination or expiration of this Agreement, Franchise Owner shall immediately cease to be a licensee of LITTLE CAESAR and . . . [f]ranchise owner must cease using the name LITTLE CAESAR and other PROPRIETARY MARKS. . . ." Plaintiffs claim that they rightfully terminated Defendant Franchisees for failing to pay royalty, advertising and product fees in a timely manner as is required under section XIX. B. of the Franchise Agreements. Thus, Plaintiffs assert that RJL's continued use of the "Little Caesar" name constitutes infringement under 15 U.S.C. § 1114 and 1125(a). The case law is clear that the unauthorized use of a registered trademark is a violation of the federal trademark statutes. Thus the Court agrees that Plaintiffs meet their burden for a preliminary injunction if it is established that the use was unauthorized. The Court will therefore devote most of its energy to Defendants' argument, because the Court feels that the issue in this case turns on the contract issue raised by Defendants.

As noted, Defendants concede that they are in arrears on the required payments but contend that they were essentially forced into breach by LCE and LCNAP's advertising and pricing policies and by Plaintiffs' coercive conduct of requiring them to participate in the national advertising program. Furthermore, Defendants contend that this coercive conduct by Plaintiffs constituted a violation of the franchise agreements; specifically the "Pricing Policy" provision of the contracts, under section VIII, which provides in relevant part that "[t]he final decision as to all such manner of pricing however shall be made solely by Franchise Owner;" and section VI. D. 3, which states that it is the franchise owner's option "to display promotional signs or other written materials or participate in other promotions, in the manner, from which time to time may be provided by LITTLE CAESAR. . . ." ( See Franchise Agreement, at §§ VIII; VI. D. 3).

In legal support for the argument that a preliminary injunction should issue in their favor, Defendants rely on the principle that "[h]e who commits the first substantial breach of a contract cannot maintain an action against the other contracting party for failure to perform;" citing Jones v. Berkey, 181 Mich. 472, 148 N.W. 375 (1914); and Ehlinger v. Bodi Lake Lumber Co., 324 Mich. 77, 89, 36 N.W.2d 311 (1949). Defendants also observe correctly that the principle is applicable only when the breach is substantial and offer the following quote from McCarty v. Mercury Metalcraft Co., 372 Mich. 567, 574, 127 N.W.2d 340 (1964):

[T]he words "substantial breach" in the ruling must be given close scrutiny. Such scrutiny discloses that the application of such rule can be found only in cases where the breach has effected such change in the essential operative elements of the contract that further performance by the other party is thereby rendered ineffective or impossible, such as causing a complete failure of consideration or the prevention of performance by the other party.

Id. (citations omitted). See also National Teleinformation Network, Inc. v. Michigan Public Service Comm'n., 687 F. Supp. 330, 337 (W.D.Mich. 1988) (relying on McCarty, the federal district court held that NTN was precluded from suing Michigan Bell for the latter's failure to carry NTN's sponsored program service where NTN was the first party to fail to comply with an explicit agreed-upon contract term).

Defendants assert that LCE and LCNAP's activities and conduct with regard to the national advertising strategy, namely the price point national advertising, constitutes the initial substantial breach in this case since LCE did not reserve to itself in the franchise agreements even a right to suggest pricing. Rather, Defendants point to language in the Pricing Policy of the franchise agreements which provides that "LITTLE CAESAR may, UPON REQUEST, provide the Franchise Owner with information for its CONSIDERATION in establishing prices for the food products advertised, sold and offered for sale by Franchise Owner;" and that " UPON REQUEST of Franchise Owner, LITTLE CAESAR shall advise it of menu price variation. . . ." (Emphasis added by Defendants). To demonstrate that the breach was substantial, Defendants allege that they could not remain solvent at the promotional prices since customers demanded the television advertised promotional product at the television price; while at the same time expecting the quality of pizzas to be that of the standard, as opposed to the promotional, pizza. Defendants state that they lost money attempting to meet both demands.

Defendants' argument is not without some force. The Court finds however on the basis of the facts set forth in Defendants' brief, motion and Amended Verified Counter-Complaint, that it is Defendants themselves who committed the initial substantial breach in this case by repeatedly failing to make royalty, advertising and product payments to Plaintiffs. The Affidavit of Richard T. Cueny, Vice-President of Finance and Internal Control of LCE, states that Defendants have outstanding royalty fees due to LCE since July 1, 1991; outstanding advertising fees due to LCNAP since June 1, 1991; and outstanding food product fees owed to Blue Line Distributing, Inc., more than fourteen days, which is its due date. ( See Cueny Affidavit at ¶¶ 3-7). Furthermore, and of particular importance here, Defendants have conceded at oral argument on March 24, 1992 and in their brief that they have been in arrears on at least their royalty and LCNAP payments since their inception, that is, since 1987. (Defendants' Brief at 6). In fact, Defendants rely on that fact in arguing that issuance of an injunction in their favor would cause no harm to others, including Plaintiffs, since that has been the state of affairs for a long time. Thus it appears that Defendants have been in continuous default under the franchise agreement for a period exceeding four years, while the earliest date on which LCE is alleged to have breached the agreement would be some time in early 1990, when LCE allegedly first advertised in Defendants Area of Dominant Market Influence without the RJL Franchisees' consent. That is, the first significant breach is that of Defendants, not Plaintiffs. Moreover, based on the exhibits which were attached to the verified pleadings, Plaintiff LCE appears to have made substantial efforts to work with Defendants in reducing the amounts in arrears. As late as November 1991, Defendants were thanking LCE for its patience and assistance, and were not complaining about LCE's conduct as having caused the breach.

Although Defendants attempt to make some sort of estoppel argument in that LCE has repeatedly allowed them the opportunity to cure, the non-waiver clause in the franchise agreement destroys that argument. That provision states:

XX. NON-WAIVER

A failure by LITTLE CAESAR to exercise any right hereunder or otherwise waive or condone any delay or failure by Franchise Owner to comply with any of the terms or conditions of this Agreement, shall not constitute a waiver of any such requirements or provisions, waive LITTLE CAESAR's right to terminate this Agreement, or exercise any other right of LITTLE CAESAR under this Agreement.

Having said all that, there is a more fundamental legal reason, based on contract principles why Defendants cannot prevail on this argument. The fact that LCE may have breached the agreement does not entitle Defendants to breach themselves by not making royalty, advertising and supply payments. Defendants' failure to make those payments constitutes an independent breach, and Plaintiff LCE is entitled to assert the remedy of termination in response to that breach. Like the defendants in Burger King Corp. v. Austin, Bus. Franchise Guide (CCH), ¶ 9788 (S.D.Fla. December 26, 1990, modified February 22, 1991), the RJL Franchisees have failed to preserve their right to recover for the alleged breaches and continue to use the "Little Caesar" trademark, by ceasing to pay the advertising, royalty and food product fees. The following quote from that case applies with equal force here:

Even assuming the breach of contract claims are adequately pled, Defendants still are unlikely to prevail on Plaintiff's trademark infringement claims. When one party to a contract materially breaches his duties under the contract, the other party may proceed in one of two ways. He can either consider the contract terminated and sue for total breach, or he can continue his performance and sue for partial breach. Calamari Perillo, Contracts § 11-37 (1977); Restatement (Second) of Contracts § 236 comment b. As Defendants have ceased paying the amounts due under the franchise and lease agreements, they seem to have chosen the first option of considering BKC's alleged breach a total breach. Thus, Defendants themselves appear to have terminated their contractual relationship with BKC. See 4 Corbin on Contracts § 946, at 809-10. Although Defendants may prevail on their breach of contract claims, thus excusing them from paying the amounts currently due and perhaps entitling them to further damages, the Court cannot see how this separate cause of action entitles them to continued rights under the franchise agreement.