DUNKIN' DONUTS FRANCHISING, LLC et al v. CLAUDIA III, LLC et al
Filing
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MEMORANDUM AND/OR OPINION. SIGNED BY HONORABLE GERALD A. MCHUGH ON 8/11/2014. 8/11/2014 ENTERED AND COPIES E-MAILED.(kp, )
IN THE UNITED STATES DISTRICT COURT
FOR THE EASTERN DISTRICT OF PENNSYLVANIA
DUNKIN DONUTS FRANCHISING
LLC, et al.,
Plaintiffs,
:
:
:
:
:
:
:
:
v.
CLAUDIA III, LLC, et al.,
Defendants.
Civil Action No. 14-2293
MEMORANDUM
MCHUGH, J.
I.
August 11, 2014
Introduction
This matter is before the court on a motion for a preliminary injunction. The central
question presented is whether a retail franchisee’s failure to timely remodel its store constitutes
irreparable harm to the franchisor. Specifically, plaintiff Dunkin Donuts Franchising, LLC and
related companies (collectively, “Dunkin”), brought this action against one of their franchisees,
Claudia III, LLC, as well as the franchisee’s members, Manfred and Lynn Marotta. (“Claudia”).
Dunkin contends that Claudia breached its franchise agreement by failing to complete
renovations within a contractually required schedule. This breach, Dunkin argues, negates the
franchise agreement, and necessarily renders Claudia’s continued operation of its store a
violation of Dunkin’s trademarks, constituting irreparable harm as a matter of law. It seeks a
preliminary injunction prohibiting Claudia from continuing to operate under the Dunkin name,
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which would of course require Claudia to close its store completely. Because I conclude that
irreparable harm has not been shown, the motion for a preliminary injunction is denied.
II.
Findings of Fact
a. Parties
Plaintiff Dunkin Donuts Franchising, LLC, is a limited liability company with its
principal place of business in Canton Massachusetts. Plaintiffs DD IP Holder, LLC and BR IP
Holder, LLC are limited liability companies; they hold the registrations of the trademarks
“Dunkin’ Donuts” and “Baskin-Robbins,” respectively. Plaintiff Baskin-Robbins Franchising,
LLC is a Delaware company with a principal place of business in Canton, Massachusetts.
Collectively, these companies operate a large franchise system across the United States. They
license independent businesses to use Dunkin’s and Baskin’s well-known trademarks and other
intellectual property and sell food and beverage products that Dunkin and Baskin develop.
Defendant Claudia III, LLC, is a limited liability company in Pennsylvania. Claudia III
operates the Dunkin Donuts franchise that is at issue in this case. Defendants Manfred Marotta
and Lynne Marotta are Pennsylvania residents and own Claudia III.
b. The Franchise Agreement
On July 16, 2009, Dunkin and Claudia III executed an agreement establishing the terms
under which Claudia III would operate a Dunkin Donuts and Baskin-Robbins franchise in
Perkasie, Pennsylvania. 1 The agreement granted Claudia III a license to operate a store selling
1
Franchise Agreement, Plaintiffs’ Exhibit 1.
2
Dunkin Donuts and Baskin-Robbins food products and using plaintiffs’ intellectual property,
including trademarks, patents, and copyrights. 2 In return Claudia III accepted a number of
obligations. These obligations touched many aspects of running the business and included paying
franchise and advertising fees, 3 participating in training, 4 and adhering to bookkeeping and
reporting standards. 5 The agreement also outlines notice and cure procedures through which
Dunkin may terminate the agreement upon a franchisee’s breach.
This dispute focuses on the renovation requirement in the agreement. Section 8.1 of the
Franchise Agreement’s Terms and Conditions requires the franchisee to “refurbish the Store in
accordance with [Dunkin’s] then-current Standards.” 6 Claudia III, the franchisee, had the
obligation to complete and pay for the renovation. Dunkin retained significant control over how
a franchisee could accomplish the renovation:
You agree that the Store […] must be designed, laid out, constructed, furnished,
and equipped to meet our Standards [….] Any deviations from our plans,
specifications and requirements must have our prior written approval. 7
When the parties signed the agreement in 2009, the remodel was due to be completed by June 5,
2013. 8 Significantly, except for its failure to meet the deadline for remodeling, based on the
record, I conclude that Claudia has otherwise met all of its obligations under the agreement.
c. Beginning Renovations
2
Franchise Agreement, Plaintiff’s Exhibit 1, Terms and Conditions § 2.
Franchise Agreement, Contract Data Schedule.
4
Franchise Agreement Terms and Conditions § 4.
5
Franchise Agreement Terms and Conditions § 11.
6
Franchise Agreement Terms and Conditions § 8.
7
Franchise Agreement Terms and Conditions § 3.
8
Franchise Agreement Contract Data Schedule.
3
3
Claudia III began planning the renovations in the spring of 2013, working with Edward
Mack, Dunkin’s construction manager for most of Pennsylvania. Dunkin provided a design
concept to the store in April. In June, Dunkin and Claudia III received a quote for services from
one of the approved architects, but both agreed the price was unreasonably high. Dunkin
suggested another firm from its list of approved architects, A & A Architects, which quoted a
much more sensible price and was hired. The architect, Mr. Mazumdar, created and submitted a
set of plans based on Dunkin’s design to the township he believed had the authority to grant a
building permit for the remodel. 9
d. Unforeseen obstacles
The remodel process hit a wall, so to speak, in the fall of 2013. Mr. Mazumdar received
comments from the township in September asking for further information before a building
permit could be issued. 10 The township’s comments included a request for proof of Department
of Health approval of layout plans. 11 Then a “well stub,” the plugged top of a drinking water
well, was discovered in one of the locations proposed for a bathroom in the remodeled store.
Unsurprisingly, the notion of placing a bathroom over a source of fresh drinking water was
problematic for the Department of Health. It concluded that the bathroom would have to be
relocated, and the plans for the remodel would need to be revised.
The parties engaged in a series of inconclusive communications to resolve the problem.
Mr. Marotta suggested removing one of the bathrooms, but the architect replied that removing a
9
In fact, as discussed below, the plans were originally submitted to the wrong township.
Plaintiffs’ Exhibit 4.
11
Plaintiffs’ Exhibit 4.
10
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bathroom was impermissible given the amount of customer seating the store planned to offer. 12
Mr. Marotta also inquired about extending the pipe through the ceiling. 13 The architect countered
that he was considering putting the stub in a closet. 14 Mr. Marotta asked Mr. Mack, the
construction manager, for assistance, but Mr. Mack referred Mr. Marotta to Mr. Mazumdar. 15
Consequently, the well stub issue remains unresolved. Mr. Marotta conceded that
ultimately someone must decide how to remove the well stub from the bathroom, and he
admitted that the decision is at least partly up to him. 16 It may be that the bathroom can be
relocated after Dunkin approved Marotta’s request to remove a Baskin-Robbins freezer from his
store in February 2014. 17 Nonetheless, the record does not indicate if Mr. Marotta has actually
tried to get revised plans since Dunkin made that decision. Until Marotta, Dunkin, and the
architect decide how to resolve the well stub issue and draw up new plans, the Health
Department cannot approve the layout, the building permit cannot issue, and the renovations
cannot begin.
e. Unclean Hands at the Donut Shop?
Responsibility for the delay lies at least in part with Mr. Marotta, but actions by parties
on all sides of this dispute contributed to the delays that held up, and still hold up, the remodel.
Dunkin Donuts has a number of practices and policies that have made it difficult for the
franchisee to satisfy his obligations in a timely manner. Dunkin argues that the franchisee is
12
Plaintiffs’ Exhibit 8.
Plaintiffs’ Exhibit 8.
14
Plaintiffs’ Exhibit 8.
15
Plaintiffs’ Exhibit 8.
16
Transcript of Preliminary Injunction Hearing on June 23, 2014 at 113 (Direct of Manfred Marotta) (“the
resolution had to come between myself, the architect or Dunkin […] it had to be a group effort to get this to move
forward.”).
17
Defendants’ Exhibit 9.
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responsible for renovating according to timelines that Dunkin sets, and yet maintains a
significant degree of control over critical phases of remodeling projects. The plans for the
remodel must come from Dunkin itself, and Dunkin must approve any changes. Mr. Marotta
requested one change to his store—removing a Baskin Robins freezer—in October 2012. 18
Dunkin did not approve the request until February 2014. 19
Dunkin had its own independent relationship with A & A Architects, which has done
more than one hundred Dunkin remodels. Though Dunkin maintains that Mr. Mazumdar was
strictly Claudia’s architect, it is clear that Dunkin and the architect communicated directly about
the remodel. 20 Of note, Mr. Mazumdar originally submitted plans to the wrong township, and
was abroad for the entire month of December, 2013—facts learned by Claudia for the first time
during this litigation. At least some of the responsibility for Mr. Mazumdar’s delays should be
borne by Dunkin, which supplies its franchisees with an approved list of architects.
I also note that the well stub caused a delay that none of the parties foresaw or reasonably
could have foreseen. Mr. Mack, Dunkin’s construction manager responsible for central and
eastern Pennsylvania, and Mr. Mazumdar, an architect who worked frequently with Dunkin, both
explained they had never encountered a similar obstacle in any other Dunkin remodel. 21 The well
stub did not appear on any of the documents that were used to plan the remodel. Dunkin’s
internal store planning team designs location layouts, 22 and as Claudia inherited the original
space from a prior franchisee, 23 presumably Dunkin designed the store that Claudia came to
18
Declaration of Mr. Marotta, Doc. 13-4.
Defendants’ Exhibit 9.
20
See Defendants’ Exhibit 4, “Ed Mack spoke to your architect this morning and he is to reply to the [township’s]
comments by the end of business Friday, 10/4/13”; Plaintiffs’ Exhibit 5 (conversation between architect and Ed
Mack without Marotta’s participation).
21
Transcript of Preliminary Injunction Hearing on June 23, 2014 at 71 (Direct of Edward Mack).
22
Transcript of Preliminary Injunction Hearing on June 23, 2014 at 63 (Direct of Edward Mack).
23
Transcript of Preliminary Injunction Hearing on June 23, 2014 at 22 (Cross of Jean Mazzotta).
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operate, but Dunkin never discovered the well stub. Years later Dunkin also designed the
remodel, but was apparently still ignorant of the existence of the well stub. I do not accept
Dunkin’s argument now that the delay the well stub caused to the remodel is entirely Claudia’s
responsibility. Once again, Dunkin shares at least some of the responsibility for these
complications.
f. The Status Quo
Dunkin and Claudia III are now at loggerheads. Dunkin issued a termination of the
franchise agreement and currently insists that Claudia III is no longer a franchisee. According to
Dunkin, Claudia III is pirating its intellectual property by continuing to use its name and trade
dress, and irreparably injuring its good name by operating a store with out-of-date décor. Claudia
III responds that it has complied with its contract to the extent it can, meeting all of its
obligations except for the remodel. Claudia III continues to operate as a franchise and pay the
fees required in the Franchise Agreement, which Dunklin continues to accept.
III.
Consideration of the Injunction
A preliminary injunction is an equitable remedy that a court should not grant lightly. Kos
Pharmaceuticals, Inc. v. Andrx Corp., 369 F.3d 700, 708 (3d Cir. 2004) (“Preliminary injunctive
relief is ‘an extraordinary remedy’ and ‘should be granted only in limited circumstances”). The
court must consider (1) the likelihood that the moving party will succeed on the merits of claims,
(2) the extent to which the moving party would be irreparably harmed without an injunction, (3)
the extent to which the non-moving party would suffer irreparable harm if the court issues the
preliminary injunction, and (4) the public interest. Bimbo Bakeries USA v. Botticella, 613 F.3d
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102, 109 (3d Cir. 2010); Opticians Ass’n v. Independent Opticians, 920 F.2d 187, 191-92 (3d
Cir. 1990).
a. Likelihood of Success on the Merits
For a franchisor to prove that a franchisee is engaged in unauthorized use of intellectual
property, the franchisor must show that the franchise agreement containing the license to use the
marks was properly terminated. S & R Corp. v. Jiffy Lube, 968 F.2d 371, 379 (3d Cir. 1992); 7Eleven Inc. v. Upadhyaya, 926 F.Supp.2d 614, 626 (E.D. Pa. 2013). Here, Dunkin ultimately has
the right to terminate the agreement if the obligation to remodel remains unfulfilled. That
termination would render continued use of the trademark unlawful, and a plaintiff can prevail on
a trademark infringement claim under § 32 of the Lanham Act by showing unauthorized use of
valid trademarks without the need to prove actual consumer confusion. S & R Corp., supra, 968
F.2d at 375(holding that because franchisee defendant was using the franchisor plaintiff’s mark,
“there is no question […] that their concurrent use is highly likely to cause consumer confusion”)
(citing Opticians, 920 F.2d at 192).
Based on the record before me, I believe it is reasonably likely that plaintiffs will be able
to show that they properly terminated the defendant’s franchise agreement. Following the terms
of the franchise agreement, the plaintiffs sent the defendant multiple notices to cure default of
late remodeling. 24 Unquestionably the remodel is not finished. It is not clear to me that Claudia
will be able to prove that its failure to perform was caused by Dunkin’s failure to meet its
obligations. It is possible that the defendants could prevail on counterclaims for Dunkin’s role in
this default, but even a successful counterclaim would not mean the agreement was not ‘properly
24
Plaintiffs’ Exhibits 7 (Nov. 13, 2013), 10 (Feb. 25, 2014), and 11 (March 7, 2014).
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terminated.’ Because it is likely Dunkin will be able to show proper termination of the
defendant’s franchise agreement, it follows that it will likely succeed on the trademark
infringement claim as well.
b. Irreparable Harm to Plaintiffs
Although I find Dunkin likely to succeed on the merits of its claims, I am not persuaded it
will suffer irreparable harm without a preliminary injunction.
Regarding the defendants’ likely trademark infringement, the plaintiffs are correct that, to
date, the Third Circuit has applied the rule that a party is entitled to a presumption that it would
suffer irreparable harm after a finding of trademark infringement. For example, in Kos
Pharmaceuticals v. Andrx Corp., 369 F.3d 700 (3d Cir. 2004), the Court of Appeals, after
finding that the plaintiff had shown a likelihood of success on the merits of a trademark
infringement claim, went on to state: “as we have already found that Kos has shown a likelihood
of success, we hold it is entitled to a presumption that it will suffer irreparable harm absent an
injunction.”
However, a growing number of courts have recognized that the Supreme Court’s decision
in eBay v. MercExchange, 547 U.S. 388 (2006) appears to have prohibited courts from applying
this automatic presumption to circumvent the traditional equitable test for issuing a preliminary
injunction. In eBay, the party seeking the injunction demonstrated that eBay likely infringed one
of its patents. The Court of Appeals for the Federal Circuit, relying on the same principles that
Dunkin invokes here, applied the “general rule that courts will issue permanent injunctions
against patent infringement absent exceptional circumstances.” Id. at 390. The Supreme Court
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reversed, holding that the traditional four-part test for injunctive relief still applied to intellectual
property claims litigated under the Patent Act. Id. at 393.
Several circuit court decisions have held that eBay’s reasoning requires courts not to
presume irreparable injury in other intellectual property contexts. The Ninth Circuit read eBay as
ending the presumption in claims under the Copyright Act. Perfect 10 v. Google, 653 F.3d 976,
980-81 (9th Cir. 2011) (“[N]othing in the statute indicates congressional intent to authorize a
‘major departure’ from ‘the traditional four-factor framework that governs the award of
injunctive relief.”). The Ninth Circuit also ended the presumption in trademark cases such as this
one. Herb Reed Enterprises, LLC v. Florida Entm’t Mgmt., Inc., 736 F.3d 1239, 1249 (9th Cir.
2013). The Second Circuit reached the same conclusion in the trademark infringement context.
Salinger v. Colting, 607 F.3d 68, 78 n.7 (2d Cir. 2010) (“we see no reason that eBay would not
apply with equal force to an injunction in any type of case”). See also Swarovski v. Bldg No. 19,
704 F.3d 44, 54 (9th Cir. 2013) (noting that eBay may invalidate the presumption but not
deciding the issue); N.Am.Med.Corp. v. Axiom, 522 F.3d 1211, 1228 (11th Cir. 2008) (same);
Paulsson Geophysical Servs. Inc. v. Sigmar, 529 F.3d 303 (5th Cir. 2008) (same).
The Third Circuit has not yet decided whether eBay eliminates the presumption of
irreparable harm upon demonstrating a violation of intellectual property rights. In 7-Eleven v.
Upadhyaya, 926 F.Supp.2d 614, 630 (E.D. Pa. 2013), Judge Dubois recognized the likelihood
that eBay has changed the law, without finding it necessary to reach the issue. In Buzz Bee Toys,
Inc. v. Swimways Corp., No. 14-1948, 2014 WL 2006799 (D.N.J. 2014), however, Chief Judge
Simandle concluded that eBay’s precepts are now controlling.
Given the reasoning of the Supreme Court in eBay, I conclude that it prohibits me from
presuming irreparable harm in this case. The holding in eBay was based on the Court’s reading
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of the Patent Act. The Patent Act includes as one remedy for infringement that the court “may”
grant an injunction. The Supreme Court concluded that Congress intended courts to follow
traditional equity principles, rather than authorizing courts to grant automatic injunctions to
parties that are successful on the merits of an infringement claim.
In this case, the Plaintiffs allege a violation of Section 32 of the Lanham Act, 15 U.S.C. §
1114. The Act states that a person who uses a registered mark in a way that is likely to cause
confusion or deceive “shall be liable in a civil action for the remedies hereinafter provided.” §
1114(1).
Section 1116 grants courts authority to issue injunctions as an infringement remedy.
Paragraph (a) reads, in part:
The several courts vested with jurisdiction of civil actions arising under this
chapter shall have power to grant injunctions, according to the principles of
equity and upon such terms as the court may deem reasonable, to prevent the
violation of any right of the registrant of a mark registered in the Patent and
Trademark Office or to prevent a violation under subsection (a), (c), or (d) of
section 1125 of this title.
15 U.S.C.A. § 1116 (West) (emphasis added). The language emphasized is almost identical to
the language the Supreme Court relied on in eBay:
The several courts having jurisdiction of cases under this title may grant
injunctions in accordance with the principles of equity to prevent the violation of
any right secured by patent, on such terms as the court deems reasonable.
35 U.S.C.A. § 283 (West); eBay, 547 U.S. at 391-92.
The Supreme Court found that the language in 35 USC § 283 reflected no Congressional
intent to disturb the traditional four-part injunction test. eBay, 547 U.S. at 391-92. The key
language in the Lanham Act is nearly identical, supporting the conclusion that in drafting Section
1116, Congress likewise had no intent to disturb the traditional injunction test.
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Therefore, to follow the Supreme Court’s decision in eBay, I must independently evaluate
whether Dunkin has in fact established it will suffer irreparable harm absent a preliminary
injunction.
Courts have found irreparable harm to trademark holders when the trademark owner
faced a “loss of control of reputation, loss of trade, and loss of goodwill.” S & R Corp, 968 F.2d
at 378. In S & R Corp, the franchisee had modified the trademarks and business practices
mandated by the franchisor, leaving the court to find that such innovation caused the plaintiff to
lose control of its intellectual property. Id. In the instant case, the defendants continue to operate
their Dunkin Donuts store according to Dunkin Donuts’ rules and procedures. There is no
indication that sales have suffered in any way. Inspections of the franchise by Duncan have not
revealed any problems with respect to product identity or quality control. The only deviation is
the remodel that Dunkin requires. The premises are not in disrepair, and the most that can be said
is that Dunkin customers are not experiencing the “next generation” of Dunkin Donuts decor. At
argument, counsel for Dunkin conceded that the current generation of Dunkin franchises
provides customers with an enjoyable and quality experience. 25
Courts also find irreparable harm when money damages cannot adequately compensate a
plaintiff. E.g., Adams v. Freedom Forge Corp., 204 F.3d 475, 484 (3d Cir. 2000) (finding no
irreparable harm to a plaintiff who could be compensated with money damages). Because
Claudia is operating in conformity with Dunkin’s rules, other than the delayed remodel, I find
that any damages Dunkin may be suffering are compensable with damages.
c. Irreparable Harm to Defendants
25
Transcript of Preliminary Injunction Hearing on June 23, 2014 at 164-65.
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A plaintiff seeking a preliminary injunction “must also show that its benefits from a
preliminary injunction are not outweighed by irreparable injury to [defendants].” S & R Corp,
968 F.2d at 379. I conclude Dunkin has not carried this burden.
I reject Dunkin’s argument that any harm Claudia would suffer should be discounted
because such harm would be a consequence of Claudia’s own wrongful conduct, relying on
Opticians, supra, and cases citing it. 920 F.2d at 197 (“By virtue of this recalcitrant behavior, the
IOA can hardly claim to be harmed, since it brought any and all difficulties occasioned by the
issuance of an injunction upon itself.”). I do not read Opticians as establishing a per se rule. In
Opticians, a group of “schismatic” opticians split from the Opticians Association of America
(OAA) to form the Independent Opticians of America (IOA). Id. at 191. The upstart IOA insisted
on using trademarks owned by the OAA, arguing they were not trademarks at all, but in fact
certification marks. The Third Circuit ruled that the IOA had likely infringed OAA trademarks.
Opticians, Id. at 192-95. When weighing the hardships that a preliminary injunction would
impose on the rebels of the IOA, the Third Circuit reasoned that the IOA had made a deliberate
decision to use infringing marks, and could therefore not be heard to complain that an injunction
would be too damaging. Rita’s Water Ice, Rita’s Water Ice Franchise Corp. v. DBI Investment
Corp., No. 96-306, 1996 WL 165518 (E.D. Pa. 1996), another case cited by Dunkin, also dealt
with a willful infringement. Defendants there operated a Rita’s Water Ice franchise and had
signed an agreement that defined exactly what food and beverage products the franchise might
sell. Id. at *2. In direct violation of the contract, the defendants were caught selling hot dogs and
other unapproved products. Id. The court granted injunctive relief in favor of the franchisor,
discounting any harm the defendants might suffer because the defendants consciously chose to
sell the unauthorized products. Id. at *5.
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The situation here is distinguishable. Claudia is not using Dunkin’s marks after
intentionally separating from the franchisor and forming a new entity as in Opticians. Nor is
Claudia intentionally selling unauthorized merchandise as in Rita’s. Instead, Claudia continues to
operate a Dunkin franchise according to Dunkin’s rules, and pay franchise fees, deviating only in
that a required remodel was delayed.
For Claudia, entry of an injunction would be a death knell. An injunction would deprive
Claudia of any income and leave them with the costs of maintaining the store. A closure would
also drive customers to competitors, and the customer base might not return if the store reopens.
Given the nature of the infringement in question, the harm to Claudia if an injunction is issued
far outweighs any harm to Dunkin stemming from Claudia’s continued operation of the existing
store.
At the hearing on the injunction, over Claudia’s objection, Dunkin submitted evidence
suggesting that Claudia lacks the financial resources to accomplish the remodeling under the
franchise agreement. For present purposes, I accept Claudia’s position that such evidence is not
relevant to my decision whether to grant preliminary relief.
d. Public Interest
The public interest does not weigh in favor of granting a preliminary injunction. Plaintiffs
have not alleged defendants are operating their franchise in a fraudulent manner. See Upadhyaya,
926 F.Supp.2d at 631. Nor have plaintiffs alleged that leaving the store open as litigation
proceeds presents any safety hazards.
Dunkin argued that “the public interest is served by fulfilling the contractual interests of
the parties and maintaining the viability of the franchise system.” Maaco Franchising Inc. v.
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Augustin, No. 09-4548, 2010 WL 1644278, at *5. In Maaco, however, the franchisee entirely
failed to perform under the agreement, specifically failing “to make payments [..] report their
weekly gross receipts, or make their advertising contributions.” Id. at *2. Given that Claudia has
otherwise performed under the agreement, “the contractual interests of the parties and
maintaining the viability of the franchise system” will be better served by maintaining the status
quo and allowing the litigation process to run its full course.
In short, to the extent that “America runs on Dunkin,” I am not persuaded that having its
customer base continue to run to Claudia’s Perkasie location constitutes irreparable harm.
IV.
Conclusion
Balancing the equities discussed above, I conclude that the plaintiffs have not carried
their burden. Accordingly, I will maintain the status quo and deny the preliminary injunction
plaintiffs have requested. Because I have decided not to grant the preliminary injunction, I do not
need to consider at this time whether to enforce the covenant not to compete. An appropriate
order follows.
/s/ Gerald Austin McHugh
United States District Court Judge
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