Just Tacos, Inc. et al v. Zezulak et al
Filing
29
ORDER GRANTING IN PART AND DENYING IN PART WITHOUT PREJUDICE PLAINTIFFS' MOTION FOR PRELIMINARY INJUNCTION 2 . Excerpt of Order: ~ The parties are directed to meet with Magistrate Judge Kevin S.C. Chang withi n thirty (30) days from the date of this Order in an effort to reach some mutually agreeable resolution to the instant action. All discovery in this case is stayed until further Order of this Court. ~ Signed by JUDGE DAVID ALAN EZRA on 12/9/2011. [Order follows hearing held 12/8/2011. Minutes of hearing: doc no. 28 ] (afc) CERTIFICATE OF SERVICEParticipants registered to receive electronic notifications received this document electronically at the e-mail address listed on the Notice of Electronic Filing (NEF). Participants not registered to receive electronic notifications were served by first class mail on the date of this docket entry
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
JUST TACOS, INC.; and RESOL
HAWAII, LLC,
)
)
)
Plaintiffs,
)
)
vs.
)
)
MICHAEL ZEZULAK; JUST
)
TACOS PEARL CITY, INC.; and
)
JUST TACOS HAWAII KAI, INC., )
)
Defendants.
)
_____________________________ )
CV. NO. 11-00663 DAE-KSC
ORDER GRANTING IN PART AND DENYING IN PART WITHOUT
PREJUDICE PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION
On December 8, 2011, the Court heard Plaintiffs’ Motion for
Preliminary Injunction. Milton M. Yasunaga, Esq., appeared at the hearing on
behalf of Plaintiffs; Philip A. Davis, Esq., appeared at the hearing on behalf of
Defendants. After reviewing the motion and the supporting and opposing
memoranda, the Court GRANTS IN PART and DENIES IN PART WITHOUT
PREJUDICE Plaintiffs’ Motion for Preliminary Injunction. (Doc. # 2.)
BACKGROUND
The instant action arises from a dispute between Plaintiffs Just Tacos,
Inc. and Resol Hawaii, LLC, franchisors and owners of the Just Tacos brand, and
Defendants Just Tacos Pearl City, Inc. and Just Tacos Hawaii Kai, Inc., former
corporate franchisees, as well as Defendant Michael Zezulak, the proprietor of
those franchisees.
In 2005, Jesus Santoyo opened a take-out Mexican restaurant in
downtown Honolulu named “Just Tacos Mexican Grill.” (“Santoyo Decl.,” Doc.
# 2-2 ¶ 2.) The business was incorporated as “Just Tacos, Inc.” (“JTI”). (Id.) On
June 13, 2007, JTI registered the trade name “Just Tacos Mexican Grill & Cantina”
with the State of Hawaii. (Id.; Doc. # 2-5.) Defendant Resol Hawaii, LLC
(“Resol”), a company formed by Santoyo to hold his intellectual property, has filed
applications for federal registrations for “Just Tacos Mexican Grill & Cantina” and
“Just Tacos.” (Id. ¶ 9.) Those applications are still pending. (Id.) Santoyo later
opened a Just Tacos Mexican Grill & Cantina in Mililani in 2007 and in Ko Olina
in 2009. (Santoyo Decl. ¶ 2, 15.)
In 2007, Santoyo began creating a Just Tacos in Pearl City. (Id. ¶ 10.)
Since the Pearl City location was smaller, it was planned as a Grill, not a Cantina.
(Id.) In 2008, Santoyo was introduced to Defendant Michael Zezulak, who was
looking for an investment opportunity in Hawaii. (Id. ¶ 11.) Zezulak agreed to
pay for the construction of the Pearl City Just Tacos Grill and it was agreed that it
would be his restaurant. (Id. ¶ 12.) Zezulak also agreed to pay monthly fees to JTI
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in exchange for the use of the Just Tacos name, trade secrets, and procedures as
well as the Just Tacos plan of organization and operation. (Id.; Doc # 2-4.) In
March 2008, Santoyo and Zezulak signed a written Franchise Agreement
(“Agreement”), which was prepared by Zezulak’s attorney. (Santoyo Decl. ¶ 13;
see “Agreement,” Doc. # 2-4.) That Agreement contains the following relevant
provisions:
5. FEES
b.
At all times after the commencement of operation by Franchise
Owner, Franchise Owner shall pay to Franchisor the following
recurring fees:
i.
A continuing fee equal to three percent (3.00%) of the
Total Sales . . . per month no later than the 15th of the
month . . . .
6. LICENSED MARKS
a.
Franchise Owner expressly acknowledges Franchisor’s rights in
and to the Licensed Marks . . . .
b.
Franchise Owner understands and agrees that any use of the
Licensed Marks other than as expressly authorized by this
Agreement, without Franchisor’s prior written consent, may
constitute an infringement of Franchisor’s rights therein and
that the right to use the Licensed Marks granted herein does not
extend beyond the termination or expiration of this Agreement.
7. STANDARDS OF OPERATION
Franchise Owner shall maintain standards of quality, appearance and
operation for the Franchised Business. For the purpose of giving
3
distinctiveness to the Licensed Marks, enhancing the public image and
reputation of businesses operating under the Just Tacos System and
for the purpose of increasing the demand for services and products
provided by franchise owners and Franchisor, the Franchise Owner
agrees to operate the Unit in strict conformity with Franchisor’s
standards and all rules, regulations and policies.
8. CONFIDENTIAL OPERATING MANUAL
a.
In order to protect the reputation and goodwill of the businesses
operating under the Just Tacos System and to maintain
standards of operation under the Licensed Marks, Franchise
Owner shall conduct the Franchised Business operated under
the Just Tacos System in accordance with various written
instructions and confidential manuals . . . , all of which
Franchise Owner acknowledges belong solely to Franchisor and
shall be on loan from Franchisor during the term of this
Agreement.
11. COVENANTS
...
b.
In the event this Agreement is terminated, expires, or is not
renewed, . . . Franchise Owner must remove all signage and
trade marked materials relating to the Just Tacos Franchise.
c.
In the event of any termination, expiration or non-renewal of
this Agreement, Franchise Owner agrees that it will never use
Franchisor’s confidential information, trade secrets, methods of
operation or any proprietary components of the Just Tacos
System in the design, development or operation of any
business.
14. POST TERM OBLIGATIONS
Upon the expiration of this Agreement, Franchise Owner shall
immediately:
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a.
Cease to be a franchise owner of Franchisor under this
Agreement and cease to operate the former franchised business
under the Just Tacos System. Franchise Owner shall not
thereafter, directly or indirectly, represent to the public that the
former franchised business is or was operated or in any way
connected with the Just Tacos System or hold itself out as a
present or former franchise owner of Franchisor at or with
respect to the Premises;
b.
Pay all sums owing to Franchisor, including those invoiced to
Franchise Owner after this Agreement expires or is
terminated. . . .
c.
Return to Franchisor the Confidential Operating Manual and all
trade secret and other confidential materials, equipment and
other property owned by Franchisor, and all copies thereof. . . .
d.
Take such action as may be required by Franchisor to transfer
and assign to Franchisor or its designee or to remove any
connection to the Just Tacos System from all telephone
numbers, white and yellow page telephone references and
advertisements, and all trade and similar name registrations and
business licenses, and to cancel any interest which Franchise
Owner may have in the same; and
e.
Cease to use . . . any methods, procedures or techniques
associated with the Just Tacos System in which Franchisor has
a proprietary right, title or interest; cease to use the Licensed
Marks and any other marks and indica of operation associated
with the Just Tacos System and remove all trade dress, physical
characteristics, color combinations and other indications of
operation under the Just Tacos System from the Premises.
Without limiting the generality of the foregoing, Franchise
Owner agrees that it the event of any termination or expiration
of this Agreement, it will remove all signage bearing the
Licensed Marks, and, upon Franchisor’s request, deliver the
facia for such signs to Franchisor, and will remove any items
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which are characteristic of the Just Tacos System “trade dress”
from the Premises.
(Agreement at 7–10, 13–14, 19, 27–28.) The parties dispute whether this
Agreement was intended to be permanent or temporary. According to Santoyo,
Zezulak told him that the Agreement would serve to protect both sides in the
interim until a more formal agreement could be entered. (Santoyo Decl. ¶ 13.)
Defendants, on the other hand, assert that the Agreement was never intended to be
temporary. (“Dfs. Oppo.,” Doc. # 27 ¶ 41.)
In 2010, Zezulak asked Santoyo if the Pearl City Just Tacos Grill
could be converted into a Just Tacos Grill & Cantina. (Santoyo Decl. ¶ 17.)
Santoyo told him that he had been working on the formal franchise agreement that
they had discussed in 2008 and explained that it would have several terms that
differed from the interim agreement. (Id.) According to Santoyo, Zezulak orally
agreed to those terms and Santoyo thus proceeded to handle the construction,
additional vendor relations, and employee training and hiring that was necessary to
turn the Pearl City location into a Just Tacos Grill & Cantina. (Id.) Zezulak
disputes that any such oral agreement was made.
Zezulak and Santoyo subsequently entered an agreement to build a
Just Tacos Grill & Cantina in Hawaii Kai, which was to be owned by Zezulak
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through a new company that he would form. (Id. ¶ 19; Dfs. Oppo. ¶ 4.) According
to Defendants, the 2008 Agreement gave Zezulak the right to open other locations
under the same or better terms than set forth in the Pearl City Agreement.
(Santoyo Decl. ¶ 19; Dfs. Oppo. ¶¶ 2–4.) Zezulak asked Santoyo to handle the
Hawaii Kai build out, hire and train the employees, get the location running, help
put on a grand opening publicity event to take place sometime after the soft
opening, and manage the location’s operations. (Santoyo Decl. ¶ 19.) Zezulak
agreed to pay Santoyo for these services and Santoyo proceeded to work on these
matters. (Id.)
In early 2011, Santoyo had his attorney prepare a formal franchise
agreement. (Id. ¶ 21.) According to Santoyo, this was the formal agreement that
Zezulak and Santoyo had contemplated in 2008 and it contained the terms to which
Zezulak had orally agreed in 2010. (Id.) However, Defendants assert that the
terms of the new franchise agreement were far worse than the terms of the previous
Agreement. (Dfs. Oppo. ¶ 9.) Zezulak therefore refused to sign the new
agreement. (Santoyo Decl. ¶ 21.)
Defendants contend that Plaintiffs threatened that if the new franchise
agreement was not signed by a certain date, then the Hawaii Kai and Pearl City
franchises would be immediately terminated. (Dfs. Oppo. ¶ 13.)
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On August 21, 2011, Santoyo received a “Letter of Termination and
Ceases and Desist” from Defendants’ attorney, Adam Davis, Esq. That letter
states, in part, as follows:
You are hereby officially terminated as an employee of Franchisee 2.
Although your employment with Franchisee 2 was only anticipated to
last no longer than one month so that you could help open the Hawaii
Kai store[], your services are no longer required. . . .
You are in material breach of these Licensing Agreements and have
failed to cure as requested. As such, Franchisees will no longer be
honoring these Licensing Agreements. No further “franchise” fees
will be paid to you under these Licensing Agreements, which should
cause you no real alarm given the fact that you are indebted to
Franchisees in an amount that is far greater than [the] monthly fee
under these Licensing Agreements. These fees will be held by my
Client, and/or by a Court, if necessary, pending resolution of my
Clients’ claims.
With regard to the “Just Tacos” brand, the name of the Stores will be
changing shortly. The cost associated therewith will be your
responsibility.
....
You are no longer permitted to enter the Stores. You are no longer
permitted to take any action with regard to the Stores. Should you act
in defiance of these positions, action will be immediately taken,
including, but not limited to, resort to injunctive relief and criminal
prosecution.
(Doc. # 2-15.)
On August 26, 2011, Santoyo received another letter from Davis,
stating, in pertinent part, as follows:
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[P]lease be advised that we are changing the name of the company and
the signage, however, given the situation with the liquor license, the
liquor license needs to be transferred in order to assure that our name
change doesn’t interfere. Are you ready to aid in the proper transfer
of the liquor license, or not? We want to have the name[] changed
this week as soon as possible, but may need your assistance with the
liquor license.
(Doc. # 2-16.)
On September 8, 2011, Plaintiffs’ attorney, Milton Yasunaga, Esq.,
wrote Adams a letter, which stated the following:
In light of the above declarations you made on behalf of Mr. Zezulak
and his companies in your August 21 and August 26 letters, and your
clients’ failure to pay franchise fees and abide by other requirements
of their agreements with Mr. Santoyo and his companies, you and
your clients are hereby notified that Mr. Santoyo and his companies
demand that Mr. Zezulak and his companies immediately – which
means well before the planned grand opening of the Hawaii Kai store
– cease using the name “Just Tacos”, whether in signage, stationery,
decor, menus, napkins, uniforms, wrappers, products, advertising,
promotion, names, or any other usage, and immediately return my
client’s menu recipe book(s) and cease using his menu recipes and
other proprietary property, and destroy all copies. (Despite your
August 21 statement that “with regard to the ‘Just Tacos’ brand, the
name of the stores will be changing shortly,” we note that, even as of
this afternoon, your clients are still using Mr. Santoyo’s
trademark/tradename “Just Tacos” – the signage on the Hawaii Kai
store still stays “Just Tacos” name for the grand opening . . . )
Mr. Santoyo will cooperate with your client’s application to transfer
the Pearl City store’s liquor license to your client as soon as your
client prepares the transfer application.
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The two sides have some outstanding payment issues, which they can
work together to resolve soon, but that should not delay your clients’
stopping the use of the name “Just Tacos” and use of other proprietary
things.
(Doc. # 2-18.)
As of October 28, 2011, the Pearl City and Hawaii Kai Just Tacos still
had the same Just Tacos food, signage, menus, and Just Tacos trade dress as the
Mililani and Ko-Olina locations. (Santoyo Decl. ¶¶ 18, 22; Docs. ## 2-13, 2-14.)
However, Defendants appear to be in the process of “rebranding” the Pearl City
and Hawaii Kai stores and intend to change the name of the stores to “Miguel’z”
upon completion of the liquor license forms. (Dfs. Opp. ¶ 27; Dfs. Appx. at
428–431.)
On October 28, 2011, Plaintiffs JTI and Resol filed a Complaint
against Defendants Zezulak, Just Tacos Pearl City, Inc., and Just Tacos Hawaii
Kai, Inc. alleging, inter alia, claims for (1) Trademark Infringement, (2) Trade
Dress Infringement, (3) Breach of Contract, and (4) Misappropriation of Trade
Secrets. (“Compl.,” Doc. # 1.) On the same day, Plaintiffs also filed the instant
Motion for Preliminary Injunction. (“Mot.,” Doc. # 2.) On November 30, 2011,
Defendants submitted a Verified Response in Opposition to the Motion.1 (Doc.
1
Due to ECF transmission problems, defense counsel initially submitted Defendants’
Opposition to the Court by email. That Opposition was subsequently filed in the docket by the
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# 27.) On December 5, 2011, Defendants filed a Reply in support of their Motion.
(Doc. # 26.)
STANDARD OF REVIEW
“[I]njunctive relief is an extraordinary remedy that may only be
awarded upon a clear showing that the plaintiff is entitled to such relief.” Winter
v. Natural Res. Def. Council, Inc., 129 S. Ct. 365, 376 (2008). To obtain a
preliminary injunction, the moving party must demonstrate “that he is likely to
succeed on the merits, that he is likely to suffer irreparable harm in the absence of
preliminary relief, that the balance of equities tips in his favor, and that an
injunction is in the public interest.” Id. at 365 (citing Munaf v. Geren, 128 S. Ct.
2207, 2218–19 (2008); Amoco Prod. Co. v. Gambell, 480 U.S. 531, 542 (1987);
Weinberger v. Romero-Barcelo, 456 U.S. 305, 311–12 (1982)); see also Stormans,
Inc. v. Selecky, 586 F.3d. 1109, 1126–27 (9th Cir. 2009) (applying heightened
standard mandated by Winter). “‘[S]erious questions going to the merits’ and a
hardship balance that tips sharply towards the plaintiff can [also] support issuance
of an injunction, so long as the plaintiff also shows a likelihood of irreparable
injury and that the injunction is in the public interest.” Alliance for Wild Rockies
v. Cottrell, 622 F.3d 1045, 1053 (9th Cir. 2010). A district court has great
Clerk’s office. (See Doc. # 27.)
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discretion in determining whether to grant or to deny a preliminary injunction. See
Wildwest Inst. v. Bull, 472 F.3d 587, 589–90 (9th Cir. 2006); see also Lopez v.
Heckler, 713 F.2d 1432, 1435 (9th Cir. 1983) (“At one end of the continuum, the
moving party is required to show both a probability of success on the merits and
the possibility of irreparable injury. At the other end of the continuum, the moving
party must demonstrate that serious legal questions are raised and that the balance
of hardships tips sharply in its favor.”) (internal citations omitted).
Plaintiffs seeking preliminary injunctive relief must “demonstrate that
irreparable injury is likely in the absence of an injunction.” Winter, 129 S. Ct. at
375 (emphasis in original). The mere possibility of irreparable harm is insufficient.
Id. (finding the Ninth Circuit’s standard of a “possibility” of harm too lenient).
“To seek injunctive relief, a plaintiff must show that he is under threat of suffering
‘injury in fact’ that is concrete and particularized; the threat must be actual and
imminent, not conjectural or hypothetical; it must be fairly traceable to the
challenged action of the defendant; and it must be likely that a favorable judicial
decision will prevent or redress the injury.” Summers v. Earth Island Inst., 129 S.
Ct. 1142, 1149 (2009).
If irreparable injury is shown, courts must then “‘balance the
competing claims of injury and must consider the effect on each party of the
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granting or withholding of the requested relief.’” Winter, 129 S. Ct. at 376
(quoting Amoco Prod. Co., 480 U.S. at 542). In assessing whether the plaintiff has
met this burden, the district court has a “‘duty . . . to balance the interests of all
parties and weigh the damage to each.’” Stormans, 586 F.3d. at 1138 (quoting
L.A. Mem’l Coliseum Comm’n v. Nat’l Football League, 634 F.2d 1197, 1203 (9th
Cir. 1980)).
Finally, the court must weigh the public interest, if any, implicated by
the injunction. Winter, 129 S. Ct. at 374. When the reach of an injunction is
narrow, limited only to the parties, and has no impact on nonparties, the public
interest will be “at most a neutral factor in the analysis rather than one that
favor[s][granting or] denying the preliminary injunction.” Bernhardt v. Los
Angeles County, 339 F.3d 920, 931 (9th Cir. 2003). “If, however, the impact of an
injunction reaches beyond the parties, carrying with it a potential for public
consequences, the public interest will be relevant to whether the district court
grants the preliminary injunction.” Stormans, 586 F.3d. at 1139 (citing
Sammartano v. First Judicial Dist. Court, 303 F.3d 959, 965 (9th Cir. 2002)).
“[When] an injunction is asked [for] which will adversely affect a public interest
. . . the court may in the public interest withhold relief until a final determination of
the rights of the parties, though the postponement may be burdensome to the
13
plaintiff.” Weinberger v. Romero-Barcelo, 456 U.S. 305, 312–13 (1982). In fact,
“courts . . . should pay particular regard for the public consequences in employing
the extraordinary remedy of injunction.” Winter, 129 S. Ct. at 376–77.
DISCUSSION
In their Motion, Plaintiffs seek a preliminary injunction that enjoins
Defendants from using the designations “Just Tacos” and “Just Tacos Mexican
Grill & Cantina,” requires them to remove from their stores all elements that make
up the Just Tacos trade dress, and prohibits them from making any representations
to the public that their former franchised businesses are in any way affiliated with
the Just Tacos brand. Plaintiffs also seek to enjoin Defendants from using or
divulging various Just Tacos trade secrets, recipes, menus, manuals, and financial
information and require them to perform all the post-termination obligations set
forth in the March 2008 Franchise Agreement.
I.
Use of the Just Tacos Trade Name
With respect to the use of the trade name, the Court concludes that
Plaintiffs are entitled to a preliminary injunction enjoining Defendants from using
the “Just Tacos” or “Just Tacos Mexican Grill & Cantina” trade name for the
reasons that follow.
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A.
Likelihood of Success on the Merits
First, Plaintiffs have demonstrated a likelihood of succeeding on the
merits of their trademark infringement claim under the Lanham Act. 15 U.S.C.
§ 1125(a). A “trademark” is defined as any combination of words or symbols used
in commerce to identify and distinguish one’s goods from those manufactured or
sold by others and to indicate the source of the goods. 15 U.S.C. § 1127. “To
show trademark infringement, [a plaintiff] ‘must demonstrate that it owns a valid
mark, and thus a protectable interest,’ and it must show that [a defendant’s] ‘use of
the mark is likely to cause confusion, or to cause mistake, or to deceive.’” Lahoti
v. VeriCheck, Inc., 586 F.3d 1190, 1198 (9th Cir. 2009) (quoting KP Permanent
Make-Up, Inc. v. Lasting Impression I, Inc., 408 F.3d 596, 602 (9th Cir. 2005)).
The evidence before the Court demonstrates that Plaintiffs have a
valid and protectable interest in the Just Tacos trade name. Plaintiffs registered the
trade name “Just Tacos Mexican Grill & Cantina” with the State of Hawaii. (Doc.
# 2-5.) The parties do not dispute that since 2005, Plaintiffs have continuously and
extensively used the “Just Tacos” mark for its restaurant business and related
goods and services. (Santoyo Decl. ¶ 2.) Moreover, pursuant to paragraphs 1(b)
and 6(a) of the Franchise Agreement, Defendants expressly
15
acknowledge the distinctiveness and value of Just Tacos’ trademarks as well as
Plaintiffs’ rights to those trademarks.
The evidence also makes clear that Defendants continue to use the
Just Tacos trademark in a way that is likely to cause confusion. Defendants have
continued to operate under the auspices of being a legitimate Just Tacos franchise
even though the franchise relationship has been terminated. Indeed, “[c]ommon
sense compels the conclusion that a strong risk of consumer confusion arises when
a terminated franchisee continues to use the former franchisor’s trademarks.” 4
McCarthy on Trademarks and Unfair Competition § 25:31 (4th ed. 2011) (quoting
Burger King Corp. v. Mason, 710 F.2d 1480, 1492 (11th Cir. 1983)). Thus, a
“licensor’s case for a preliminary injunction against a holdover dealer or franchisee
is stronger than in the ordinary trademark infringement case.” Id. (citing Sunward
Electronics, Inc. v. McDonald, 362 F.3d 17, 25 (2nd Cir. 2004) (“There is a
compelling need for injunctive relief especially when the case involves a former
licensee because, after a license has been revoked, there is an increased danger that
consumers will be confused and believe that the former licensee is still an
authorized representative of the trademark holder.”)) The Court therefore
concludes that Defendants’ continued and unauthorized use of Just Tacos marks
after the termination of the Agreement creates a clear and obvious likelihood of
16
confusion. Accordingly, Plaintiffs have demonstrated a likelihood of succeeding
on the merits of their trademark infringement claims.
In reaching this conclusion, the Court rejects the two arguments
advanced by Plaintiffs in their Opposition to the instant motion. First, they
contend that Plaintiffs are the ones who wrongfully terminated the Franchise
Agreement and therefore are not entitled to a preliminary injunction. Second, they
assert that the doctrine of unclean hands bars Plaintiffs’ Lanham Act infringement
claims.
With respect to the first contention, Defendants assert that Plaintiffs
engaged in “malicious and intentionally egregious acts amounting to repudiation of
the Franchise Agreement.” (Dfs. Opp. ¶ 20.) However, Plaintiffs have not
submitted any evidence to support this assertion. Moreover, even assuming that
Plaintiffs did in fact wrongfully terminate the Agreement, that would not bar the
issuance of a preliminary injunction where, as here, the franchisee has stopped
performing under the contract. It is an elementary principle of contract law that:
[W]hen one party to a contract feels that the other contracting party
has breached its agreement, the nonbreaching party may respond to
the other party’s breach in one of two ways: (1) either stop
performance and assume the contract is ended; or (2) continue
performance and sue for damages. Under no circumstances may the
nonbreaching party stop performance and continue to take advantage
of the contract’s benefits.
17
4 McCarthy on Trademarks and Unfair Competition §25:31 (citing S & R Corp. v.
Jiffy Lube Intern., Inc., 968 F.2d 371, 376 (3d Cir. 1992); cf. Constandi v.
AAMCO Automatic Transmissions, Inc., 456 F.2d 941, 942 (9th Cir. 1972). Thus,
Defendants’ remedy for the alleged wrongful termination of the Agreement by
Plaintiffs is money damages, not the continued unauthorized use of the Just Tacos
trademark.
Defendants next assert that Plaintiffs threatened to terminate the
agreement unless Defendants executed a new franchise agreement and that this
threat constitutes inequitable conduct that bars the issuance of an injunction
pursuant to the doctrine of unclean hands. As a preliminary matter, the Court notes
that Defendants again have not presented any evidence demonstrating that
Plaintiffs made any such threats. Furthermore, even assuming Plaintiffs had made
such threats, that would not constitute grounds for an unclean hands defense to the
instant allegations.
The Ninth Circuit has explained that “[t]rademark law’s unclean
hands defense springs from the rationale that it is essential that the plaintiff should
not in his trade mark, or in his advertisements and business, be himself guilty of
any false or misleading representation.” Perfumebay.com Inc. v. eBay, Inc., 506
F.3d 1165, 1177 (9th Cir. 2007) (citation and internal quotation marks omitted).
18
“To show that a trademark plaintiff’s conduct is inequitable, defendant must show
that plaintiff used the trademark to deceive consumers.” Id. (citation and internal
quotation marks omitted). “Bad intent is the essence of the defense of unclean
hands.” Id. (citation and internal quotation marks omitted).
Here, Defendants do not allege that Plaintiffs used the Just Tacos
trademark to deceive customers, nor does the record demonstrate any such
deception. The fact that Plaintiffs threatened to terminate the agreement does not
constitute a false or misleading representation supporting a finding of unclean
hands. Further, Defendants have not demonstrated that Plaintiffs acted with the
requisite bad intent. Accordingly, the Court concludes that Defendants have not
shown that Plaintiffs engaged in any inequitable conduct that would support an
unclean hands defense.
B.
Irreparable Harm
A plaintiff seeking a preliminary injunction must “demonstrate that
irreparable injury is likely in the absence of an injunction.” Winter, 129 S. Ct. at
375 (emphasis in original). In trademark infringement cases, courts have found
irreparable harm in the loss of control over a business’ reputation and loss of
goodwill. See Stuhlbarg Int’l Sales Co., Inc. v. John D. Brush & Co., Inc., 240
F.3d 832, 841 (9th Cir. 2001); Rent-A-Center, Inc. v. Canyon Television and
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Applicable Rental, Inc., 944 F.2d 597, 603 (9th Cir. 1991); and Maxim Integrated
Products, Inc. v. Quintana, 654 F. Supp. 2d 1024, 1035–36 (N.D. Cal. 2009) (citing
Apple Computer, Inc. v. Formula Int’l. Inc., 725 F.2d 521, 526 (9th Cir. 1984)).
Here, Defendants have persuasively shown that, without the
injunction, they stand to lose control over Just Tacos’ reputation. In particular,
Plaintiffs have submitted evidence indicating that Defendants have deviated from
certain Just Tacos operating practices by, among other things, allowing their
female bartenders to wear revealing outfits on the job and permitting employees on
duty to drink with customers. (Santoyo Decl. ¶ 33; Docs. ## 2-24, 2-26.) These
practices serve to compromise efforts to maintain Just Tacos’ reputation as a
family-friendly restaurant. (Santoyo Decl. ¶ 33; Docs. # 2-23.) Since Defendants
are former franchisees and still have the Just Tacos signage on their stores, it is
likely that customers may mistakenly attribute any practices at Defendants’ stores
to the Just Tacos franchise more generally. Accordingly, the Court concludes that
Plaintiffs will likely suffer irreparable harm to their business reputation absent an
injunction requiring Defendants to cease using the Just Tacos trademark.
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C.
Balance of Equities
The Court also determines that the balance of equities tips in
Plaintiffs’ favor. As described above, Plaintiffs will likely suffer irreparable harm
to their reputation if no injunction is issued. Meanwhile, although Defendants may
be harmed by the issuance of an injunction, they brought on any such difficulties
upon themselves by choosing to stop their own performance under the Franchise
Agreement. See 4 McCarthy on Trademarks and Unfair Competition
§ 30:48 (“‘[A] party’s self-inflicted harm by choosing to stop its own performance
under the contract and thus effectively terminating the agreement is outweighed by
the immeasurable damage done to the franchisor of the mark.’”) (quoting Pappan
Enterprises, Inc. v. Hardee’s Food Systems, Inc., 143 F.3d 800, 806 (3rd. Cir.
1998)). To be sure, to the extent that Defendants claim that Plaintiffs breached the
Agreement, they are not prevented from seeking damages for any alleged
wrongdoing on the part of Plaintiffs. However, as discussed above, “[u]nder no
circumstances may the nonbreaching party stop performance and continue to take
advantage of the contract’s benefits.” Id. (quoting S & R Corp., 968 F.2d at 376).
Since Defendants stopped performing under the Franchise Agreement, they cannot
establish a right to continue using the Just Tacos trademark.
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D.
Public Interest
Lastly, a plaintiff seeking an injunction must establish that the
injunction is in the public interest. In the trademark context, courts have
recognized that the public has a valid interest in avoiding confusion as to the
source of consumer products and services. See Internet Specialities West, Inc. v.
Milon-DiGiorgio Enterprises, Inc., 559 F.3d 985, 993 (9th Cir. 2009); Kos
Pharmaceuticals, Inc. v. Andrx Corp., 369 F.3d 700, 730 (3d Cir. 2004). As
discussed above, the risk of confusion is heightened where, as here, the infringing
party is a former franchisee. Thus, “the public interest is especially served by
issuing a preliminary injunction against a former franchisee as the licensee’s status
increases the probability of consumer confusion.” Vander Vreken v. American
Dairy Queen Corp., 261 F. Supp. 2d 821, 825 (E.D. Mich. 2003). Additionally, the
Ninth Circuit has recognized that the public has an interest in protecting
trademarks generally. Brookfield Communications, Inc. v. West Coast
Entertainment Corp., 174 F.3d 1036, 1066 (9th Cir. 1999). Here, a preliminary
injunction would serve the public’s interest in both avoiding consumer confusion
and protecting trademarks more generally. The Court thus concludes that this
factor weighs in favor of granting an injunction.
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E.
Preliminary Injunction
Based upon consideration of all the Winter factors set forth above, the
Court concludes that Plaintiffs have demonstrated that they are entitled to a
preliminary injunction enjoining Defendants from continuing to use the “Just
Tacos” trade name. Defendants are hereby ordered to cease using the “Just Tacos”
trade name and remove all signs containing the “Just Tacos” designation by no
later than thirty (30) days from the date of this Order. Based on defense counsel’s
representations at the hearing, this will provide Defendants sufficient time to file
the necessary liquor license forms and change the signs at both the Hawaii Kai and
Pearl City locations to reflect the restaurants’ new name, “Miguel’z.” Plaintiffs are
directed to cooperate with Defendants to get the liquor licenses properly changed
and Defendants are directed to report back to the Court regarding their compliance
with this Order.
Additionally, during the next thirty days—or until Defendants cease
using the “Just Tacos” trade name if that should occur before the thirty days
run—Defendants shall take all reasonable steps to maintain the standards of the
Just Tacos franchise by operating their stores in a manner consistent with Just
Tacos practices. This includes prohibiting employees from dressing in revealing
clothing or drinking with customers while on duty.
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II.
Further Injunctive Relief
The Court denies without prejudice the balance of Plaintiffs’ request
in their Motion for Preliminary Injunction. The parties are directed to meet with
Magistrate Judge Kevin S.C. Chang within thirty (30) days from the date of this
Order in an effort to reach some mutually agreeable resolution to the instant action.
All discovery in this case is stayed until further Order of this Court.
III.
Waiver of Bond Requirement
Federal Rule of Civil Procedure 65(c) provides that “the court may
issue a preliminary injunction or a temporary restraining order only if the movant
gives security in an amount that the court considers proper to pay the costs and
damages sustained by any party found to have been wrongfully enjoined or
restrained.” The Ninth Circuit has recognized that Rule 65(c) “‘invests the district
court ‘with discretion as to the amount of security required, if any.’” Johnson v.
Couturier, 572 F.3d 1067, 1086 (9th Cir. 2009) (quoting Jorgensen v. Cassiday,
320 F.3d 906, 919 (9th Cir. 2003)) (emphasis in original).
Here, paragraph 19(b) of the Franchise Agreement provides that:
Franchisor or its designee shall be entitled to obtain, without bond,
declarations, temporary and permanent injunctions, and orders of
specific performance, in order to enforce the provisions of this
Agreement relating to Franchise Owner’s use of the Licensed Marks,
the obligations of Franchise Owner upon termination or expiration of
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this Agreement, and assignment of the Franchise and ownership
interests in Franchise Owner . . . .
(Doc. # 2-4 at 31 (emphasis added).) Accordingly, Defendants have plainly
waived any bond posting requirement for injunctive relief.
CONCLUSION
For the reasons stated above, the Court GRANTS IN PART and
DENIES IN PART WITHOUT PREJUDICE Plaintiffs’ Motion for Preliminary
Injunction. (Doc. # 2.)
IT IS SO ORDERED.
DATED: Honolulu, Hawaii, December 9, 2011.
_____________________________
David Alan Ezra
United States District Judge
Just Tacos, Inc., et al. v. Michael Zezulak, et al., CV No. 11-00663 DAE-KSC;
ORDER GRANTING IN PART AND DENYING IN PART WITHOUT
PREJUDICE PLAINTIFFS’ MOTION FOR PRELIMINARY INJUNCTION
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