DUNKIN' DONUTS FRANCHISING LLC et al v. C3WAIN INC. et al
Filing
160
MEMORANDUM AND FINAL JUDGMENT. Signed by Judge Peter G. Sheridan on 9/28/2018. (mmh)
NOT FOR PUBLICATION
RECEIVED
SEP 2 8 2018
UNITED STATES DISTRICT COURT AT a:3o
.. .
M
FOR THE DISTRICT OF NEW JERSEY WILLIAM T. wAisir·
CLERK
DUNKIN' DONUTS FRANCHISING LLC,
et al.,
Plaintiffs,
Civil Action No.: 13-cv-6865 (PGS)(DEA)
MEMORANDUM AND FINAL
JUDGMENT
V.
C3 WAIN INC., et al.,
I
Defendants.
I
SHERIDAN, District Judge
This matter returns to the Court after granting, in part, Plaintiff Dunkin' Donuts
Franchising LLC's (hereinafter, "Dunkin") motion for summary judgment on January 14, 2016.
As such, a two day bench trial was conducted. The Court has original subject matter jurisdiction
over this action pursuant to Sections 34(a) and 39 of the Lanham Act, 15 U.S.C. §§ l l 16(a) and
1121, and 28 U.S.C. §'§ 1331, 1332(a), 1338, and 1367(a). Both parties agree that the Franchise
Agreements are governed by Massachusetts law, based on the choice of law provisions contained
in each agreemJnt. Under Massachusetts law,
I
Plaintiffs bear the burden of proof by a
preponderance of the evidence, that Defendants breached their contractual obligation under the
franchise agreements. Here, Plaintiffs assert that because Defendants committed fraud, Plaintiffs'
burden of proof Led "not be shown by anything more than the ordinary preponderance of the
~
evidence standard applicable to civil cases in general." Compagnie de Reassurance D 'Ile De
France v. New Enkland Reinsurance Corp., 57 F.3d 56, 72 (I st Cir. 1995) (applying Massachusetts
I
law).
According to the Freehold Mall franchise agreement, confidential information "means
information relating to us . . . that is not generally available to the public, including manuals,
recipes, products, or other trade secrets and all other information and know-how relating to
methods of developing, operating, and marketing the restaurant ... "(Ex. Pl, §10.5).
Dunkin
maintained that the couple traded confidential marketing information which violates nondisclosure clauses of the franchise agreements during this pillow talk. For example, Jack
Laudermilk, Esq., in-house counsel for Dunkin, testified at a deposition that "pillow talk is pillow
talk, and we don't know its not happening." (Dep. Tr. 191 :2-6). 1
Over the course of the trial, Dunkin eased up on the pillow talk theory, and focused on
other more concrete facts. On a motion for summary judgment, Dunkin presented undisputed
evidence of Moothedath' s interest in the Red Mango shop by demonstrating, among other things,
a personal guarantee on a joint loan ($250,000) to Moothedath's and Raji's corporations (CWAIN
and Greensphere) for improvements to the Red Mango and the combination shop at the Freehold
Mall. Summary judgment was granted against Moothedath's other corporation (C3W AIN, Inc.)
on the Freehold tyfall Franchise but denied with regard to Moothedath's other franchises held by
I
CWAIN because ~e corporate entity was different.
Here, Durtkin seeks to terminate the other two viable ongoing franchises, Wilson A venue
and Gordon's Comer because the principal shareholder, Moothedath, fraudulently misrepresented
facts about the Freehold Mall franchise. Interestingly, on its face, Dunkin appears to be concerned
with the covenant, not to compete; but its application is different: it seeks to terminate the other
i
franchises due to Noothedath's fraudulent statements with regard to the Freehold Mall location.
Obviously, this ~tatement is not very helpful to Dunkin who bears the burden of proving "pillow
1
talk".
1
3
Baskin-Robbins Franchising LLC is engaged in the business of creating and developing BaskinRobbins franchises throughout the United States. (Pis' PFFCL
at~
8; Tr. 70:6-13). Plaintiff BR
IP Holder LLC is the owner of the trademark, service mark, and trade name "Baskin-Robbins,"
and related marks. (Pls' PFFCL at~ 9; Stipulation of Facts at~ 3f). Baskin-Robbins is authorized
to use the marks owned by BR IP Holder LLC and to sublicense the use of these marks to
franchisees. (PFFCL at ~ 10).
Defendant Moothedath is a New Jersey citizen and the president and sole shareholder of
C3WAIN Inc. and CWAIN Inc. (Stipulation of Facts at if 3d). Specifically, C3WAIN Inc. is a
New Jersey corporation that owned and operated a Dunkin'. Donuts and Baskin-Robbins
combination shop located in the Freehold Raceway Mall in Freehold, New Jersey. (Stipulation of
Facts at
~
3c). Defendant CWAIN Inc. is a New Jersey corporation that currently owns and
operates a Dunkin' Donuts and Baskin-Robbins combination shop located at 26 Wilson Avenue,
Manalapan, New Jersey; and a Dunkin' Donuts shop located at 285 Gordons Corner Road,
Manalapan, New Jersey. (Stipulation of Facts
at~~
3a, 3b). Since 2005, Moothedath has been a
Dunkin franchisee and still currently owns and operates the two shops in Manalapan, New Jersey.
(Tr. 17:6-8).
Defendant Moothedath and his wife, Raj i, were both born in India and immigrated to the
United States over thirty years ago. According to Moothedath, he and his wife have pursued
prosperity through education and hard work. (Tr. 401: 13-25). They have been married for thirty
years and have three daughters. (Tr. 402:2-3; 408:10-11). Moothedath holds a bachelor's degree
in engineering and a Master's in Business Administration from Villanova University. (Tr. 16:1417; 17:12-13). Raji earned a Master's degree in industrial psychology from Kean University. (Tr.
401: 18-20).
5
Prior to icoming a Dunkin franchisee~ Moothedath practiced as a staff engineer for T &M
Associates, an e,ngineering firm, where he designed roadways and highways. (Tr. 17:12-20).
While at T &M, personal computers were being introduced into the market and Moothedath
became familiar with the operation of such computers, so he trained other engineers on their use.
(Tr. 17: 15-20).
Seeing personal computers as a new business opportunity, in 1988, the
Ramachandrans started a computer company named Bits-N-Bytes. One of its primary customers
was the State of New Jersey, to which Bits-N-Bytes supplied and installed new computers for
schools across the State. (Tr. 18:5-19; 239:22-240:4). While Bits-N-Bytes initially flourished, by
the mid-2000s, sales tapered off as competition intensified; and the State outsourced such contracts
with other vendors. (Tr. 407:21-408:5). Recognizing that the computer business had reached its
peak, Moothedath began investigating new business ventures in which to invest. (Tr. 19:21-25).
Eventually, he focused on opening a Dunkin Donuts store.
Over the next decade, Moothedath would enter three separate franchise agreements with
Dunkin. On June 20, 2005, Moothedath, on behalf of CW AIN, executed a Franchise Agreement
for the operation of a Dunkin' Donuts shop located at 285 Gordons Comer Road, Manalapan, New
Jersey (hereinafter, the "Gordons Comer Franchise Agreement"). (Stipulation of Facts at, 3a;
Ex. P3). The following year, July 25, 2006, CWAIN, again through Moothedath, entered a second
Franchise Agreement for the operation of a Dunkin' Donuts and Baskin-Robbins combination
shop located at 26 Wilson Avenue, Manalapan, New Jersey (hereinafter, the "Wilson Avenue
Agreement"). (Stipulation of Facts at, 3b; Ex. P2). Finally, on November 14, 2012, C3WAIN,
by and through Moothedath, executed a third Franchise Agreement for the operation of a Dunkin'
Donuts and Baskin-Robbins combination shop located in the Freehold Raceway Mall, Freehold,
New Jersey (hereinafter, the "Freehold Mall Agreement"). (Stipulation of Facts at, 3c; Ex. Pl).
6
As noted in Section I, all three agreements contained covenants against competition, which
I
prohibited any franchisor from "own[ing], maintain[ing], engag[ing] in, be[ing] employed by, or
hav[ing] any interest in any business which sells or offers to sell the same or substantially similar
products to the type" offered by Dunkin. (Ex. Pl, § 10, P2, § 8.0.3; Ex. P3 § 8.0.3) (emphasis
added).
Throughout Moothedath's ownership and operation of his Dunkin franchises, he exhibited
a commitment towards improving and advancing his franchises. He regularly worked long hours
and weekends; and Raji assisted Moothedath in promoting various special marketing events. (Tr.
31:12-13; 403:15-404:22). They organized community blood drives, Halloween and Christmas
parties, and Easter Egg Hunts, to advance the Dunkin brand, sell coffee and build a relationship
with the community. (Tr. 403:3-7). Moothedath explained that these events were tailored' towards
families and were intended to show "a goodwill standpoint" of Dunkin and his shops. (Tr. 236:22237:3). By looking at the revenue, this commitment and hard work has been beneficial with annual
sales of $1.3 million at the Gordon's Comer location and $1.1 million at the Wilson A venue store.
(Tr. 52:9-11; 56:8-12)3 • Since both shops were prospering, Moothedath was pursuing a third shop,
and coincidentally, Raji began looking for a new business to operate.
As noted above, beginning in 2008, business at Bits-N-Bytes began "slowing down quite
a bit" and Raji found herself with more free time on her hands to pursue other business ventures.
(Tr. 407: 19-408:6). Initially, she considered opening franchises with Computer Geeks or Alpha
Graphics. (Tr. 409:14-18). However, after visiting a frozen yogurt shop in Princeton, New Jersey
with her daughters, Raji had, as she put it, an "a-ha moment" and found herself enamored with the
3
Although the Wilson A venue shop was a combination shop; the annual revenues were never
allocated between Dunkin and Baskin.
7
,
idea of owning dnd operating a frozen yogurt franchise whose market was adolescents and young
~
adult college stufjents. (Tr. 408:7-25). Eventually, she became aware of Red Mango and decided
to pursue a franchise with it, based upon its marketing message and business philosophy. (Tr.
I
409:3-13). Red Mango offers for sale, among other things, various frozen yogurt flavors; frozen
I
Greek yogurt; frozen yogurt blended with various toppings; and various smoothie flavors.
(Stipulation of Facts at if 3h). However, despite Raj i's interest, Moothedath had reservations about
opening a Red Mango franchise, due to the volatility of such "health fad" businesses. (Tr. 410: 1123).
In any event, on May 10, 2011, Raji, on behalf of Greensphere, executed a franchise
agreement for the operation of a Red Mango frozen yogurt and smoothies franchise; and
Moothedath on behalf of C3 WAIN signed the Freehold Mall franchise agreement. (Stipulation of
Facts at if 3g; Ex. PIO). As described below, Red Mango and the Freehold Mall Dunkin initially
negotiated to occupy a single block of space at the Freehold Mall, and then subdivided the space
for their respective needs. Subsequent to signing the franchise agreement, Raji transferred control
of the Red Mango franchise to Greensphere Inc., 4 of which she is the sole owner. (Id.).
After acquiring the franchise, Raji, along with a real estate agent assigned to her by Red
Mango, began considering various locations for the new franchise. (Tr. 411: 16-412:5). According
to Raji, she considered a lease in Princeton, New Jersey before "this whole Freehold Raceway
Mall came about." (Tr. 412:11-16). Raji did not choose the Freehold Mall location by herself;
rather, Moothedath coaxed her into leasing space in Freehold Mall, since it offered a unit of space
that could accommodate both Moothedath's Dunkin franchise and Raji's Red Mango at a cost
4
Originally, Greensphere filed a certification of trade name with the. Court Clerk of Monmouth
County with the purpose of entering the recycling business (Ex. Dl3); but since the recycling
business never occurred, Raji changed its purpose to operate a Red Mango franchise.
8
effective rental rate. (Tr. 417:13-418:1). The unit would be split, with the Dunkin franchise
acquiring the larger share. (Tr. 271:18-272:10). In describing negotiations between the mall
representative and the two franchises, Raji described it as "joint," explaining that the mall had
questions for both Moothedath and Raji concerning issues of how the space would be split between
the two franchises. (Tr. 420: 14-421 :6).
On March 20, 2012, almost a year after Raji acquired the Red Mango franchise,
Moothedath emailed Bridget Gilbertsen, Freehold Mall's leasing agent, about different units
available in the Freehold Mall. (Ex. P5 at 2).
Copied on this email was Alan Persico, a
Development Manager for Dunkin Brands, and two other Dunkin officials. (Id.). In this email
Moothedath discussed the advantages of the two unit locations, which "would give this
'Youthtopia' Dunkin I Red Mango a different look and feel and not a 'run of the mill' store.
Dunkin and Red Mango being good, strong national brands would bring a lot of value to the mall
and vice versa." (Id.).
The following day, Persico responded to Moothedath's email, expressing concern about
Moothedath' s potential interest in a Red Mango franchise:
Rama,
Why no Baskin Robbins at the mall if you are interested in space? Do you own any
Red Mango stores currently? You can not [sic] be approved to develop a Red
Mango with Dunkin' Donuts at the mall.
(Ex. P5 at 2).
In response to Persico's inquiry, Moothedath claimed, "No, I am not developing any Red
Mango stores nor do I have franchise agreement with them." (Id.).
In a subsequent email to Persico, and two other Dunkin officials, Moothedath again
disclaimed any interest or affiliation with Red Mango:
9
[P]lease be informed that I DO NOT HAVE A RED MANGO. I am not a
franchise),[e] of that company, own any stores, nor do I have an agreement to
develop any stores for them. They ([R]ed Mango) would be like any other store in
l
the mall 'like a Star Bucks [sic], Gloria jeans or the local bagel store. I have no
financial interest in a Red mango therefore, it is indeed not a factor to be concerned
I
about.
1
I
(Ex. P6).'
In any event, Bridget Gilbertsen. (whose deposition testimony was read into the record),
discussed Moothedath' s involvement in acquiring unit space at the Freehold Mall. In 2012,
Gilbertsen was a senior manager for Macerich, where she was responsible for leasing space for
shopping centers, including the Freehold Mall. (Tr. 201 :5-23). As lease manager for the Freehold
Mall, Gilbertsen negotiated the leases for both Dunkin and Red Mango. (Tr. 202:14-203:6; 206:814). According to Gilbertsen, prior to ever discussing the opening of a Dunkin' Donuts franchise
at the Freehold Mall, Moothedath contacted her about leasing a space in the mall for a Red Mango
store. (Tr. 207:14-208:11). Gilbertsen explained that she only dealt with Moothedath, when
discussing the Dunkin lease; but communicated with both Moothedath and Raji with regard to the
Red Mango. (Tr. 205:2-7; 206:8-14). Similarly, when the parties were preparing the final letters
of intent for the lease-space at the Freehold Mall, Gilbertsen explained that both Moothedath and
Raji participated in negotiating the details of the lease. (Tr. 212: 11-13). When asked to describe
Moothedath's role in negotiating the Red Mango lease, Gilbertsen explained that he was involved
in discussing how the unit space would be split between the two stores and that he was copied on
Red Mango-related e-mails. (Tr. 213:1-16). Additionally, at Red Mango's Letter oflntent stage,
Gilbertsen described Moothedath as "the primary or dominant person in the conversations." (Tr.
213: 1-16).
On October 11, 2012, Greensphere Inc. entered into a lease with the Freehold Raceway
Mall for the Red Mango franchise; that same day, C3 WAIN Inc. entered into a lease with the mall
10
for a Dunkin' Donuts and Baskin-Robbins combination shop. (Stipulation of Facts at
~~
3j, 3k;
Ex. P 11, P 12). i Moothedath personally guaranteed Greensphere Inc.' s lease, on behalf of Red
Mango, with tmlle mall, making him personally liable for Greensphere Inc.' s obligations.
(Stipulation of F, cts at~ 31; Ex. Pl 1 at 62).
The follJwing month, November 30, 2012, Greensphere Inc. and CWAIN Inc. jointly
obtained a $250,000 loan from Amboy Bank, the proceeds of which were deposited into CW AIN
Inc.'s account. (Stipulation of Facts at
~~
3m, 3n; Exs. Pl3, Pl4).
Moothedath personally
guaranteed the loan and pledged as collateral the lease of the Gordons Corner Shop. (Stipulation
of Facts at
~~
3p, 3q; Exs. P18, P19).
Under the terms of the security agreement, should
Moothedath default on his payment obligations,
[Amboy Bank] shall be entitled to enter upon and take possession of the lease hold interest in the Mortgaged Property ... , and collect and receive all rent, issues
and profits arising from the Mortgaged Property, including the rents, issues and
profits then due and unpaid to [Moothedath], and also those thereafter to fall due.
(Ex. P 19 at~ 10). After acquiring the loan from Amboy Bank, CWAIN Inc. transferred $150,000
to Greensphere Inc., which used the funds to construct the Red Mango franchise at the Freehold
Mall. (Stipulation of Facts at if 3o). Each month, Greensphere Inc. pays its share of the loan to
CW AIN, which then pays the full monthly amount to Amboy Bank. (Tr. 36:23-37: 12). As such,
given Moothedath's personal guarantee of both Greensphere's lease with the Freehold Mall and
the parties' joint loan with Amboy bank, Moothedath had a financial interest in Red Mango's
operations. (Stipulation of Facts at~ 31; Ex. Pl 1 at 62; Tr. 277:3-10).
Since all three Dunkin Franchise Agreements have terms prohibiting franchisees from
having any interest in any business that sells the same or substantially similar products as Dunkin
and Baskin-Robbins products, Defendants argued that the Red Mango and the Freehold Mall
combination shop were not competitors, and therefore the covenant not to complete was not
11
violated. As such, a significant portion of the trial was devoted towards discussing the similarities
I
and differences between Red Mango and Baskin-Robbins products. (Ex. Pl,§ 10; Ex. P2, § 8.0.3;
· Ex. P3, § 8.0.3}. Specifically, Section 10 of the Freehold Mall Franchise Agreement concerns
"restrictive covenants" that provide covenants against competition:
10.1 During the term of this Agreement, neither you nor any
shareholder, member, partner, officer, director of guarantor of
yours, or any person or entity who is in active concert or
participation with you or who has a direct or indirect beneficial
interest in the franchised business, may have a direct or indirect
interest in, perform any activities for, provide any assistance to, sell
any approved products to, or receive any financial or other benefit
from any business or venture that sells products that are the same or
substantially similar to those sold in Dunkin' Donuts or BasinRobbins restaurants ...
See also Ex. P2 and Ex. P3 at§§ 8.0, 8.0.3. (emphasis added).
Interestingly, Dunkin seeks to apply Moothedath's fraudulent statements about his interest
in the Red Mango, as opposed to the substance of the above provision, because the cross-default
provisions are limited to fraud. More precisely, the Gordon's Comer shop's 5 covenant not to
compete was not breached by the activities that violated other Dunkin non-compete clauses.
Accordingly, Dunkin seeks relief under the Freehold Mall agreement based on fraud.
The Freehold Mall Agreement includes a "cross-default" and fraud provisions. Section 14,
entitled "Default and Remedies" provides:
14.0. l You breach an obligation under this Agreement, or an
obligation under another agreement, which agreement is necessary
to the operation of the Restaurant.
***
14.0.4 You or your owners commit a fraud upon us or a third party
relating to a business franchised or. licensed by us.
5
This Dunkin sells only Dunkin products.
12
***
1~.0.6.
We terminate any other franchise agreement with you or any
affiliated entity by reason of a default under sections 14.0.3, 14.0.4
or 14.0.5.
Relying on Section 10.1, Dunkin asserts that Moothedath violated the Freehold Mall
Agreement since he had an interest in Raji' s Red Mango, which alleged! y sells similar products to
that of Baskin-Robbins. In addition, by failing to disclose same to Dunkin, Moothedath defrauded
Dunkin in violation of Section 14.0.4 having "commit[ed] a fraud upon [Dunkin] with respect to
Freehold Mall franchise acquisition. As noted above, the Agreements also have "cross-default"
provisions. That is, if you are in default on the Freehold Mall franchise agreement by an act of
fraud, then the franchisee is in default in all of the other franchise agreements. (Ex. Pl, § 14.0.6)
According to Dunkin, given that the two companies (Red Mango and the Freehold Mall
combination shop) are both in the "frozen dessert" business and offer frozen yogurt, the two are
deemed to sell the same or substantially similar products. Kathryn Thomas, Vice-President and
Managing Counsel for Dunkin' Brands, testified from a lawyer's perspective regarding these two
franchises. 6 Thomas testified to the general legal and business practices of Dunkin. Thomas, a
lawyer, testified about the language within the non-compete provision. To Thomas, both BaskinRobbins and Red Mango sold frozen yogurt with the same types of toppings. As such, the products
were the same or similar. 7 She explained that, under the terms of the Baskin-Robbins franchise
6
Thomas was not involved with the Freehold Mall franchise transaction and had little personal
knowledge of the facts surrounding Moothedath' s negotiations and acquisition of the Freehold
Mall location.
·
7
Prior to trial, there was a Daubert motion brought by Dunkin's counsel seeking to exclude the
testimony of Jack A. Gordon, a financial forensics analyst. His opinion was that the Red Mango
and Baskin Robbins were not similar; but his qualifications did not meet the standard set forth in
13
agreement, the parties understood the fact that Baskin-Robbins is in the ice cream and yogurt
I
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business. (Tr. 73:16-21). Notably, under the Wilson Avenue Franchise Agreement, Thomas
testified that Baskin-Robbins is in the business of providing "ice cream, yogurt, and novelties."
(Ex. P2 at 2). Additionally, under the "Terms and Conditions" for a Baskin-Robbins franchise,
the Agreement defines "Baskin-Robbins Products" as:
[I]ce cream, ice milk, sherbets, water ices, yogurts,frozen. desserts, syrups,
toppings, confections, novelties, food, beverages and fountain ingredients,
all of a variety of kinds of flavors, made in accordance with the formulas
or specifications designated by BASKIN-ROBBINS and identified by the
Baskin-Robbins Proprietary Marks.
(Id. at 20) (emphasis added).
Oddly, Thomas testified that the management of Dunkin maintained an "internal policy"
that identified what products are the same or substantially similar, (Tr. 80: 12-16; Ex. P31 );
however, the policy is a written policy distributed to Dunkin management but not to franchisees
like Moothedath. The internal policy states, "Baskin-Robbins is an ice cream and frozen treats
chain, and we do not permit into the Baskin-Robbins System someone who has an interest in any
ice cream or frozen treats retail business." (Ex. P31 at 2). The policy provides examples of what
it considers "competition":
*
Ice Cream Concepts (hard or soft) including Ben & Jerry's, Haagen Daz, Friendly's,
Brigham's, Carvel, Dairy Queen, Swenson's
*
Yogurt Concepts including TCBY Treats.
*
Smoothie Concepts including Planet Smoothie.
(Id.).
F .R.E. 702. Although Thomas as a lawyer does not have business experience to determine whether
Red Mango and Baskin Robbins compete; she was qualified to explain the non-compete provision.
14
As the trier of fact, it seemed peculiar that such definitive information was developed into
I
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a policy for Dunkin executives, but was not shared with franchisees. If the policy had been given
to the franchiseJ. the franchisee's knowledge of what Dunkin considered "same or substantially
similar products" would have been more apparent. In addition, the policy also notes that there are
exceptions to the enforcement of the same or substantially similar products prohibition, and it
recognizes some of its franchisees own other franchises which may sell the same or substantially
similar products, that is:
B. It is not our intention to preclude an operator of another restaurant
or concept simply because it competes for the same day-part dollars
as one or more Dunkin' Brands franchises. In a multi-brand world,
this would preclude the vast majority of existing operators.
Accordingly, our policy does not preclude, for example, a Burger
King franchisee from purchasing a Dunkin' Donuts franchise simply
because Burger King competes in the morning and sells coffee and.
breakfast sandwiches.
C. If the prospect seeks to develop ... a Dunkin' Brands combo, the
test is whether the prospect/franchisee has an interest in a business
that is a competitor any of the Dunkin' Brands franchises to be
operated. (emphasis added).
Obviously, the underscored language discredits Ms. Thomas' testimony wherein she
asserted that no franchise should have "divided loyalties" by selling the same or similar products.
(Tr. 120: 1-20). Moreover, Ms. Thomas conceded that "its okay to have an interest in a company
which sells a small amount of the same or similar business." (Tr. 142:1-7). Also, the internal
policy sets forth an alternative remedy other than termination, ifthe franchisee is selling competing
products. The policy requires "any individual who has a financial interest that would violate
Dun.kin's Brand policy must divest his interest in the competing brand" or "convert the competing
use" to a Dunkin brand. It states:
5.
Avenues of Resolution-Divest or Convert
15
In order to be approved into the Dunkin' Brands system or to grow
or retrofit to add brands, any individual who has a financial interest
tHat would violate Dunkin' Brands policy must divest his interest in
ttie competing brand( s) by transferring of the business in a
1
d~cumented arms-length transaction (no transfers to relatives) or, in
limited circumstances approved in advance in writing by Dunkin'
B~ands, must alternatively convert the competing use to the Dunkin'
B~ands brand.
I
There was no testimony that Dunkin allowed Moothedath to "sell a small amount" of frozen
desserts or allowed him to "divest" his interest in the Red Mango.
In any event, Thomas discussed why Dunkin considers Red Mango products to be the same
or substantially similar to Baskin-Robbins. She explained, "[v]irtually everything [Red Mango]
sell[s] we sell ... they are a purveyor of frozen treats, they are a frozen dessert brand like BaskinRobbins; they sell frozen yogurt, they sell parfaits, they sell smoothies, they offer toppings just
like Baskin-Robbins." (Tr. 91:3-10). Thomas noted that both companies offer the same smoothies .
and "nearly the same kind of toppings ranging from gummy bears to brownie bites to M&Ms."
(Tr. 92:6-14). Additionally, in response to the growing trend towards frozen yogurt products,
Thomas explained that Baskin-Robbins launched a new initiative, "BRight Choices," in 2009. (Tr.
92:6-93:3). The BRight Choices platform emphasizes the healthier items available at BaskinRobbins, such as fat free frozen yogurt and Greek yogurt, as well as no-sugar-added ice creams.
(Tr. 92:15-93:3, 511:6-512:18). The initiative has been in effect since 2009, and Baskin-Robbins
has required its franchisees to carry at least three BRight Choice products. (Tr. 512:24-513:10).
Moothedath and Raji, had a more practical view of what the non-compete clause meant.
First, Moothedath testified that some of the products overlap, but the business models of Dunkin
and Red Mango are completely different. Moothedath was adamant that the Red Mango products
16
. were not the sarrle or substantially similar to Baskin Robbins. 8 According to Moothedath, Baskin- '
Robbins is
prim~rily focused on selling ice-cream and its products to many who are not health-
oriented; whereas Red Mango products are geared to health concerns and younger people. (Tr.
I
289:23-290:20). , Although frozen yogurt is offered, Moothedath claims that in the "12 years that
I've been in Baskin-Robbins, there was not one scoop of hard-packed yogurt that I sold." (Tr.
28:16-20). He conceded that his shops may have offered four or five BRight Choice products; but
he had never heard of the BRight Choice platform as a marketing scheme. (Tr. 291:6-9; 343:1315).
Despite that Red Mango and Dunkin/Baskin are both in the frozen dessert business,
Moothedath claimed that his Dunkin combination shop and the neighboring Red Mango shop
could financially coexist, since Red Mango had a specialized market which sold to healthconscious patrons and Dunkin/Baskin sold to patrons who were less nutrition oriented.
He
explained:
It's been a hundred percent corroborated with my vision and what I
thought based on my conversation with Red Mango throughout, that
this as a health and fitness space, I mean why would I put my store
next to them otherwise.
(Tr. 454:2-11 ).
Like Moothedath, Raji also testified that Red Mango is "totally different" from BaskinRobbins. (Tr. 446: 1-2). According to Raji, Red Mango is focused on healthy frozen desserts and
uses stevia, instead of sugar, in its smoothies. (Tr; 446:4-18). Raji also noted that the two business
have different business operations. At Baskin-Robbins, orders are prepared over the counter;
however, Red Mango employs a self-service business operation, where customers prepare their
8
During Moothedath' s direct examination, he brought prepared notes to the stand and began
reading them into the record. (Tr. 293: 16-295: 18). These notes were later admitted into evidence
as Exhibit D52, and are largely excerpts from the Baskin-Robbins' website.
17
own desserts. (Tr. 450:2-11 ). This being said, she did concede that many of the same toppings
offered at BaskiJil-Robbins are also available at Red Mango, such as Oreo cookie bites, sprinkles,
i
I
gummy bears, M&Ms, brownie bites, peanut butter cups, and chocolate syrup. (Tr. 485:9-486:16).
I
.
Defendant's brief claims that Dunkin was being selective in its enforcement of its anticompetition clause. Evidently, Dunkin allows Dunkin franchisees to have an interest in a Burger
King which sells coffee and breakfast sandwiches, and Defendants point is that Red Mango is no
different.
In any event, consistent with the Court's summary judgment decision, it is clear that both
franchises sold frozen yogurt.
From the testimony, Moothedath
and Raji claimed the
Dunkin/Baskin-Robbins business/marketing model is far different than the Red Mango model.
That is probably true; however, this franchise agreement prohibits the sale of same or substantially
similar products.
Here, the products are the same. As such, this provision of the franchise
agreement has been breached.
VIL Termination of the Franchise Agreements
Based on Defendants' misrepresentation, regarding his interest in Red Mango, Dunkin sent
Defendants a "Notice of Default and Termination" letter, terminating the Freehold Mall, Wilson
Avenue, and Gordons Comer Franchise Agreements on October 10, 2013. (Ex. P7). The basis
for termination was that Defendants breached the Franchise Agreements by "operating a Red
Mango frozen yogurt franchise next door to your Dunkin' Donuts/Baskin-Robbins franchise ....
This was done without [Dunkin's] knowledge or consent." (Id. at 2). The letter explained:
You have committed fraud in connection with your franchises by: (1) intentionally
misrepresenting your involvement with a competing business in order to induce
[Dunkin's] approval of your Freehold Raceway Mall Franchise, and (2) continuing
to conceal from [Dunkin] your interest in a competing business. Specifically, prior
to entering into your Franchise Agreement for the Freehold Raceway Mall
Franchise, you intentionally failed to disclose to [Dunkin] that a competing
18
business ;would be opening next to the proposed site of that franchise and your
interest in that competing business. Further, after entering into the Franchise
Agreemdnt for Freehold Raceway Mall Franchise, you continued to conceal your
interest ih the competing business.
I
i
(Id).
I
As such, !Dunkin explained that these breaches constituted a default under Section 14 of
I
I
•
the Freehold Mall Franchise Agreement and provided good cause for terminating the Freehold
Mall franchise. (Id).
Finally, based on the cross-default provision in Section 14.06 of the
Franchise Agreement, Dunkin also terminated the Wilson Ave and Gordon's Comer franchise.
Jack Laudermilk, whose deposition testimony was read into the record, explained the basis
for deciding to terminate_ the Franchise Agreements. He explained that he reviewed the loss
prevention report, which investigated the matter, and spoke with counsel before terminating the
franchises. (Tr. 180:2-181 :3). According to Laudermilk, there were no circumstances wherein a
Baskin-Robbins franchisee, who also had an interest in a competitor, was permitted to cure the
default. (Tr. 181: 17-21 ). The reasoning, as Laudermilk explained, is that "it would [open] the
gates for similar conduct," wherein franchisees would attempt to operate competing businesses,
since there is not as great a deterrent. (Tr. 181:22-182:12). However, given that there are thousands
of franchisees, oversight is unfeasible, which is why such a "rigid" policy is in place for those who
default on their Agreement. (Tr. 182:6-12). Since Laudermilk did not appear at trial, he was not
cross-examined on the internal policy of Dunkin. That policy shows some inconsistency in
Laudermilk' s testimony.
Despite receiving the notice of termination, Defendants continued to operate each of the
franchises. (Tr. 42:13-43:2). However, consistent with the Court's summary judgment decision,
and the Third Circuit's affirmation, in 2017, Defendants closed the Freehold Mall franchise, but
continue to operate the two remaining shops and pay the required consulting franchise and
19
continuing advertising fees. (Stipulation of Facts
at~
3s; Tr. 56: 13-23). Similarly, Raji sold her
Red Mango fr~chise on September 29, 2017 for the approximate amount of $159,000. (Tr.
475:17). Despite selling both franchises at the Freehold Mall, the loan with Amboy Bank is still
being repaid. (Tr 437:22-24),
1
Lastly, based on Defendants' breach of the Franchise Agreements, Plaintiffs' seek for the
Court to order their compliance with the Post-Termination Obligations set forth in the parties'
Franchise Agreements. Section 9 .4 of the Franchise Agreements, sets forth several requirements,
should a franchisee be in default:
9.4.2 FRANCHISEE shall immediately cease to operate the Unit, and shall not
thereafter, directly or indirectly, represent to the public or hold itself out as apresent
or former FRANCHISEE of FRANCHISOR; and
9.4.3 FRANCHISEE shall immediately and permanently cease to use, by
advertising or in any other manner whatsoever, any feature or method associated
with the System(s), any or all of the Proprietary Marks and any other trade secrets,
confidential information, operating manuals, slogans, trade dress, signs, symbols or
devices which are part of FRANCHISOR's System(s) ....
9.4.4 FRANCHISEE shall immediately return to FRANCHISOR all operating
manuals, plans, specifications, and other materials in FRANCHISEE's possession
containing information prepared by FRANCHISOR and relative to the operation of
the Unit, and all copies thereof (all of which are acknowledged to be
FRANCHISOR's property).
(Ex. P2 and Ex. P3, §§ 9.4, 9.4.2, 9.4.3, 9.4.4). Based on the above, Plaintiffs request that
Defendants cease use of Dunkin's proprietary marks, trade secrets, confidential information,
manuals, and proprietary business methods. In addition, Plaintiffs seek that Defendants refrain
from holding themselves out as Dunkin franchisees and return all operating manuals, plans, and.
other proprietary information relating to the operation of the franchises.
20
CONCLUSIONS OF LAW
GenerallL the Court is mindful that it has equitable powers to decide a case, (Eash v,
Riggins Trucking, Inc., 757 F . 2d 557, 563 (3d Cir. 1985)); and that the New Jersey Legislature has
deemed that there is a "disparity of bargaining power" between franchiser-franchisee relations.
Liberty Lincoln-Mercury v. Ford Motor Co., 134 F.3d 557, 566 (3d Cir. 1998) (citations omitted).
At trial, Defendant's counsel requested that I reconsider my previously entered summaryjudgment
decision based on new evidence presented about the internal policy of Dunkin about the interests
in a competing business. As a matter of fairness, I reviewed that decision.
In the summary judgment decision, I found unmistakably that Moothedath had
misrepresented to Dunkin representatives, on at least two occasions, that he had no interest in the
Red Mango franchise. See, supra. at p. 6-7, see also Dunkin Donuts Franchising, LLC v. C3 WAIN,
Inc., 677 F. App'x 779, 783 (3d Cir. 2017). If Moothedath had truthfully disclosed his or Raji's
interest in the Red Mango, the issue could have been addressed; but Moothedath chose otherwise,
leaving himself and Raji in this untenable situation. Since Dunkin was fraudulently induced into
executing the Freehold Mall Franchise Agreement through Moothedath's misrepresentations, there
is no reason to reassess that decision to terminate the franchise agreement of the Freehold Mall.
Moothedath falsely induced Dunkin to enter the Freehold Mall Franchise and the franchise
agreement provides for termination. The issue here is whether the court should enforce the no
fraud provision and the cross-default provision to terminate the other two franchise agreemertts. 9
On this issue, Dunkin coyly argues that the no-fraud provision triggers the cross-default
provision, yielding Dunkin the right to immediately terminate the two other franchise agreements.
It should be noted that Dunkin also seeks for the Court to find that Defendants committed
trademark and trade dress infringement. However, there was little evidence presented during trial
regarding same.
9
21
On its face, that remedy may actually be in accord with the terms of the Freehold Mall franchise
agreement; but itis a harsh result. After all, the two franchises are controlled by a minority owned
entrepreneur who arduously and diligently worked for their success! Although Dunkin is asserting
the fraud provision, its chief complaint is about a violation of the covenant not to compete, and the
law on such a provision should be considered.
Primarily, this case is about Moothedath's engagement in a competing business. The
primary goal of contract interpretation is to enforce contracts as the parties intended. Ill. Nat'! Ins.
Co. v. Wyndham Worldwide Operations, Inc., 85 F. Supp. 3d 785, 794 (D.N.J. 2015) (quotations
omitted). Further, a court must look at the contract as a whole. Barco Urban Renewal Corp. v.
Hous. Auth. ofAt!. City, 674 F.2d 1001, 1009 (3d Cir. 1982). A covenant not to compete is valid
if it is reasonable in light of the facts of each case. Boulanger v. Dunkin' Donuts, Inc., 815 N .E.2d
572 (2004). To determine reasonableness, the court reviews the legitimate business interests
behind the covenant, including the protection of trade secrets and prohibition on the sale of a
competitor's similar products. Id. at 578-80.
When reviewing the Freehold Mall franchise
agreement, and the legitimate business interests of Dunkin, I find that termination of the franchise
agreements based on the covenant not to compete for Gordon's Corner and Wilson A venue are
unreasonable for the following reasons:
First, although trade secrets (described by Dunkin as "pillow talk") was initially raised, at
trial, there was little or no substantial evidence that such discussions occurred. Dunkin submitted
the deposition testimony of Jack Laudermilk, Esq. who was involved in Moothedath's breach of
the non-compete clause. His testimony was unimpressive. He noted "pillow talk is pillow talk and
we don't know it'~ not happening." (Tr. 191 :2-6). The ambiguity of that statement by Laudermilk
does not warrant rrscinding the other two franchise agreements.
22
Second, with regard to the sale of similar products, there is no evidence of harm or injury
to Dunkin.
Grknted, both Red Mango and Dunkin sell frozen yogurt at the Freehold Mall
combination shop; but there is no evidence that the Red Mango impacted sales at the Gordon
Comer and Wilson A venue franchises. To enforce the franchise provisions against all three
franchises when there is no proof of financial harm or injury to Dunkin is an untenable outcome.
Third, the only witness Dunkin produced at trial was Kathryn Thomas, Vice President and
managing counsel for Dunkin Brands.
She testified about the meaning and practice of
Dunkin/Baskin non-compete clause, but she was not involved in the underlying facts set forth in
the case. More particularly, she did not quantify the scope of any injury, or set forth why the
covenant not to compete should be rigidly applied to defendant
M~othedath,
except to say that a
franchisee should not have "divided loyalties." However, even that testimony is at odds with the
internal policy. This undermines her credibility.
Fourth, Dunkin's internal policy undercuts Dunkin's rationale in this case. The internal
policy recognizes that some franchisees may own other franchises that "compete for the same-day
part dollars" because "in a multi-brand world, this would preclude the vast majority of existing
operators .. " (Ex. P-31). There was no evidence or justification presented why the internal policy
is being strictly enforced against Mooothedath's corporations, but may be waived against others.
Fifth, the internal policy sets forth "avenues of resolution" if a franchisee breaches the
covenant not to compete provision. That is, a franchisee "must divest his interest by transferring
the business in a documented arm's length transaction or receive approval of Dunkin in limited
circumstances (Ex. P-31). In this case, Moothedath has complied with one "avenue of resolution,"
since Raji testified she has sold the Red Mango franchise at the Freehold Mall. (Tr.
475:12~17).
As such, Moothedath no longer holds an interest in a competing business (except to repay the loan
23
from Amboy
Bt).
There was no evidence presented why this avenue of resolution was not
pursued.
Sixth, apparently Dunkin seeks termination of these two franchises as a means of
deterrence to prevent other franchisees from violating covenants not to compete. The deterrent
effect is satisfied through the termination of the Freehold Mall franchise, since it clearly satisfied
the deterrence perspective.
Seventh, CW AIN and C3 WAIN are minority owned franchisees who have succeeded on
the hard work of Moothedath and Raji, to a lesser extend. It seems unreasonable to crush the two
successful small business franchises by virtue of several misrepresentations when the termination
of one is sufficient.
Eighth, there are actually other less onerous remedies that may be implemented. They are:
(a) since only Baskin products are at issue, potentially the termination of the Baskin line of
products at the Wilson Avenue location is sufficient; (b) if termination of all three businesses is
the only appropriate solution, then a long term dissolution plan, as opposed to immediate
termination that Dunkin proposes, should be developed wherein Moothedath may convey his
interest to a third party, hopefully at a price closer to market rate rather than at a fire sale; and (c)
payment of legal fees and costs. 10
° Finally, Defendants set forth a counterclaim, which asserts that Dunkin's termination of the
Franchise Agreements violated the New Jersey Franchise Practice Act (NJFPA); it is without
merit. The NJFP A offers no relief under these circumstances. See Liberty Sales Assocs., Inc. v.
Dow Corning Corp., 816 F. Supp. 1004, 1008 (D.N.J. 1993). The NJFPA proscribes franchisors
from terminating "a franchise without having first given written notice setting forth all the reasons
for such termination, cancellation, or intent not to renew to the franchisee at least 60 days in
advance of such termination." N.J.S.A. § 56:10-5. Such a notice was provided. See Ex. P7.
Moreover, in this case Moothedath defrauded Dunkin, nothing in the NJFP A protects against
fraudulent conduct of a franchisee.
1
24
In conclusion, the Court finds that Dunkin's application to immediately terminate all three
franchises is denied.
The Court· concludes the immediate termination of the Freehold Mall
Franchise Agreement plus reasonable fees and cost, approved by the Court, is a fair and just
remedy.
ORDER AND JUDGMENT
It is on this
~ 'i
day of ~018
ORDERED and adjudged that the application to immediately terminate the Wilson
Avenue and Gordon Corner franchises is denied; and it is further
ORDERED and adjudged that the immediate termination of the Freehold Mall Franchise
Agreement is granted; and it is further
ORDERED and adjudged that C3Wain and Wain shall reimburse Dunkin reasonable
legal fees and cost as approved by the Court.
PETER G. SHERIDAN, U.S.D.J
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