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Little Caesar Enterprises, Inc. v. Miramar Quick Service Restaurant Corp.

United States District Court, E.D. Michigan, Southern Division

July 16, 2019

LITTLE CAESAR ENTERPRISES, INC., et al., Plaintiffs,
v.
MIRAMAR QUICK SERVICE RESTAURANT CORPORATION et al., Defendants.

          ORDER GRANTING PLAINTIFFS' MOTION FOR PRELIMINARY INJUNCTION, DENYING DEFENDANTS' MOTION FOR PRELIMINARY INJUNCTION

          TERRENCE G. BERG, UNITED STATES DISTRICT JUDGE

         In this breach of contract and trademark infringement case, the pizza restaurant company Little Caesars Enterprises, Inc. and LC Trademarks, Inc., which owns the Little Caesars trademark, are suing operators of several franchise stores for repeatedly violating the franchise agreement that governs the parties' relationship and mutual obligations. The Plaintiffs have moved the Court to enter a preliminary injunction prohibiting the franchisees from operating in violation of the franchise agreements, while the franchisees on their part ask the Court to enjoin Little Caesars from canceling the franchises. The Plaintiffs' position is the stronger, so preliminary injunctive relief will be granted in their favor and denied to the franchisees.

         BACKGROUND

         The “Little Caesars” trademark, service mark, trade name, and related marks are owned by Plaintiff LC Trademarks, Inc. ECF No. 32 PageID.321-22. LC Trademarks licenses these marks to Plaintiff Little Caesar Enterprises, Inc., which in turn licenses them to franchisees throughout the United States. ECF No. 32 PageID.322. Little Caesars franchisees are permitted to use the Little Caesars marks and to operate under the Little Caesars System, “which involves the production, merchandizing, and sale of pizza, chicken wings, and related products utilizing special equipment, equipment layouts, interior and exterior accessories, identification schemes, products, management programs, standards, specifications, proprietary marks, and information.” ECF No. 32 PageID.321.

         Khalid Drihmi and Abdel Drihmi are brothers who purchased four Little Caesars franchises in Connecticut and Massachusetts. They own the franchises through two companies, Miramar Quick Service Restaurant Corporation, and Silon Corporation. ECF No. 32 PageID.322-23. The relationship between Little Caesar Enterprises and Defendants was governed by detailed franchise agreements signed by the parties and personally guaranteed by the Drihmis. ECF No. 33-4 PageID.452-54. The agreements provided that “Franchisee shall operate the Restaurant in strict conformity with such methods, standards, procedures, and specifications as Little Caesar may from time to time prescribe.” ECF No. 33-4 PageID.441. The franchisees were further required to “maintain the Restaurant premises and adjacent public areas in a clean, orderly, and excellent condition and in excellent appearance to the public.” ECF No. 33-4 PageID.412. Little Caesar Enterprises retained authority under the franchise agreements to conduct inspections of the franchise premises “when and as frequently as it deems appropriate, without notice to Franchisee.” ECF No. 33-4 PageID.410, 412.

         The agreements also mandated that Defendants purchase all products, ingredients, equipment, and supplies used or sold in their restaurants “solely from Little Caesar's affiliate Blue Line Foodservice Distribution (“Blue Line”), or from such other entity as Little Caesar designates in writing.” ECF No. 33-4 PageID.412. The agreements specified that Defendants were to pay Blue Line directly for all supplies “in accordance with Blue Line's then-current payment terms and conditions.” ECF No. 33-4 PageID.412. If a franchisee failed to make any payment required under the agreement in full, “Little Caesar and Blue Line reserve[d] the right, among other remedies, to (a) suspend or refuse shipment to Franchisee of additional Blue Line products until such payment has been made in full, and/or (b) require payment for any or all future shipments of Blue Line products to be made on a cash-on-delivery (COD) basis.” ECF No. 33-4 PageID.412.

         Defendants were further required to maintain accurate financial records and accounts, and to provide “weekly reports of Gross Sales, ” “financial statements on a quarterly basis, ” and “such other data and information regarding the operation of the Restaurant as Little Caesar may require.” ECF No. 33-4 PageID.428. Little Caesar Enterprises retained the right “at any time to examine and copy, at Little Caesar's expense, the books, records, accounts, and business tax returns of the Franchisee, and the personal tax returns of Franchisee's owners.” ECF No. 33-4 PageID.429.

         Conditions warranting termination of the franchise agreements were set forth in plain language. They included the franchisee receiving three or more notices of default within a year, or demonstrating “willful or repeated failure . . . to meet any requirements or specifications established by Little Caesar with respect to product quality, physical property, condition of equipment or materials used, products manufactured, menu, or the use of products, packaging or promotional materials that have not been specified or approved by Little Caesar.” ECF No. 33-4 PageID.435. Termination was also justified if a franchisee “refuses to permit Little Caesar to inspect Franchisee's Restaurant, books, records, and other documents” or “fails to cure any default under this Agreement which materially impairs the goodwill associated with the Propriety Marks or presents a health or safety hazard to Restaurant employees or customers.” ECF No. 33-4 PageID.436.

         Any violations such as these, under the franchise agreement, warranted termination “without affording Franchisee any opportunity to cure the default, effective immediately upon receipt of notice by Franchisee.” ECF No. 33-4 PageID.434. Moreover, upon termination, the agreement required the franchisee to “immediately cease to operate the Restaurant” and no longer to “directly or indirectly, represent to the public or hold itself out as a present or former franchisee of Little Caesar.” ECF No. 33-4 PageID.437. The franchise agreement also contemplated liquidated damages for noncompliance, including $250 per day for each day the franchisee is in default, as well as estimated revenue and royalty fees Little Caesar Enterprises would forgo because of the franchisee's breach. ECF No. 33-4 PageID.438.

         In August 2016, after five payments to Blue Line were returned for insufficient funds, Defendants' Wethersfield, Connecticut and Springfield, Massachusetts franchises were instructed to provide cash on delivery for product shipments going forward. ECF No. 46 PageID.956. Later, in January 2018, the Manchester, Connecticut and Hartford, Connecticut franchises were moved to prepayment terms “after 18 payments across the four stores were returned for insufficient funds over the prior year and a half.” ECF No. 46 PageID.956. Prepayment required payment when the food and supplies are ordered from Blue Line, which was typically two days before delivery. Id.

         On February 22, 2018, Little Caesar Enterprises sent Defendants two separate letters with the subject “Notice of Default and Notice of Franchise Agreement Termination.” ECF Nos. 33-5, 33-6. Those letters described a long list of critical operational defaults and system standards defaults observed by Little Caesar Enterprises inspectors at the four restaurants owned by Defendants in November and December 2017. ECF Nos. 33-5, 33-6. Little Caesar Enterprises also sent Defendants separate “Supplemental Notice[s] of Franchise Agreement Termination, ” similarly dated February 22, 2018, which detailed additional defaults by Defendants. ECF Nos. 33-7, 33-8. Specifically, these supplemental notices described how Defendants had “fail[ed] to comply with federal tax laws, as evidenced by a 2016 Notice of Levy from the Internal Revenue Service related to your franchised restaurants, ” and “fail[ed] to provide to Little Caesar required financial statements related to your franchised restaurants and . . . to make timely payments to your supplier, Little Caesar affiliate Blue Line Foodservice Distribution, Inc., for food and supply deliveries.” ECF No. 33-7 PageID.471; ECF No. 33-8 PageID.476. These various notices of default and termination referenced previous notices of default sent by Little Caesar Enterprises to Defendants in May, August, November, and December 2017. ECF No. 33-5 PageID.458; ECF No. 33-6 PageID.465; ECF No. 33-7 PageID.471; ECF No. 33-8 PageID.476. Accordingly, Defendants were on notice of the problems identified by Little Caesar Enterprises.

         Defendants had also neglected to report gross sales at their Manchester franchise and to pay contractually required royalty and advertising fees on those sales since September 17, 2018. ECF No. 33-2 PageID.393. Likewise, since October 2018 they had not been reporting sales and paying the requisite fees for the Wethersfield franchise. Id. PageID.391. Defendants similarly did not report gross sales at their Springfield franchise or pay royalty and advertising fees on those sales during at least 38 weeks in 2018 and 2019. Id. They were likewise behind on reporting gross sales and paying the related fees in connection with their Hartford franchise. Id. at PageID.393-34. Little Caesars notified Defendants of these violations of the franchise agreements in a “Supplemental Notice of Default and Notice of Franchise Agreement Termination” dated January 9, 2019. ECF No. 33-9 PageID.479; see ECF No. 33-11 PageID.485-86 (List of Missing Franchise Payments). And Plaintiffs ground their request for a preliminary injunction in these most recent, and perhaps most serious violations of the franchise agreements, which remained uncured as of the date of the May 3, 2019 hearing on this matter. See ECF No. 45-1 PageID.943. Though Defendants submitted an opposition to Plaintiffs' motion for a preliminary injunction, that brief was late-filed and, most critically, does not dispute the bulk of Defendants' specific factual allegations regarding the franchise agreement violations outlined in Plaintiffs' briefing and accompanying exhibits. Rather, Defendants take the position that Plaintiffs “themselves created the conditions that resulted in their alleged violations.” ECF No. 49 PageID.963.

         DISCUSSION

         “The purpose of a preliminary injunction is merely to preserve the relative positions of the parties until a trial on the merits can be held.” Univ. of Tex. v. Camenisch, 451 U.S. 390, 395 (1981). In deciding whether to grant a preliminary injunction, the Court considers: “(1) whether the movant has a strong likelihood of success on the merits; (2) whether the movant would suffer irreparable injury absent the injunction; (3) whether the injunction would cause substantial harm to others; and (4) whether the public interest would be served by the issuance of an injunction.” Graveline v. Johnson, 747 Fed.Appx. 408, 412 (6th Cir. 2018) (quoting Bays v. City of Fairborn, 668 F.3d 814, 818-19 (6th Cir. 2012)). These four ...


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