Atmosphere Hospitality Management, LLC v. Shiba Investments, Inc. et al
Filing
53
ORDER granting in part and denying in part 27 Motion for Preliminary Injunction. Signed by U.S. District Judge Karen E. Schreier on 12/18/2013. (KC)
UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
WESTERN DIVISION
ATMOSPHERE HOSPITALITY
MANAGEMENT, LLC,
Plaintiff,
vs.
SHIBA INVESTMENTS, INC.,
KARIM MERALI, and
ZELIJKA CURTULLO,
Defendants and
Third-Party Plaintiffs,
vs.
JAMES HENDERSON,
Third-Party Defendant.
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CIV. 13-5040-KES
ORDER GRANTING IN PART AND
DENYING IN PART PLAINTIFF’S
MOTION FOR PRELIMINARY
INJUNCTION
Plaintiff, Atmosphere Hospitality Management, LLC, moves for a
preliminary injunction against defendants, Shiba Investments, Inc., Karim
Merali, and Zelijka Curtullo. Atmosphere asks the court to enjoin defendants
from using the Adoba® brand and processes associated with the brand and
also asks the court to order Shiba to pay all debts owed to vendors incurred
during the operation of the Adoba® hotel. Defendants resist the motion and
claim they are entitled to continue using the Adoba® brand and processes
associated with it in the operation of the hotel. The court held a hearing on this
motion and heard testimony from James Henderson, Adrienne Pumphrey,
Karim Merali, and James Postma. For the following reasons, the motion for a
preliminary injunction is granted in part and denied in part.
BACKGROUND
Atmosphere is a Delaware limited liability company with its principal
place of business in Colorado. Atmosphere is in the hotel hospitality business.
James Henderson and Adrienne Pumphrey are managing partners of
Atmosphere.
Shiba is a Texas corporation with its principal place of business in South
Dakota. Shiba owns the hotel located in Rapid City, South Dakota, that is at
the center of this litigation. Karim Merali is a resident of South Dakota and an
equity owner of Shiba.
In May 2011, Merali and Henderson began discussing the possibility of
Atmosphere taking over management of Shiba’s hotel and re-branding it as an
Adoba® hotel.1 Atmosphere trademarked Adoba® and intended to create a
hotel brand using the Adoba® name.2 An Adoba® hotel uses “a green hotel
design concept and operating standard . . . to maximize energy efficiency and
apply environmentally responsible and sound operating and management
standards and sustainable practices.” Docket 37-3 at 1. There were no other
1
At the time, the hotel was operating as a Radisson.
2
Henderson testified that the Adoba® brand is his “life’s work.”
2
Adoba® hotels in existence at the time Henderson and Merali entered into
discussions.3
The parties ultimately agreed that the hotel would re-brand as an
Adoba® and that Atmosphere would manage the hotel as such. Henderson’s
attorney, Lyle Boll, drafted two contracts—a licensing agreement and a
management agreement—to memorialize the parties’ agreement, and the
contracts were provided to Merali in either October or November of 2011. After
Merali and his attorney reviewed the contracts, Merali asked for and received a
copy of them in Microsoft Word format. Atmosphere informed Merali that it
wanted to get the agreements signed before the end of 2011.
The parties dispute the events that took place from the time Merali
received the contracts and December 31, 2011, the date the Licensing
Agreement and Management Agreement were signed. Atmosphere claims very
few discussions took place regarding the language of the contracts and that
Merali often refused to respond to emails and phone calls. Merali claims he and
Henderson spent several days discussing the various terms of the agreements
and, at times, exchanged drafts.
On December 31, 2011, Merali sent Henderson an email at 4:59 p.m.
that included the final version of the Licensing Agreement. The email stated,
“Jim, Attached is the license Agreement... Please review and let me know if ok
3
The hotel would eventually become the first Adoba® hotel.
3
as per our discussions late last night.” Exhibit Y. Later that same evening,
Merali and Henderson met in Merali’s office, which is located in the hotel, and
signed both the Licensing Agreement and the Management Agreement.4 Both
Henderson and Merali initialed or signed every page in each agreement.
On January 8, 2012, Henderson sent Merali an email that said:
The management contract as well as the license agreement we
wrote is really not good. It is basically a 90 day contract and not
worth anything to you or Atmosphere. . . . I suggest we write an
addendum that omits that 90 day out and we write legitimate
reasons why either can terminate, or, write more basic language. I
had to show the agreement to my insurance company, Lyle and
Wells Fargo in order to get insurance, show my lawyer and to open
up an operating account with benefits at Wells Fargo, I asked your
approval prior to showing any of these parties the other day. In
unison, all the parties I just mentioned state the contract is
worthless with that 90 day out term for any reason written in the
contract.
Docket 35-1. No addendums, amendments, or changes were ever made to
either agreement, and the parties operated under the Licensing Agreement and
Management Agreement for over a year.
On April 23, 2013, Shiba, acting through its attorney, sent Atmosphere
an email informing Atmosphere that Shiba was canceling the Licensing
Agreement pursuant to § 3b and canceling the Management Agreement
pursuant to § 5.01(b). Additionally, the email indicated that “Shiba is electing
(per 3.(b). of the Licensing Agreement) to ‘ . . . keep the technology and the
4
Henderson admits that he and Merali discussed certain changes that were
made by Merali prior to Henderson signing the agreements.
4
Adoba Brand as an independent operation.” Docket 31-25. Section 3b of the
Licensing Agreement states:
Notwithstanding the foregoing, [Shiba] or Atmosphere can cancel
this contract without cause with 90 days written cancellation at
any time, without any penalties. This clause supersedes any other
cancellation or termination clause in this entire agreement. Due to
the nature and circumstances of a deep and long lasting
friendship, [Shiba] and Atmosphere both agree that a termination
will have significant impact on either party and as such each party
should leave the agreement with vested interest. [Shiba] will keep
the technology and the Adoba Brand as an independent operation.
If [Shiba] chooses not to continue use of the Adoba Brand, he will
remove all brand material and signage in a reasonable time
mutually agreed upon. In any event, upon termination of this
agreement by [Shiba], Atmosphere will receive all current monies
due in full to date.
Docket 37-3 at 5. Shiba and Karim Merali took over operation of the hotel on
May 1, 2013.
Currently, there are unpaid bills from vendors who serviced the hotel
prior to May 1, 2013. Merali represented to vendors that Atmosphere is
responsible for those debts. Atmosphere disagrees and claims Shiba is the
party responsible for paying the debts.
DISCUSSION
Atmosphere seeks a preliminary injunction and asks the court to enjoin
defendants in two respects. First, Atmosphere claims defendants are not
entitled to use of the Adoba® brand and processes associated with it and asks
the court to enjoin them from doing so. Second, Atmosphere asks the court to
order defendants to pay all debts owed to vendors which arose from the
operation of the hotel.
5
“A preliminary injunction is an extraordinary remedy and the burden of
establishing the propriety of an injunction is on the movant.” Roudachevski v.
All-American Care Ctrs., Inc., 648 F.3d 701, 705 (8th Cir. 2011) (citing Watkins,
Inc. v. Lewis, 346 F.3d 841, 844 (8th Cir. 2003)). To determine whether a
preliminary injunction is appropriate the court considers the Dataphase
factors:
(1)
whether the movant is likely to prevail on the merits;
(2)
the threat of irreparable harm to the movant;
(3)
the state of balance between this harm and the injury that
granting the injunction will inflict on the other parties
litigant; and
(4)
the public interest.
TCF Nat’l Bank v. Bernanke, 643 F.3d 1158, 1162 (8th Cir. 2011) (citing
Planned Parenthood Minn., N.D., S.D. v. Rounds, 530 F.3d 724, 733 (8th Cir.
2008); Dataphase Sys., Inc. v. C L Sys., Inc., 640 F.2d 109, 113 (8th Cir. 1981)).
The Dataphase test for preliminary injunctive relief is a flexible analysis.
Hubbard Feeds, Inc. v. Animal Feed Supplement, Inc., 182 F.3d 598, 601 (8th
Cir. 1999). “While no single factor is determinative, the probability of success
factor is the most significant.” Home Instead, Inc. v. Florance, 721 F.3d 494,
497 (8th Cir. 2013) (internal quotations and citations omitted).
I.
Adoba® Brand and Processes
Atmosphere claims defendants should be enjoined from using the
Adoba® brand and processes under three theories: fraudulent inducement,
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breach of contract, and misappropriation of trade secrets. First, Atmosphere
contends defendants fraudulently induced it to enter the Licensing Agreement
and the agreement should therefore be rescinded. Second, Atmosphere
contends defendants breached, and continue to breach, provisions in the
Licensing Agreement and the Management Agreement. Third, Atmosphere
contends defendants are misappropriating its trade secrets by continuing to
use its trademark and trade secrets. Under these theories, Atmosphere asks
the court to enjoin defendants from using the Adoba® brand and processes.
A.
Likelihood of Success on the Merits
The court begins its analysis by examining Atmosphere’s likelihood of
success on the merits with respect to its three theories. In determining the
likelihood of success on the merits, the litigant bringing the claim need not
show that he or she will ultimately win the case, rather, “at the early stage of a
preliminary injunction motion, the speculative nature of this particular inquiry
militates against any wooden or mathematical application of the test.” United
Indus. Corp. v. Clorox Co., 140 F.3d 1175, 1179 (8th Cir. 1998). A court should
instead “weigh the case’s particular circumstances to determine whether the
balance of equities so favors the movant that justice requires the court to
intervene to preserve the status quo until the merits are determined.” Id.
(internal citations and quotations omitted). “Probability of success on the
merits” in this context means that the moving party must show it has “a ‘fair
chance’ of success on the merits[.]” Planned Parenthood, 530 F.3d at 731. A
7
“fair chance of prevailing” does not mean a greater than 50 percent likelihood
of prevailing on the merits of the claim. See id. at 731 (citing Dataphase, 640
F.2d at 113). The burden on the movant is heavy where granting the
preliminary injunction will give the movant substantially the relief it would
obtain after a trial on the merits. United Indus. Corp., 140 F.3d at 1179.
1.
Fraudulent Inducement
Atmosphere claims defendants fraudulently induced it to enter into the
Licensing Agreement and the Management Agreement. Defendants dispute
Atmosphere’s allegation and, separately, contend that even if Atmosphere was
fraudulently induced, it has since waived that claim because it chose to operate
under the agreements for over a year knowing their terms.
“Fraudulent inducement entails willfully deceiving persons to act to their
disadvantage.”5 Law Capital, Inc. v. Kettering, 836 N.W.2d 642, 646 (S.D. 2013).
To establish fraudulent inducement, Atmosphere must prove defendants
committed one of the following acts:
(1) The suggestion as a fact of that which is not true by one who
does not believe it to be true;
(2) The positive assertion, in a manner not warranted by the
information of the person making it, of that which is not true,
though he believes it to be true;
5
Based on their briefs and arguments during the hearing, the parties
appear to agree that South Dakota law applies in this diversity action. Also, the
Licensing Agreement states that it “shall be governed by and interpreted under
the laws of the State of South Dakota.” Docket 37-1 at 20.
8
(3) The suppression of that which is true by one having knowledge
or belief of the facts;
(4) A promise made without any intention of performing it; or
(5) Any other act fitted to deceive.
SDCL 53-4-5; see also Poeppel v. Lester, 827 N.W.2d 580, 587 (S.D. 2013).
Atmosphere must also prove defendants’ fraudulent behavior induced it to act
to its detriment. Johnson v. Miller, 818 N.W.2d 804, 808 (S.D. 2012).
“Rescission of a contract is available if the consent of the party seeking
rescission was obtained by . . . fraud[.]” Shedd v. Lamb, 553 N.W.2d 241, 244
(S.D. 1996). But “[f]ailure of a party to disaffirm a contract over a period of time
may ripen into ratification, especially if rescission will result in prejudice to the
other party.” Id. at 244-45. A “party rescinding a contract must rescind
promptly, upon discovering the facts which entitle him to rescind[.]” SDCL 5311-4. The question of whether a rescinding party acted promptly is a question
of law. Shedd, 553 N.W.2d at 245.
Even assuming Atmosphere can prove defendants fraudulently induced it
to enter into the agreements, Atmosphere failed to rescind the agreements
promptly. Defendants produced an email sent at 4:59 p.m. on December 31,
2011, in which Karim Merali sent Henderson a copy of the final Licensing
Agreement. The email includes a statement from Merali which reads: “Attached
is the license Agreement. . . Please review and let me know if ok as per our
discussions late last night.” This email shows the parties were negotiating the
9
terms of the contract as of December 30, 2011, and also shows Atmosphere
had access to the final version prior to and immediately after signing it.
Moreover, defendants introduced an email sent by Henderson to Merali on
January 8, 2012, discussing the Licensing Agreement and the Management
Agreement. Docket 35-1. In this email, Henderson wrote:
The management contract as well as the license agreement we
wrote is really not good. It is basically a 90 day contract and not
worth anything to you or Atmosphere. . . . I suggest we write an
addendum that omits that 90 day out and we write legitimate
reasons why either can terminate, or, write more basic language. I
had to show the agreement to my insurance company, Lyle and
Wells Fargo in order to get insurance, show my lawyer and to open
up an operating account with benefits at Wells Fargo, I asked your
approval prior to showing any of these parties the other day. In
unison, all the parties I just mentioned state the contract is
worthless with that 90 day out term for any reason written in the
contract.
Docket 35-1 (emphasis added). This email suggests Atmosphere and others,
including its lawyer, reviewed the agreements just days after they were signed.
In light of these emails, Atmosphere was aware of any alleged fraud and needed
to take efforts to rescind the agreements promptly. By not rescinding promptly
and instead receiving benefits under the agreements for well over a year,
Atmosphere ratified the allegedly fraudulently induced agreements through its
actions.
Henderson testified that he had only discussed the ninety-day
termination provision with one of his relatives and that the contents of the
email are not accurate, claiming he did not actually show the contracts to
10
anyone. Even if the court were to believe Henderson’s testimony, Atmosphere
still fails to show it is likely to succeed on the merits.
Atmosphere and defendants began discussions about forming a business
relationship in which Atmosphere would license its brand and processes
associated with the brand to defendants in the spring of 2011. The parties
began negotiating the actual language of the two agreements in October or
November of 2011 when Atmosphere delivered draft versions of the documents
to Merali. The agreements were ultimately signed on December 31, 2011. Prior
to signing the agreements, Atmosphere was aware Merali had made significant
changes to the documents.6
Atmosphere now claims it did not read the agreements in full even
though Merali informed them that he had made significant changes to them.7
The agreements were the culmination of over six months of discussions and
negotiations dealing with Henderson’s self-described “life’s work.” It was
Atmosphere’s responsibility to act diligently and review the contracts before
signing them; indeed, it was Atmosphere’s legal duty to do so. See
Kernelburner, LLC v. MitchHart Mfg., Inc., 765 N.W.2d 740, 743 (S.D. 2009)
6
The parties dispute when Atmosphere became aware of certain changes as
well as the extent of the changes. Henderson admits, however, that Merali told
him changes were made to the termination provision and the fees provision.
7
In fact, Atmosphere claims it never read the agreements in full until well
into this litigation. This is despite the fact that Henderson signed or initialed
every page of both agreements.
11
(noting a contracting party’s legal duty is to read a contract before signing it).
Atmosphere’s failure to read the agreements, especially when considering the
self-described importance of such agreements, cannot be used by Atmosphere
to rescind the agreements over a year down the road—after benefitting from the
same agreements—when the relationship between the parties has soured. “To
permit a party . . . to admit that he signed [a contract] but to deny that it
expresses the agreement he made or to allow him to admit that he signed it but
did not read it or know its stipulations would absolutely destroy the value of all
contracts.” Kernelburner, LLC, 765 N.W.2d at 743. Accepting Atmosphere’s
version of the facts leads only to the conclusion that it neglected its legal duty
to read the contracts before signing them.
In sum, Atmosphere either failed to rescind the contracts promptly or
neglected its legal duty to read the contracts before signing them. Atmosphere
chose to operate under the agreements for over a year and received the benefits
of doing so. Thus, Atmosphere effectively ratified the agreements that it now
claims it was fraudulently induced to enter. Atmosphere has not shown that it
is likely to succeed on the merits of its fraudulent inducement claim.
2.
Breach of Contract
Atmosphere also claims defendants breached and continue to breach
both the Licensing Agreement and the Management Agreement by continuing
to use the Adoba® brand and processes following termination of the
agreements. Defendants contend the Licensing Agreement allows them to
12
continue using the Adoba® brand and processes even after termination of the
agreements so long as defendants provided notice of their intentions to do so.
The dispute rests on a matter of contract interpretation.
When interpreting a contract, the language the parties used in the
contract is determinative of their intention. Poeppel, 827 N.W.2d at 584. When
the language of a contract provides a plain and unambiguous meaning,
construction is not necessary. All Star Constr. Co. v. Koehn, 741 N.W.2d 736,
744 (S.D. 2007). But when the contract language provides an ambiguous
meaning, the rules of construction are required for interpretation. Id. “[A]
contract is ambiguous only when it is capable of more than one meaning when
viewed objectively by a reasonably intelligent person who has examined the
context of the entire integrated agreement.” Id.
The issue here is whether Shiba can continue using the Adoba® brand
and processes following Shiba’s termination of the Licensing Agreement and
Management Agreement. The court first looks to § 12 of the Licensing
Agreement, which details Shiba’s obligations upon termination. Section 12
provides:
Subject to other provisions herein, including section 3.b, on
termination or expiration of this License Agreement for any reason,
[Shiba] shall, at its sole expense, on or before the effective date of
termination or expiration:
13
a. Immediately discontinue all use of the Marks8 and any word or
mark similar to the Marks, and refrain from using the Marks to
identify the Hotel. All signage and other identifying equipment that
use any of the Marks in any form shall be immediately removed
from the interior and exterior of the Hotel. If [Shiba] does not
immediately discontinue its use of the Marks, Atmosphere shall be
deemed to have suffered irreparable harm and will be entitled to
affirmative injunctive and other equitable relief. [Shiba] waives, to
the maximum extent permitted by law, any claim that
Atmosphere's damages under such circumstances can be
adequately remedied by monetary damages alone and any
requirement that Atmosphere post any bond for the issuance of
any injunction. Should a bond nonetheless be required, [Shiba]
agrees that the amount of such bond need not exceed $1,000.00[.]
Docket 37-3 at 13 (emphasis added). Section 12a requires Shiba to discontinue
using the Adoba® name immediately upon termination of the Licensing
Agreement. But § 12a is explicitly subject to § 3b, which provides:
8
“Marks” means all of Atmosphere’s trademarks and trade names
and includes the trademarks set forth on Exhibit B, which is
attached to this Agreement and incorporated by this reference, the
trade names set forth on Exhibit C, which is attached to this
Agreement and incorporated by this reference, and all associated
Adoba® URL addresses and other intellectual property owned by
Atmosphere and used with the Licensed Concept. The term
includes the related all forms of logos, designs, stylized letters,
images, and colors that identify or define the brand in all formats,
including without limitation on social media or otherwise
distributed on-line, that are approved for use with the Licensed
Concept from time to time at the Hotel and in advertising for the
Hotel. The term includes any other additional or substituted
trademarks, trade names, service marks or logos that Atmosphere
later adopts and authorizes [Shiba] in writing to use. [Shiba] agrees
to operate the Hotel exclusively under the Marks and the trade
name “Adoba® Eco Hotel” during the Term (defined below) and the
term of the Management Agreement.
Licensing Agreement, § 1n, at Docket 37-3 at 3.
14
Notwithstanding the foregoing, [Shiba] or Atmosphere can cancel
this contract without cause with 90 days written cancellation at
any time, without any penalties. This clause supersedes any other
cancellation or termination clause in this entire agreement. Due to
the nature and circumstances of a deep and long lasting
friendship, [Shiba] and Atmosphere both agree that a termination
will have significant impact on either party and as such each party
should leave the agreement with vested interest. [Shiba] will keep
the technology and the Adoba Brand as an independent operation. If
[Shiba] chooses not to continue use of the Adoba Brand, he will
remove all brand material and signage in a reasonable time
mutually agreed upon. In any event, upon termination of this
agreement by [Shiba], Atmosphere will receive all current monies
due in full to date.
Docket 37-3 at 5 (emphasis added). Section 3b, therefore, permits Shiba to
keep the “technology and the Adoba Brand,” and Shiba is only required to
remove all signage and branding if it chooses not to keep the brand. These
sections in the Licensing Agreement support defendants’ argument that they
should be allowed to continue using the Adoba® brand and processes.
Other sections in the Licensing Agreement, however, support
Atmosphere’s position. Section 2 states, “During the Term9 and the term of the
Management Agreement, Atmosphere grants to [Shiba] the non-exclusive
license to use the Licensed Concept, the Manuals, the System, and the Marks
in operating the hotel.” Docket 37-3 at 4. This languages suggests that the
license would expire upon termination of the Licensing Agreement or
Management Agreement. Moreover, § 8a of the Licensing Agreement states:
9
“ ‘Term’ means the period of time [the] Licensing Agreement is in effect[.]”
Licensing Agreement, § 1w, at Docket 37-3 at 4.
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[Shiba] acknowledges and agrees that the Licensed Concept,
including the Manuals, the Marks, the System, and the Rules and
Regulations are the sole property of Atmosphere and agrees not to
claim any interest therein except to the extent provided to the
Hotel based on specifically on (sic) this License
Agreement. . . . [Shiba] understands and agrees that: the Licensed
Concept, the Manuals, the System, and the Marks are and will
remain the sole and exclusive property of Atmosphere; . . . [Shiba]
will immediately assign to Atmosphere upon its request any rights
to the Licensed Concept, the Manuals, the System, or the Marks
that [Shiba] may gain through its ownership of the Hotel.
Docket 37-3 at 8 (emphasis added). Section 8a provides that the Adoba® brand
is and will remain the “sole and exclusive property of Atmosphere,” thereby
conflicting with the notion that defendants can continue using it after
termination of the agreements. Recital C of the Licensing Agreement also gives
credence to Atmosphere’s position. Recital C states, “Atmosphere’s agreement
to grant a license to the Licensed Concept for the Property is expressly
conditioned upon . . . Atmosphere’s operation and management of the Hotel.”
Docket 37-3 at 1. This language suggests defendants can no longer use the
Adoba® brand or processes if Atmosphere is not operating and managing the
hotel. Therefore, the Licensing Agreement includes language that supports
Atmosphere’s argument that defendants are no longer entitled to use the
Adoba® name or processes.
Atmosphere also directs the court to the Management Agreement in
support of its position. While it is rather unlikely that the parties intended that
the Management Agreement control the grant of the license, the court examines
the language in the Management Agreement nonetheless. See Kramer v.
16
William F. Murphy Self-Declaration of Trust, 816 N.W.2d 813, 815 (2012)
(providing that when two writings are executed together as part of a single
transaction they should be interpreted together).
Atmosphere emphasizes two parts of the Management Agreement: Recital
F and § 2.04. Recital F provides:
Atmosphere’s agreement to grant a license to the Licensed Concept
for the Property is expressly conditioned upon Atmosphere’s
approval of the use and application of the Licensed Concept in the
renovation of the Hotel and Atmosphere’s continuous operation
and management of the Hotel. Accordingly, Atmosphere’s
agreement to enter this Agreement is conditioned upon [Shiba’s]
concurrent execution and delivery of this Agreement and the
License Agreement.
Docket 1-2 at 2. Section 2.04 states, “[Shiba] agrees that the Property shall be
part of the Adoba® Hotels System as defined in the License Agreement to the
full to the (sic) extent reasonably possible and permitted by [Shiba].” Docket 12 at 4. Because Recital F essentially mimics Recital C of the Licensing
Agreement, Recital F conveys the same intention—that defendants can no
longer use the Adoba® brand or processes if Atmosphere is not operating and
managing the hotel. Section 2.04 simply notes that the Licensing Agreement
defines the license relationship. In sum, the Management Agreement does not
provide clarity as to whether defendants can continue using the Adoba® brand
and processes.
After reviewing the entirety of the Licensing Agreement and the
Management Agreement, the court finds the language allows for two conflicting
17
outcomes. Some language in the agreements supports defendants’ position
(that it should be allowed to continue using the Adoba® brand and processes);
other language supports Atmosphere’s position (that upon termination of the
agreements, defendants must cease using the Adoba® brand and processes).
Because the agreements are capable of more than one meaning, they are
ambiguous. All Star Constr. Co., 741 N.W.2d at 744.
Because the agreements are ambiguous, parol evidence may be
introduced to determine the intent of the parties. Pankratz v. Hoff, 806 N.W.2d
231, 237 (S.D. 2011). The parties testified at length during the hearing
regarding Atmosphere’s fraudulent inducement claim.10 But little was said
regarding the parties’ intentions when entering into the agreements, and
therefore, neither party made a strong showing as to the meaning of the
agreements.
Atmosphere contends that the custom in the industry is that the licensee
ceases using the licensed brand following termination of a licensing agreement.
While this argument has some weight, the circumstances here were not typical
because the hotel was the first Adoba® hotel. Merali testified about the risks
that he faced by entering into a licensing agreement in which his hotel would
operate under an entirely new brand as opposed to an older, more established
10
Merali testified on behalf of Shiba, and James Henderson and Adrienne
Pumphrey testified on behalf of Atmosphere.
18
hotel brand. Thus, the industry custom is not as determinative here as it may
be in other circumstances.
Overall, Atmosphere has not put forth convincing parol evidence to show
that the parties intended that defendants must cease using the Adoba® brand
and processes upon termination of the agreements. As a result, Atmosphere
has not met its burden of showing that it is likely to succeed on the merits of
its breach of contract claim.
3.
Misappropriation of Trade Secrets
Atmosphere also claims it is entitled to relief under a misappropriation of
trade secrets theory. The problem with this theory, however, lies in the court’s
analysis above. Because Atmosphere failed to show a likelihood of success on
its breach of contract claim, the court assumes defendants are entitled to “keep
the technology and Adoba Brand” for purposes of this section. Atmosphere has
not clearly articulated what trade secrets are separate and distinct from the
“technology and Adoba Brand” such that defendants are not entitled to
continue operating the motel as they currently are. Therefore, Atmosphere
failed to meet its burden under its misappropriation of trade secrets theory as
well.
In sum, Atmosphere has not shown that it has a likelihood of succeeding
on any of its three theories. The court will nevertheless analyze the remaining
three Dataphase factors.
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B.
Threat of Irreparable Harm to Atmosphere Absent a
Preliminary Injunction
“Irreparable harm occurs when a party has no adequate remedy at law,
typically because its injuries cannot be fully compensated through an award of
damages.” General Motors Corp. v. Harry Brown’s, LLC, 563 F.3d 312, 319 (8th
Cir. 2009). Atmosphere must “demonstrate that irreparable injury is likely in
the absence of an injunction.” Winter v. Natural Res. Def. Council, Inc., 555 U.S.
7, 22 (2008).
Atmosphere alleges it is suffering irreparable harm because it may be
hampered when it attempts to attract future franchisees. Atmosphere also
alleges that defendants are diluting the value of the Adoba® brand by not
meeting Adoba® standards and that there is a risk of consumer confusion.
Atmosphere did not put forth substantial evidence that defendants’
conduct has hampered Atmosphere’s ability to attract other franchisees. In
fact, Henderson testified that they were in the process of franchising a new
hotel in Texas. Atmosphere’s alleged harm to their future prospects, at this
point, is speculative as opposed to likely.
In contrast, Atmosphere put forth evidence that customers are
complaining about their experiences at the Rapid City Adoba® hotel, which
suggests brand dilution and injury to reputation and goodwill. “Injury to
reputation or goodwill is not easily measurable in monetary terms and so often
is viewed as irreparable.” 11A Charles Alan Wright & Arthur R. Miller, Federal
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Practice and Procedure § 2948.1 at 159 (3d ed. 2008). A loss of goodwill, by
itself, may not always be enough to establish irreparable harm. Rogers Grp.,
Inc. v. City of Fayetteville, Ark., 629 F.3d 784, 790 (8th Cir. 2010). The
circumstances here may present such a case. It is in defendants’ best interest
to operate the hotel at a high level, otherwise profits will tumble. Accordingly,
defendants have the incentive to maximize the value of the Adoba® brand.
Thus, Atmosphere’s complaint of injury to goodwill and brand dilution is
somewhat offset by defendants’ position.
Lastly, Atmosphere failed to put forth evidence that customer confusion
is occurring or likely to occur. There are no Adoba® hotels in the surrounding
area. The only other operating Adoba® hotel is in Dearborn, Michigan.
Atmosphere’s allegation at this point is mere speculation.
While Atmosphere’s complaint of injury to its goodwill and brand dilution
is a valid one, it has not put forth enough evidence at this time to warrant a
preliminary injunction on that basis alone, especially in light of its failure to
show a likelihood of success on the merits.
C.
Balance of Harms
Atmosphere claims defendants’ harm, in the event the preliminary
injunction is granted, would be slight. The court disagrees. Merali testified that
changing the name of the hotel would cost a substantial amount of time and
money. Atmosphere itself put forth substantial evidence regarding how costly
and difficult it is to change a hotel brand. Henderson testified at great lengths
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about the time, resources, and expense that went into changing the hotel from
a Radisson to an Adoba®. For Atmosphere to now claim that “Shiba can easily
change the name of the hotel to ‘Shiba Hotel’ or anything else” is disingenuous.
Because defendants’ harm is certain and significant while the majority of
Atmosphere’s harm is speculative, this factor weighs in favor of defendants.
D.
Public Interest
The public interest factor provides little assistance here. The public has
an interest in protecting intellectual property rights. The public also has an
interest in parties performing under the terms of the contracts to which they
enter. Certainly, an entity can contract away its intellectual property rights.
Because the public interest determination depends on the interpretation of the
agreements, Atmosphere’s failure to show a likelihood of success on the merits
causes this factor to weigh in defendants’ favor.
Atmosphere failed to show that it was likely to succeed on any of its
claims. And although Atmosphere’s claim of irreparable harm to its goodwill
and brand is a valid one, the circumstances here are not such that the
irreparable harm factor, standing alone and in light of Atmosphere’s inability to
show a likelihood of success, warrants a preliminary injunction. For these
reasons, defendants may continue operating the hotel using the Adoba® brand
and processes while this action is pending.
II.
Debts to Vendors
Atmosphere also asks the court to order defendants to pay all debts owed
to vendors that arose from operations at the hotel. Atmosphere contends that
22
Shiba is telling vendors that it is not responsible for the debts, thereby ruining
Atmosphere’s credit worthiness, reputation, and good name. Although not
entirely clear, defendants seem to argue Atmosphere is responsible for the
debts because Atmosphere allegedly embezzled over $300,000 while it was
managing the hotel.
The court begins its analysis with the Management Agreement. Under
the Management Agreement, Shiba is responsible for debts incurred in the
operation of the hotel. This is because all operating expenses were to be paid
with funds from accounts in which Shiba was responsible to fund. Section 2.02
of the Management Agreement provides: “[Shiba] shall deposit in the Operating
Account $200,000, which amount shall be replenished or increased by [Shiba]
as necessary to pay Operating Expenses, Management Fees, and insurance
premiums to the extent cash generated by the Property is insufficient.” Docket
1-2 at 3. Operating Expenses are defined in § 2.11 as “all the costs and
expenses of operating, managing, and maintaining the Property as required
herein including without limitation payroll and related taxes and insurance.”
Docket 1-2 at 5. Furthermore, § 6.02 states, “All debts, obligations, and other
liabilities incurred by the Property through the actions of Atmosphere in the
performance of its duties shall be incurred on behalf of [Shiba] and Atmosphere
shall not be liable for payment thereof.” Docket 1-2 at 12. The Management
Agreement unambiguously states that Shiba is responsible for paying all debts
incurred in the operation of the hotel.
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If Atmosphere embezzled money while managing the hotel, Shiba may be
entitled to recover a judgment against Atmosphere. But the embezzlement
issue does not control who is responsible for paying the vendors. Moreover,
defendants have not conclusively shown that Atmosphere did in fact embezzle
money. Therefore, it is appropriate for the court to enjoin Shiba from informing
vendors that Atmosphere is responsible for the debts at issue, and Shiba is
directed to promptly pay the debts owed to vendors that arose from operating
the hotel.
CONCLUSION
Atmosphere has not put forth sufficient evidence to meet its burden to
show that defendants should be enjoined from using the Adoba® brand and
processes associated with the brand while this action is pending. Separately,
the Management Agreement unambiguously states that Shiba is responsible for
paying all debts owed to vendors incurred in the operation of the hotel.
Accordingly, it is
ORDERED that Atmosphere’s motion for preliminary injunction is
granted in part and denied in part.
IT IS FURTHER ORDERED that defendants can continue operating the
hotel using the Adoba® brand and processes while this action is pending.
IT IS FURTHER ORDERED that defendant Shiba Investments, Inc. must
pay all debts owed to vendors that were incurred in the operation of the hotel
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and must refrain from informing vendors that Atmosphere is responsible to pay
these debts.
IT IS FURTHER ORDERED that Atmosphere is not required to post a
security bond consistent with the terms of § 12a of the Licensing Agreement.
Dated December 18, 2013.
BY THE COURT:
/s/ Karen E. Schreier
KAREN E. SCHREIER
UNITED STATES DISTRICT JUDGE
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