Capelli Enterprises, Inc. et al v. Fantastic Sams Salons Corporation et al

Filing 31

ORDER denying 20 Ex Parte Motion for Temporary Restraining Order and Order to Show Cause for Preliminary Injunction. Signed by Judge Edward J. Davila on 8/26/2016. (ejdlc1S, COURT STAFF) (Filed on 8/26/2016)

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1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 SAN JOSE DIVISION 7 CAPELLI ENTERPRISES, INC., et al., 8 Case No. 5:16-cv-03401-EJD Plaintiffs, 9 v. 10 FANTASTIC SAMS SALONS CORPORATION, et al., United States District Court Northern District of California 11 Defendants. 12 13 ORDER DENYING EX PARTE MOTION FOR TEMPORARY RESTRAINING ORDER AND ORDER TO SHOW CAUSE FOR PRELIMINARY INJUNCTION Re: Dkt. No. 20 In this action between franchisees and former franchisors, Plaintiffs Capelli Enterprises, 14 Inc., Nameer Jalel and Aseel Issa (collectively, “Plaintiffs”) move ex parte for a temporary 15 restraining order (“TRO”) enjoining Defendants Fantastic Sams Salons Corporation and Fantastic 16 Sams Franchise Corporation (collectively, “Defendants”) from proceeding with a demand for 17 arbitration filed with the American Arbitration Association (“AAA”). Dkt. No. 20. Defendants 18 have filed written opposition to the motion. Dkt. No. 28.1 Federal jurisdiction arises pursuant to 28 U.S.C. § 1332.2 Based on a careful review of the 19 20 21 22 23 24 25 26 27 28 1 An ex parte TRO application must satisfy Federal Rule of Civil Procedure 65(b)(1), which demands either notice to the opposing party or a declaration from the movant’s attorney certifying “in writing any efforts made to give notice and the reasons why it should not be required.” The court was unable to locate a declaration regarding notice in Plaintiffs’ application. In any event, Defendants were notified of the TRO request because Plaintiffs filed the motion on the electronic docket, and the court proceeded with briefing on the motion under those circumstances. 2 Because the court is now satisfied that federal jurisdiction exists based on Plaintiffs’ response filed on February 18, 2016 (Dkt. Nos. 23, 24), the order to show cause addressing that topic (Dkt. No. 22) is DISCHARGED. That said, the court is nonetheless compelled to comment on one particular statement made by Plaintiffs in their jurisdictional filing. While it may simply be an inartful comment, Plaintiffs do 1 Case No.: 5:16-cv-03401-EJD ORDER DENYING EX PARTE MOTION FOR TEMPORARY RESTRAINING ORDER AND ORDER TO SHOW CAUSE FOR PRELIMINARY INJUNCTION 1 parties’ pleadings in conjunction with the arguments made at the hearing on August 24, 2016, 2 Plaintiffs’ motion will be denied for the reasons explained below. 3 4 I. BACKGROUND In 2011, Plaintiffs entered into a 10-year Salon License Agreement (the “Agreement”) with 5 Defendants that required Plaintiffs to make certain payments to Defendants in exchange for the 6 use of Defendants’ commercial marks. According to Plaintiffs, the Agreement also required 7 Defendants to “maintain and enhance the reputation and trade demand of the Fantastic Sams 8 System” and to “preserve and increase the goodwill inherent to” Defendants’ marks. 9 10 United States District Court Northern District of California 11 12 13 14 15 16 17 In addition, the Agreement contains an arbitration clause which states, in pertinent part: Except for matters relating to the collection of monies owed to [Defendants] by [Plaintiffs] and/or as otherwise explicitly exempted herein, any controversy or claim arising out of or relating to this Agreement or with regard to its interpretation, formation or breach of any other aspect of the relationship between [Plaintiffs] and [Defendants] . . . which is not settled through negotiation or mediation, shall be arbitrated in accordance with the Commercial Arbitration Rules of the [AAA]. Unless required otherwise by state law or by mutual agreement, the parties agree to arbitrate in Boston, Massachusetts. The parties agree further that the Arbitrators may tender an interim ruling, including injunctive relief, an all claims of any type by either party, including defenses, are included in the jurisdiction of the arbitration. In or about April, 2016, Plaintiffs closed their Fantastic Sams salon business, and have not 18 relocated or re-opened the business. They have not used Defendants’ marks since closing the 19 business. Plaintiffs allege, however, that Defendants have sought to collect monies purportedly 20 owed for breach of the Franchise Agreement. 21 Plaintiffs initiated this case on June 17, 2016, and assert one claim for declaratory relief 22 23 24 25 26 27 28 suggest the court overlooked allegations contained in the Amended Complaint. Dkt. No. 23, at 1:24. Plaintiffs’ hypothesis apparently stems from the implicit contention that, despite the undeniable absence of critical allegations as noted by the court, diversity jurisdiction was established by documents attached to the Complaint. It is not, however, the court’s obligation to extract a basis for federal jurisdiction from unexplained clues in correspondence submitted with a party’s pleading. It was Plaintiffs’ duty to affirmatively and clearly plead jurisdiction and, as Plaintiffs themselves admit, none of the letters reveal the parties’ domiciles or principal places of business in a manner that satisfies the legal definitions of those terms. 2 Case No.: 5:16-cv-03401-EJD ORDER DENYING EX PARTE MOTION FOR TEMPORARY RESTRAINING ORDER AND ORDER TO SHOW CAUSE FOR PRELIMINARY INJUNCTION 1 against Defendants. Plaintiffs seek a declaration that no monies are owed to Defendant under the 2 Agreement even though they closed their franchise before expiration of the contractual term. In 3 response to the Complaint, Defendants filed, on August 5, 2016, a motion to compel arbitration 4 and to dismiss or stay this action based on arbitration provision cited above. They also filed a 5 demand for arbitration with the AAA on that same date. This motion followed on August 16, 6 2016. 7 II. 8 9 LEGAL STANDARD The standard for issuing a TRO is the same as that for the issuance of preliminary injunction. See New Motor Vehicle Bd. of Cal. v. Orrin W. Fox Co., 434 U.S. 1345, 1347 n.2 (1977). Thus, a TRO, like a preliminary injunction, is “an extraordinary remedy that may only be 11 United States District Court Northern District of California 10 awarded upon a clear showing that the plaintiff is entitled to such relief.” Winter v. NRDC, Inc., 12 555 U.S. 7, 22 (2008). 13 “To obtain a preliminary injunction, the moving party ‘must establish that: (1) it is likely to 14 succeed on the merits; (2) it is likely to suffer irreparable harm in the absence of preliminary 15 relief; (3) the balance of equities tips in its favor; and (4) an injunction is in the public interest.’” 16 Idaho v. Coeur D’Alene Tribe, 794 F.3d 1039, 1046 (9th Cir. 2015) (quoting Pom Wonderful LLC 17 v. Hubbard, 775 F.3d 1118, 1124 (9th Cir. 2014)). 18 Alternatively, “‘serious questions going to the merits’ and a hardship balance that tips 19 sharply towards the plaintiff can support issuance of a preliminary injunction, so long as the 20 plaintiff also shows that there is a likelihood of irreparable injury and that the injunction is in the 21 public interest.” Alliance for the Wild Rockies v. Cottrell, 632 F.3d 1127, 1135 (9th Cir. 2011). 22 This articulation represents “one alternative on a continuum” under the “‘sliding scale’ approach 23 to preliminary injunctions employed” by the Ninth Circuit. Id. at 1131-32. 24 25 Whether to grant or deny a preliminary injunction is a matter within the court’s discretion. See Miss Universe, Inc. v. Flesher, 605 F.2d 1130, 1132-33 (9th Cir. 1979). 26 27 28 3 Case No.: 5:16-cv-03401-EJD ORDER DENYING EX PARTE MOTION FOR TEMPORARY RESTRAINING ORDER AND ORDER TO SHOW CAUSE FOR PRELIMINARY INJUNCTION 1 2 3 III. DISCUSSION A. Likelihood of Success or Serious Questions To establish a likelihood of success on the merits, it not necessary for the moving party “to prove his [or her] case in full,” or show that he or she is “more likely than not” to prevail. Univ. 4 of Tex. v. Camenisch, 451 U.S. 390, 395 (1981); Leiva-Perez v. Holder, 640 F.3d 962, 966 (9th 5 6 7 8 9 10 United States District Court Northern District of California 11 Cir. 2011). Instead, the moving party must demonstrate a “fair chance of success on the merits” or raise questions “serious enough to require litigation.” Benda v. Grand Lodge of the Int’l Ass’n of Machinists & Aerospace Workers, 584 F.2d 308, 315 (9th Cir. 1978). “No chance of success at all, however, will not suffice.” Id. Plaintiffs articulate three arguments in an effort to satisfy the “likelihood of success” or “serious questions” elements. First, they argue the arbitration clause in the Agreement does not clearly delegate the “gateway” issue of arbitrability to the arbitrator. Second, they argue the 12 arbitration clause mandates the court, and not the arbitrator, enforce the provisions of the 13 Agreement. Third, Plaintiffs argue that their claim for declaratory relief falls within the 14 15 16 17 Agreement’s exclusionary provision. Unsurprisingly, Defendants disagree with Plaintiffs’ contentions. They argue the language of the arbitration clause “unmistakably” delegates issues of arbitrability to the arbitrator and incorporates the AAA rules in any event. They also argue, contrary to Plaintiffs’ interpretation, 18 that the arbitration clause does not explicitly reserve arbitrability issues to the court. In addition, 19 Defendants argue that Plaintiffs’ claim is one covered by the arbitration clause and not exempted 20 by the exclusionary provision. 21 22 i. Delegation of Arbitrability Looking first at whether the Agreement delegates arbitrability to the arbitrator, the court 23 observes that this motion essentially raises issues similar to those raised by a motion to compel 24 arbitration. Pursuant to the Federal Arbitration Act, 9 U.S.C. § 1 et. seq., a written arbitration 25 agreement is “valid, irrevocable, and enforceable” in much the same way as any other contract or 26 contractual provision. 9 U.S.C. § 2; Rent-A-Center, West, Inc. v. Jackson, 561 U.S. 63, 67 (2010). 27 28 4 Case No.: 5:16-cv-03401-EJD ORDER DENYING EX PARTE MOTION FOR TEMPORARY RESTRAINING ORDER AND ORDER TO SHOW CAUSE FOR PRELIMINARY INJUNCTION 1 Consequently, “[a] party to a valid arbitration agreement may ‘petition any United States district 2 court for an order directing that such arbitration proceed in the manner provided for in such 3 agreement.’” Lifescan, Inc. v. Premier Diabetic Servs., Inc., 363 F.3d 1010, 1012 (9th Cir. 2004) 4 (quoting 9 U.S.C. § 4). When such a request is made, two questions must be answered: whether 5 an arbitration agreement exists and whether it encompasses the dispute at issue. Id. at 1012; 6 Chiron Corp. v. Ortho Diagnostic Sys., Inc., 207 F.3d 1126, 1130 (9th Cir. 2000). If the party 7 seeking arbitration establishes these two factors, the court must compel arbitration. 9 U.S.C. § 4; 8 Chiron, 207 F.3d at 1130. 9 Plaintiffs do not dispute the existence of a valid agreement to arbitrate but focus on the scope of the arbitration clause. “It is well established ‘that where the contract contains an 11 United States District Court Northern District of California 10 arbitration clause, there is a presumption of arbitrability.’” Comedy Club, Inc. v. Improv West 12 Assocs., 553 F.3d 1277, 1284 (9th Cir. 2009)(quoting AT&T Techs., Inc. v. Commc’ns Workers 13 of Am., 475 U.S. 643, 650 (1986)). Thus, while the court employs general state law principles of 14 contract interpretation to determine the scope of an arbitration clause, it must normally do so 15 “‘while giving due regard to the federal policy in favor of arbitration by resolving ambiguities as 16 to the scope of arbitration in favor of arbitration.’” Mundi v. Union Sec. Life Ins. Co., 555 F.3d 17 1042, 1044 (9th Cir. 2009) (quoting Wagner v. Stratton Oakmont, Inc., 83 F.3d 1046, 1049 (9th 18 Cir. 1996)). Indeed, “[t]he Arbitration Act establishes that, as a matter of federal law, any doubts 19 concerning the scope of arbitrable issues should be resolved in favor of arbitration, whether the 20 problem at hand is the construction of the contract language itself or an allegation of waiver, 21 delay, or a like defense to arbitrability.” Moses H. Cone Mem’l Hosp. v. Mercury Constr. Corp., 22 460 U.S. 1, 24-25 (1983). 23 The issue of whether or not a claim is subject to arbitration “remain[s] within the province 24 of judicial review” unless the parties delegate it to the arbitrator. Momot v. Mastro, 652 F.3d 982, 25 987 (2011). In fact, arbitrability “is left to the court unless the parties clearly and unmistakably 26 provide otherwise.” Id. at 988. In Momot, the Ninth Circuit held that language delegating to the 27 28 5 Case No.: 5:16-cv-03401-EJD ORDER DENYING EX PARTE MOTION FOR TEMPORARY RESTRAINING ORDER AND ORDER TO SHOW CAUSE FOR PRELIMINARY INJUNCTION 1 arbitrator “the authority to determine ‘the validity or application of any of the provisions of” the 2 arbitration clause, constitutes ‘an agreement to arbitrate threshold issues concerning the arbitration 3 agreement’” and is evidence that “the parties clearly and unmistakably agreed to arbitrate the 4 question of arbitrability.” Id. at 988. In contrast, other courts have found that language requiring 5 that “all disputes, controversies, claims, causes of action and/or alleged breaches or failures to 6 perform arising out of or relating to” the parties’ agreement does not constitute “clear and 7 unmistakable” intent to refer issues of arbitrability to the arbitrator. Meadows v. Dickey’s 8 Barbecue Rests., Inc., 144 F. Supp. 3d 1069, 1077 (N.D. Cal. 2015); Kimble v. Rhodes College, 9 Inc., No. C-10-5786 EMC, 2011 U.S. Dist. LEXIS 59628, at *6, 2011 WL 2175249 (N.D. Cal. 10 United States District Court Northern District of California 11 June 2, 2011). Here, the arbitration clause provides that “any controversy or claim arising out of or 12 relating to this Agreement or with regard to its interpretation, formation or breach of any other 13 aspect of the relationship between [Plaintiffs] and [Defendants]” must be referred to arbitration. 14 This language is distinguishable from that considered in Momot because it does not refer issues of 15 “validity or application” of the Agreement to the arbitrator, but is similar to the “arising out of or 16 relating to” language that other courts find insufficient to refer issues of arbitrability under the 17 “more rigorous standard” that is applied. Momot, 652 F.3d at 987. Like those courts, this court 18 finds that the language used in the Agreement’s arbitration clause, while broad enough to 19 encompass arbitrability, does not alone evidence a “clear and unmistakable” intent to refer such 20 issues to the arbitrator. And though Defendants argue otherwise, the referral of matters relating to 21 the Agreement’s interpretation does not transform the clause into a “clear and unmistakable” 22 referral of arbitrability issues. See Mikhak v. Univ. of Phoenix, No. C16-00901 CRB, 2016 U.S. 23 Dist. LEXIS 80705, *12-13, 2016 WL 3401763 (N.D. Cal. June 21, 2016). 24 That determination does not end the matter, however, because the Ninth Circuit has also 25 held that “incorporation of the AAA rules constitutes clear and unmistakable evidence that 26 contracting parties agreed to arbitrate arbitrability.” Brennan v. Opus Bank, 796 F.3d 1125, 1130 27 28 6 Case No.: 5:16-cv-03401-EJD ORDER DENYING EX PARTE MOTION FOR TEMPORARY RESTRAINING ORDER AND ORDER TO SHOW CAUSE FOR PRELIMINARY INJUNCTION 1 (9th Cir. 2015). This is because one of the AAA rules “provides that the ‘arbitrator shall have the 2 power to rule on his or her own jurisdiction, including any objections with respect to the . . . 3 validity of the arbitration agreement.’” Id. 4 In this case, Plaintiffs concede that the arbitration clause incorporates the AAA rules by 5 reference. But despite the concession, Plaintiffs argue the incorporation does not “clearly and 6 unmistakably” evidence an intent to arbitrate arbitrability because they lack business 7 sophistication and experience. Plaintiffs’ position is misplaced. 8 9 Though the Ninth Circuit has touched on the issue of sophistication in cases such as Brennan and Oracle America, Inc., v. Myriad Group, A.G., 724 F.3d 1069 (9th Cir. 2013), it has not definitively decided whether and to what level a party must be sophisticated in order to exhibit 11 United States District Court Northern District of California 10 an intent to arbitrate arbitrability through the incorporation of a provider’s rules. Indeed, the 12 appellate court did not need to reach the issue in either case because each involved sufficiently 13 sophisticated parties. Brennan, 796 F.3d at 1131 (finding the parties to the agreement were 14 sophisticated when one was a lawyer and the other was a bank); Oracle Am., Inc., 724 F.3d at 15 1069 (holding that, in a contract between software companies, “as long as an arbitration agreement 16 is between sophisticated parties to commercial contracts, those parties shall be expected to 17 understand that incorporation of [rules of arbitration] delegates questions of arbitrability to the 18 arbitrator”). 19 But in light of the Ninth Circuit’s more recent opinion in Brennan, in which the court 20 acknowledged “the vast majority of the circuits” have not limited similar holdings to sophisticated 21 parties or to commercial contracts (796 F.3d at 1130-31), this court echoes the conclusion reached 22 by one of its colleagues in two decisions addressing this subject: that “[a] reference to the AAA 23 rules can be sufficient to constitute clear and unmistakable intent to delegate” (Galen v. Redfin 24 Corp., No. 14-cv-05229-TEH, 2015 U.S. Dist. LEXIS 161111, at *16-17, 2015 WL 7734137 25 (N.D. Cal. Dec. 1, 2015) (Henderson, J.)), and that neither Brennan nor Oracle America “foreclose 26 the possibility that unsophisticated parties can clearly and unmistakably delegate arbitrability to an 27 28 7 Case No.: 5:16-cv-03401-EJD ORDER DENYING EX PARTE MOTION FOR TEMPORARY RESTRAINING ORDER AND ORDER TO SHOW CAUSE FOR PRELIMINARY INJUNCTION 1 arbitrator through the incorporation of the AAA Rules.” Zenelaj v. Handybook Inc., 82 F. Supp. 2 3d 968, 973 (N.D. Cal. 2015) (Henderson, J.). This statement is particularly true when, as here, 3 the contract at issue is commercial rather than consumer in nature, because the former 4 circumstances more often involve parties with at least some degree of experience in the customs of 5 business and contract. See Tompkins v. 23andMe, Inc., No.: 5:13-CV-05682-LHK, 2014 U.S. 6 Dist. LEXIS 88068, at * 40-43, 2014 WL 2903752 (N.D. Cal. June 25, 2014), aff’d, No. 14-16405 7 (9th Cir. Aug. 23, 2016). 8 Turning to this case, the evidence shows that Plaintiffs were not unsophisticated in the details of business transactions at the time they entered into the Agreement. Both Jalel and Issa 10 are educated professionals; Jalel is a software development engineer and Issa is a chemist. Jalel 11 United States District Court Northern District of California 9 has undergraduate and masters degrees, as well as a Ph.D, and Issa has a degree in chemistry. 12 They originally purchased their Fantastic Sams franchise in 2008, along with the outstanding 13 shares of Capelli, from a previous franchisee. Thus, when Plaintiffs renegotiated their operating 14 agreement with Defendants in 2011, they had already been operating the franchise for 15 approximately three years. Under these facts, Plaintiffs cannot be considered akin to the everyday 16 consumer or even the inexperienced business owner. Accordingly, to the extent it is required, the 17 court is satisfied that Plaintiffs possessed the “modicum of sophistication” necessary to understand 18 the import of the Agreement’s terms, including the incorporation of the AAA rules. See Galen, 19 2015 U.S. Dist. LEXIS 161111, at *18. 20 Based on the information presented for this application, the court finds that the parties 21 clearly and unmistakably delegated the question of arbitrability to the arbitrator by incorporating 22 the AAA rules. 23 ii. Contradictory Provisions 24 Plaintiffs contend that, even if the Agreement contains a delegation of arbitratability, 25 another portion of the arbitration clause “undermines” any such delegation. Specifically, Plaintiffs 26 rely on the portion of the arbitration clause through which the parties consented to the “jurisdiction 27 28 8 Case No.: 5:16-cv-03401-EJD ORDER DENYING EX PARTE MOTION FOR TEMPORARY RESTRAINING ORDER AND ORDER TO SHOW CAUSE FOR PRELIMINARY INJUNCTION 1 of any appropriate court to enforce the provisions of this section and/or to confirm any award 2 rendered by the panel of arbitrators,” and argue this statement “manifestly contradicts” any 3 delegation of arbitrability. 4 In light of the “clear and unmistakable” standard that applies, courts have refused to 5 enforce seemingly express delegations of arbitrability if they are rendered ambiguous in the face 6 of a contradictory provision. For example, in Baker v. Osborne Development Corporation, 159 7 Cal. App. 4th 884 (2008), the California Court of Appeal found an agreement did not “clearly and 8 unmistakably” delegate arbitrability when it stated, on the one hand, “that issues of enforceability 9 or voidability were to be decided by the arbitrator,” but on the other, “indicated that the court might find a provision unenforceable.” 159 Cal. App. 4th at 893-94. Similarly in Cobarruviaz v. 11 United States District Court Northern District of California 10 Maplebear, Inc., 143 F. Supp. 3d 930 (2015), the district court determined that an arbitration 12 clause providing for the arbitration of “any controversy, dispute, or claim arising out of or related 13 to . . . this Agreement” including its “breach, termination, interpretation, enforcement, validity, 14 scope and applicability” was inconsistent with a severability provision stating that “any arbitrator 15 or court” could declare or determine that a provision is invalid or unenforceable. 143 F. Supp. 3d 16 at 940. On that basis, the Cobarruviaz court found that the purported delegation in the arbitration 17 clause was ineffective. Id. 18 In contrast to the contractual terms addressed in Baker and Osborne, the provision of the 19 Agreement permitting the court to enforce the arbitration clause is not inconsistent with a 20 delegation of arbitrability issues to the arbitrator. Notably, the Agreement does not permit the 21 court to find a provision of the agreement invalid or unenforceable; it only allows the court the 22 ability to enforce the provision by compelling a claim to arbitration, or to confirm any subsequent 23 award. This distinction makes a difference, because an arbitration provision can be enforced 24 without also delving into abitrability and without invading the province of any issues delegated to 25 the arbitrator. 26 27 28 On that basis, the court rejects Plaintiffs’ argument based on contradictory provisions. 9 Case No.: 5:16-cv-03401-EJD ORDER DENYING EX PARTE MOTION FOR TEMPORARY RESTRAINING ORDER AND ORDER TO SHOW CAUSE FOR PRELIMINARY INJUNCTION B. 1 2 Conclusion Given the above discussion, Plaintiffs have not satisfied their burden to demonstrate a “fair chance of success on the merits” and have not raised the types of “serious questions” necessary for 3 a TRO. See Benda, 584 F.2d at 315. Indeed, it is unlikely Plaintiffs will successfully resist 4 Defendants’ motion to compel arbitration, and in particular, Defendants’ argument that issues of 5 arbitratability be decided by the arbitrator. 6 And although the court need not examine the matter further in light of that determination, 7 it is worth pointing out that Plaintiffs have also failed to show irreparable harm. See Garcia v. 8 Google, Inc., 786 F.3d 733, 740 (9th Cir. 2015) (“Because it is a threshold inquiry, when a 9 plaintiff has failed to show the likelihood of success on the merits, we need not consider the 10 remaining three [Winter elements]” (internal citations omitted).). Plaintiffs’ articulation of that 11 United States District Court Northern District of California element is based solely on harm resulting from the time and costs expended in arbitrating a non12 arbitrable claim. But since the court need not address the question of whether Plaintiffs’ 13 declaratory relief claim is arbitrable or not in light of its finding that such issue has been delegated 14 to the arbitrator, the irreparable harm element is likewise left unsatisfied. Consequently, Plaintiffs 15 are not entitled to the extraordinary relief they seek. 16 17 IV. ORDER Plaintiffs’ ex parte motion for a TRO and order to show cause for preliminary injunction 18 (Dkt. No. ) is DENIED. 19 20 IT IS SO ORDERED. 21 Dated: August 26, 2016 22 23 24 ______________________________________ EDWARD J. DAVILA United States District Judge 25 26 27 28 10 Case No.: 5:16-cv-03401-EJD ORDER DENYING EX PARTE MOTION FOR TEMPORARY RESTRAINING ORDER AND ORDER TO SHOW CAUSE FOR PRELIMINARY INJUNCTION

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