Opinion
Civil Action No. 3:02-CV-0790-L
October 18, 2002
ORDER
Before the court are Pizza Hut, Inc.'s Application for a Temporary Restraining Order and Motion for Preliminary Injunction, filed April 17, 2002; and Defendant's Motion to Compel Arbitration, filed April 26, 2002. Plaintiff Pizza Hut ("Pizza Hut") seeks injunctive and other relief to enjoin Defendant Charles Randall White ("White") from continuing to operate his restaurant using Pizza Hut's trademarks, trade names, logos, designs, and business and merchandising systems. By order dated April 18, 2002, the court directed White to file a response to Pizza Hut's motion by April 26, 2002. Pizza Hut filed its reply to Plaintiffs response on April 30, 2002. On October 3, 2002, the court held a status conference and hearing on Pizza Hut's motion for preliminary injunction. After careful consideration of the motion, response, reply, the evidence, and the applicable law, the court, for the reasons stated herein, grants Pizza Hut's Motion for Preliminary Injunction, and grants Defendant's Motion to Compel Arbitration.
On May 2, 2002, the court referred Defendant's Motion to Compel and Demand for Arbitration to the United States Magistrate Judge. The court hereby vacates that order of reference.
In light of the court's ruling on Pizza Hut's Motion for Preliminary Injunction, its Application for Temporary Restraining order is denied as moot.
I. Factual and Procedural Background
Pizza Hut is a widely known operator of restaurants, offering primarily pizza, and has sold and advertised its services under the name and mark "PIZZA HUT" throughout the United States and in certain foreign countries. In furtherance of its business, Pizza Hut has developed and utilized a variety of trademarks, trade names, logos, designs, and business merchandising systems (collectively the "Pizza Hut Marks and System"). Pizza Hut also franchises its restaurants under the name and mark "PIZZA HUT." White operates a Pizza Hut franchise in Siler City, North Carolina.
The facts of this case are essentially undisputed. Pizza Hut and White entered into a Pizza Hut, Inc. Franchise Agreement (the "Franchise Agreement") on February 26, 1990. As part of his franchise rights, White was authorized to use the Pizza Hut Marks and System, as those terms are set forth in the Franchise Agreement, and to sell certain approved Pizza Hut products and related services. The Franchise Agreement required that White pay monthly service fees, advertising contributions and other amounts, and to adhere to certain contractual obligations as a franchisee.
By letter dated February 20, 2002, Pizza Hut notified White that he was in default under the terms of the Franchise Agreement. The letter asserted numerous breaches of the Franchise Agreement, and afforded White thirty days to cure all defaults, or risk immediate termination of the franchise. White contends that he never received the notice of default because it was sent to an address different from the one listed in the Franchise Agreement. When White failed to cure the defaults within the proscribed time period, Pizza Hut by written notice terminated the Franchise Agreement on March 27, 2002, and directed White to immediately cease using the Pizza Hut Marks and System. White does not dispute that he received this letter, which was mailed to the same address as the notice of default. Pizza Hut alleges, and White does not dispute, that despite its termination of the Franchise Agreement, White continues to operate his business under the Pizza Hut Marks and System. II. Pizza Hut's Motion for Preliminary Injunction
Given that the court has to make credibility determinations, and that White acknowledged at the hearing that he received other correspondence at the address where Pizza Hut mailed the notice of default, the court believes that he received the notice. In any event, even if White did not receive the notice of default, it is clear that he subsequently received notice, and that he did not take sufficient steps to cure his defaults. Indeed, the record establishes that White has had ample time to cure the defaults, or otherwise demonstrate his willingness to comply with the terms of the Franchise Agreement. As of the date of the hearing, however, White had not cured his defaults and has not provided information to the court since the hearing that he has cured the defaults. Rather, White, through his conduct has continued to act as though he was not in default, or the notice of default were nonexistent. White even acknowledged in court that he did not believe it was fair for him to receive the benefits and services of a Pizza Hut franchisee without paying Pizza Hut for those fights.
Although he states in his response that he intends to file a counterclaim for Pizza Hut's alleged breach of the Agreement, no such counterclaim has been filed as of the date of this order.
A. Legal Standard
In Canal Authority of the State of Florida v. Callaway, 489 F.2d 567 (5th Cir. 1974) (en banc), the Fifth Circuit set out the prerequisites for granting injunctive relief. To obtain the extraordinary relief of a temporary restraining order or preliminary injunction, Plaintiff must establish that (1) there is a substantial likelihood that it will prevail on the merits; (2) there is a substantial threat that irreparable harm will result if the injunction is not granted; (3) the threatened injury outweighs the threatened harm to Defendant; and (4) a preliminary injunction or temporary restraining order will not deserve the public interest. Id. at 572-73; Clark v. Prichard, 812 F.2d 991, 993 (5th Cir. 1987). The party seeking such relief must satisfy a cumulative burden of proving each of the four elements enumerated before a temporary restraining order or preliminary injunction can be granted. Clark, 812 F.2d at 993 ( citing Mississippi Power Light Co. v. United Gas Pipeline, 760 F.2d 618, 621 (5th Cir. 1985)).
B. Analysis
1. Substantial Likelihood of Success on the Merits
Pizza Hut's request for preliminary injunction is based on White's alleged post-termination trademark infringement. Although Pizza Hut asserts claims against White for breach of contract and trademark infringement, the court need only consider whether one of its claims — its action for relief under 15 U.S.C. § 1114 (a) — has a substantial likelihood of success.
Pizza Hut asserts trademark infringement under separate theories. The court, however, need only consider its cause of action for trademark infringement under 15 U.S.C. § 1114 (a), which proscribes the unauthorized use in commerce of a registered trademark when that use is "likely to cause confusion, or to cause mistake or to deceive."
Trademark infringement cases are typically predicated on the complaint that a defendant has used a trademark so similar to that of the plaintiff that the public will mistake the defendant's products for those of the plaintiff. See Burger King Corp. v. Mason, 710 F.2d 1480, 1491-92 (11th Cir. 1983) (citing Exxon Corp. v. Texas Motor Exch. of Houston, Inc., 628 F.2d 500 (5th Cir. 1980)). The Fifth Circuit, however, has recognized that "falsely suggesting affiliation with the trademark owner in a manner likely to cause confusion as to source or sponsorship constitutes infringement." Professional Golfers Ass'n of America v. Bankers Life Cas. Co., 514 F.2d 665, 670 (5th Cir. 1975). In Burger King, an apposite case, the franchisor, Burger King, sued a former franchisee who continued to use the Burger King trademarks, after termination of the parties' franchise agreements. The court determined that to prevail on a post-termination trademark infringement claim, the registrant of the trademark (Burger King) had to show that (1) its mark was used in commerce by the defendant without its consent and (2) the unauthorized use is likely to cause confusion, or to cause mistake or to deceive. Id. at 1491 (citing 15 U.S.C. § 1114 (1)(a)).
In this case, Pizza Hut asserts that White's continued use of the Pizza Hut Marks and System after termination of the Franchise Agreement is likely to create confusion between White's products and those of authorized Pizza Hut franchisees. Like the plaintiff in Burger King, Pizza Hut appears to be arguing that White's post-termination use of the Pizza Hut Marks and System creates the false impression or false suggestion that White's restaurant is sponsored by and affiliated with Pizza Hut.
At this stage of the litigation, the evidence establishes that Pizza Hut rightfully terminated the Franchise Agreement based on White's failure to pay monthly service fees, royalties and advertising contributions in accordance with the terms of the agreement. The evidence further establishes that when Pizza Hut notified White of his default, he had not paid monthly service fees and contractually mandated advertising contributions for several months; that such fees and contributions were due and owed at the time of default; and that White was in arrears in the approximate amount of $14,296.62. The evidence further shows that despite certain payments made by White toward the outstanding fees, he continued to owe fees at the time Pizza Hut terminated the Franchise Agreement. Based on this evidence, there is a substantial likelihood that Pizza Hut will be able to establish that it properly terminated the parties' agreement based on White's failure to satisfy his financial obligations under the Franchise Agreement.
There is also evidence that White is using the Pizza Hut Mark and System without Pizza Hut's consent. The court finds that White's unauthorized use of the trademark and systems will create a likelihood of confusion between Pizza Hut's authorized franchisees and White's products. See Burger King, 710 F.2d at 1492 ("Common sense compels the conclusion that a strong risk of consumer confusion arises when a terminated franchisee continues to use the former franchisor's trademarks"). Such a situation constitutes trademark infringement for which no legitimate defense has been offered by White. Accordingly, Pizza Hut has shown a substantial likelihood of success on the merits of its claim for trademark infringement.
2. Substantial Threat of Immediate and Irreparable Harm
Pizza Hut has also established a substantial threat that it will suffer irreparable injury if the injunction is not granted. In a trademark infringement case, "a substantial likelihood of confusion constitutes irreparable injury." See Ramada Franchise Sys., Inc. v. Jacobcart, Inc., No. CIV.A.3:01-CV-0306-D, 2001 WL 540213, at *3 (N.D. Tex. May 17, 2001) (quoting KFC Corp. v. Goldey, 714 F. Supp. 264, 267 (W.D. Ky. 1989)); see also Joy Mfg. Co. v. CGM Valve Gauge Co., Inc., 730 F. Supp. 1387, 1394 (S.D. Tex. 1989) ("When a likelihood of confusion exists, the plaintiffs lack of control over the quality of the defendant's goods constitutes immediate and irreparable harm, regardless of the actual quality of the defendant's goods.").
Moreover, if White is not enjoined from representing himself as a Pizza Hut franchisee, Pizza Hut is likely to suffer harm through the loss of control over its own goodwill and reputation. See Joy Mfg. Co., 730 F. Supp. at 1394. Because Pizza Hut has terminated the Franchise Agreement, it is in no position to exercise control over the goods marketed by White. Further, a former franchisee such as White would have little incentive to promote the value of the franchise as a whole, and his unregulated conduct under the franchise's trademark and systems could dilute the value of the marks, as well as significantly impact the customer good will associated with Pizza Hut's reputation. The court finds that White's continued use of the Pizza Hut Marks and System, together with an inability and lack of incentive to meet Pizza Hut's quality control standards, constitutes a substantial threat of irreparable injury to Pizza Hut.
3. Balancing of Hardships
This factor militates in favor of Pizza Hut. When a defendant improperly uses a plaintiffs trademark, the threatened harm to the plaintiff outweighs the threatened harm to the defendants. See Ramada, 2001 WL 540213, at *3. That White will suffer some amount of harm if the court grants a preliminary injunction is to be expected; however, the court would be hard-pressed to find that he would suffer more harm than Pizza Hut by restraining him from using trademarks that he is no longer entitled to use. Pizza Hut, on the other hand, as noted above, will suffer substantial harm if it is unable to control its own reputation and good will. See Joy Mfg., 730 F. Supp. at 1394. Importantly, the court also notes that Pizza Hut is not seeking to enjoin White from operating a restaurant or from selling pizza. Given that White has been a Pizza Hut franchisee for more than twenty years, the court does not believe that a preliminary injunction will prevent him from making a livelihood. Pizza Hut has demonstrated that the threatened harm to it outweighs the threatened harm to White.
4. Public Interest
The court also finds that this factor weighs in favor of Pizza Hut. Given that society thrives on a capital-based economy that rewards success through the competition, the public interest promotes the protection of valuable trademarks. Ramada, 2001 WL 540213, at *3. The court also finds that the public has an interest in knowing when a franchise is no longer affiliated with or sponsored by a franchisor so that consumers may make informed decisions about the goods and services they purchase. Finally, White has shown complete disregard of Pizza Hut's termination of the Franchise Agreement. This type of conduct cannot be condoned, and that the public has an interest in knowing and understanding that persons who infringe the trademarks of another may not profit from their conduct. Granting the injunction would ensure compliance with federal law, as well as the terms of the parties' Franchise Agreement.
For the reasons previously stated, Pizza Hut has demonstrated a substantial likelihood of prevailing on the merits, that it will suffer irreparable harm and loss without the preliminary injunction, that greater injury will be incurred by Pizza Hut if injunctive relief is denied than will be incurred by White if injunctive relief is granted, and that a preliminary injunction will not deserve the public interest. Pizza Hut is therefore entitled to injunctive relief and the court hereby grants Pizza Hut's Motion for Preliminary Injunction. The court will issue a preliminary injunction in accordance with this opinion by separate document.
III. Defendant's Motion to Compel Arbitration
A. Defendant's Motion to Compel Arbitration
White moves for an order compelling arbitration pursuant to the Article XXVII of the parties' Franchise Agreement. Pizza Hut does dispute that arbitration of the parties' dispute is appropriate under the arbitration clause. The court finds that the parties entered into a written agreement to arbitrate claims of the type Pizza Hut asserts in its Complaint, and that White is entitled to an order compelling arbitration. Accordingly, Defendant's Motion to Compel Arbitration is granted. Pizza Hut shall initiate arbitration proceedings in this case within ninety days of the date of this order, and notify the court when it has made a demand for the arbitration of its claims. All proceedings, except as those as necessary for matters relating to the preliminary injunction, in this case are stayed pending the completion of arbitration and further order of this court.
It is so ordered.