Jun 19, 2019 - Judge’s Distribution and Franchise Rulings from the Front Lines by |

Crux of Court’s Decision (Not including any subsequent appeals):
Tim Hortons prevailed on its preliminary injunction motion terminating its restaurant franchisees. The franchisor was entitled to a preliminary injunction terminating the franchisees because the franchisees refused to pay fees owed to the franchisor. June 17, 2019

Name of Court:
United States District Court for the Southern District of Florida

Short Case Name:
Tim Hortons v. Tims Milner

Short Factual Background and Parties:
Plaintiff is the franchisor of the Tim Hortons brand and franchises restaurants throughout the United States. In 2016, Defendants and Plaintiff and its affiliate Tim Donuts U.S. Limited, Inc. (hereafter, “Plaintiff’s Affiliate”) entered into Franchise Agreements and Lease Agreements (together, the “Agreements”) that provided for Defendants’ ownership and operation of franchised Tim Hortons restaurants at seven locations in Michigan (the “Restaurants”). Each of the Franchise Agreements grants Defendants the right to operate one Tim Hortons restaurant in a specific location and to use the Tim Hortons trademarks. Defendants, however, maintain that they reached a verbal agreement with two employees of Plaintiff prior to execution of the Agreements, that they are only required to pay rent based on a flat percentage of gross sales, and are not required to pay as additional rent all real estate taxes and assessments, sales taxes, common area maintenance charges and assessments, certain utilities, and personal property taxes (together, the “Additional Rent Amounts”)

On or about June 19, 2018, Defendants entered into an Asset Purchase Agreement with Kava, for the sale of the Restaurants to Kava. The Franchise Agreements give Plaintiff the right to approve any sale, however, before it can be final. As is its standard procedure, Plaintiff conditioned its approval of the sale upon full payment from Defendants of all past-due amounts. Defendants disputed that they owed the amounts Plaintiff sought. The sale of the Restaurants was repeatedly delayed while Plaintiff and Defendants negotiated payment of the past due amounts. The parties were unable to reach a resolution and Plaintiff filed this action on October 9, 2018. The next day Plaintiff issued Notices of Default to Defendants which stated that Defendants had breached the Agreements by failing to pay the past due amounts. The Notices gave Defendants ten days to cure their financial default, otherwise Plaintiff would terminate the Agreements. Defendants failed to cure the defaults during the cure period. On November 13, 2018, Plaintiff issued Notices of Termination of the Agreements to Defendants notifying them that the Agreements terminated effective November 12, 2018.

Defendants nonetheless continued to operate the Restaurants and the parties continued their efforts to negotiate a resolution of their dispute. Plaintiff continued to supply Defendants with approved supplies and Defendants continued to make certain payments for rent, royalties, and ad-fund contributions. The parties were unable to resolve their dispute, however, and in January 2019 Defendants ceased making any payments to Plaintiff. Shortly thereafter, in February 2019 Plaintiff cut off Defendants’ supply of approved products. On April 25, 2019, Kava terminated the Asset Purchase Agreement. Still, Defendants continued to operate, at first with stored supplies, and later using supplies from vendors not approved by Plaintiff. With the exception of one location, all of Defendants’ Restaurants were still in operation as of the evidentiary hearing on May 13 and 14, 2019.

Primary Legal Claims by Franchisor:

Plaintiff seeks a preliminary injunction in connection with its claims for trademark infringement and false designation under the Lanham Act and breach of contract. Because the Court finds that Plaintiff is entitled to a preliminary injunction in connection with its Lanham Act claims, it is not necessary to reach the breach of contract claim. See Schiavo ex rel. Schindler v. Schiavo, 357 F. Supp. 2d 1378, 1384 (M.D. Fla. 2005), aff’d, 403 F.3d 1223 (11th Cir. 2005) (“To obtain [] injunctive relief, [a party] must show a substantial likelihood of success on at least one claim.”).

Primary Legal Claims by Franchisee:
The Eleventh Circuit has held that where a franchisor seeks a preliminary injunction against a former franchisee on a claim of trademark infringement, the franchisor must make “some type of showing that the franchisor properly terminated the contract purporting to authorize the trademarks’ use, thus resulting in the unauthorized use of trademarks by the former franchisee.” McDonald’s, 147 F.3d at 1308. Defendants argue that Plaintiff has failed to make this showing because the amounts due remain in dispute. They also argue that Plaintiff cannot make this showing because it failed to provide the Defendants with sufficient documentation to support the monies they claim are due, until after it terminated the Franchise Agreements.

Defendants seek a preliminary injunction in connection with their claims that (1) Plaintiff breached the Franchise Agreements when it terminated the Agreements without good cause and (2) Plaintiff has breached the implied covenant of good faith and fair dealing by failing to act reasonably in connection with its exercise of discretion related to the approval of the sale of the Restaurants to Kava.

Some Detail of Court’s Decision (Not including any subsequent appeals):
The Defendants do not dispute, however, that the Agreements call for their payment to Plaintiff of approximately $225,000.00 of Additional Rent Amounts, which the Defendants have refused to pay. The Defendants do not challenge the adequacy of Plaintiff’s documentation to support these claimed amounts. Rather, they acknowledge that they have refused to make these payments, in reliance on an alleged verbal agreement they made with employees of Plaintiff, before the parties entered into the written Agreements.

As acknowledged by Defendants, however, the Agreements clearly state that Defendants are responsible for payment of these charges, and the Agreements include integration clauses that expressly preclude the parties’ reliance on any prior agreements or representations that conflict with its terms. Under Florida law, evidence of prior agreements cannot be used to vary or contradict the unambiguous language of a valid contract. Chase Manhattan Bank v. Rood, 698 F.2d 435, 436 (11th Cir.1983); see also Eclipse Med., Inc. v. Am. Hydro-Surgical Instruments, Inc., 262 F. Supp. 2d 1334, 1343 (S.D. Fla. 1999), aff’d sub nom. Eclipse Med., Inc. v. Am. Hydro-Surgical, 235 F.3d 1344 (11th Cir. 2000). The Agreements require Defendants to pay these substantial Additional Rent Amounts, that were due as of the Notices of Default.

The Court need not determine the accuracy of every remaining charge included in the Notices of Default to resolve the preliminary injunction motions; the Additional Rent Amounts are sufficient to establish Defendants’ financial default. A default notice need not be flawless to be enforceable. “Substantial compliance [] is all that is required for notices of default, and substantial compliance exists even if the amount demanded in the default notice is incorrect.” Tim Hortons USA, Inc. v. Singh et al., No. 16-23041-CIV, 2017 WL 4837552, at *10 (S.D. Fla. Oct. 25, 2017) (citing Suntrust Bank v. Ruiz, 648 Fed. App’x 757, 760 (11th Cir. 2016)). On this record, Plaintiff has made a sufficient showing that it properly terminated the Franchise Agreements such that Defendants’ continued use of Plaintiff’s trademarks is unauthorized. The Court thus finds that Plaintiff is likely to succeed on the merits of its Lanham Act claims.

Defendants argue that Plaintiff has failed to articulate any precise injury or immediate threatened harm that it may suffer absent an injunction. They urge that Plaintiff has provided no concrete evidence that Defendants have fallen below Plaintiff’s operational standards. This argument, however, misunderstands the standard that applies for a trademark owner to establish irreparable harm. As the Eleventh Circuit stated in Ferrellgas, “a plaintiff need not show that the infringer acted in such a way as to damage the reputation of the plaintiff. It is the loss of control of one’s reputation by the adoption of a confusingly similar mark that supplies the substantial threat of irreparable harm.” Plaintiff has demonstrated the requisite lack of control over the reputation of the Tim Horton’s franchise, and is not required to produce evidence of a specific deficient product, or operational deficiencies, to support the threat of irreparable harm. The Court finds that Plaintiff has established that it will be irreparably harmed in the absence of a preliminary injunction.

Defendants argue that Plaintiff has failed to present specific evidence that Defendants’ continued operation of the Restaurants has or will harm the goodwill of the Tim Hortons brand, whereas Defendants will suffer incurable harm if the injunction is granted and they are unable to continue operating their Restaurants. Importantly, the potential harm faced by Defendants is of their own making. Courts in this and other Circuits have found that a franchisee that has breached the terms of its franchise agreement cannot complain of the harm it would suffer if a court enjoins it from the continued use of the franchisor’s trademarks. See e.g. S & R Corp. v. Jiffy Lube Int’l, Inc., 968 F.2d 371, 379 (3rd Cir. 1992) (upholding preliminary injunction and finding that franchisee’s “self-inflicted harm is far outweighed by the immeasurable damage done Jiffy Lube by the infringement of its trademark”); Burger King Corp. v. Majeed, 805 F. Supp. 994, 1006 (S.D. Fla. 1992) (applying same reasoning in granting preliminary injunction).

Although a preliminary injunction may well cause Defendants to suffer financial losses, that harm is a result of Defendants’ own failure to comply with the Agreements. Weighing Defendants’ self-inflicted injury against Plaintiff’s immeasurable losses to its hard-earned goodwill, the Court finds that the balance of harms weighs in favor of granting Plaintiff’s requested injunctive relief.

Interesting Factual Point:
In this case the franchisees, as well as the franchisor, filed separate motions for preliminary injunction. While the Court granted the motion of the plaintiff franchisor, it denied the same motion of the franchisees. The franchisees’ main argument appeared to pivot off of their claim that a franchisor employee had orally modified the fees that the franchisees would be responsible for paying; however, the Court held that Florida law did not allow the Court to credit such statements.

Interesting Theoretical Point:

In balancing the relative harms, the Court gave great weight to the harm to ‘the public’, which obviously was not one of the two parties. “A preliminary injunction in this case “is not adverse to the public interest, because the public interest is served by preventing consumer confusion in the marketplace.” Davidoff, 263 F.3d at 1304. “In a trademark or service mark infringement case, a third party, the consuming public, is present and its interests are paramount. Indeed, when a trademark is said to have been infringed, what is actually infringed is the right of the public to be free of confusion and the synonymous right of the trademark owner to control his product’s reputation.” Sundor Brands, Inc. v. Borden, Inc., 653 F. Supp. 86, 93 (M.D. Fla. 1986) (citation omitted).”

Jeff Goldstein’s Comment:
Although many franchisees and their counsel rightfully focus upon the accuracy, truthfulness and validity of the notice of default or termination, this Court did not appear to be as focused as some other courts on this issue: “A default notice need not be flawless to be enforceable. ‘Substantial compliance [] is all that is required for notices of default, and substantial compliance exists even if the amount demanded in the default notice is incorrect.’”

The Court here also readily accepted and adopted many ‘franchisor side’ traditional arguments used in preliminary injunction disputes. For instance, in rejecting the harm that would befall the franchisees from the issuance of the preliminary injunction, the Court stated:

Importantly, the potential harm faced by Defendants is of their own making. Courts in this and other Circuits have found that a franchisee that has breached the terms of its franchise agreement cannot complain of the harm it would suffer if a court enjoins it from the continued use of the franchisor’s trademarks. See e.g. S & R Corp. v. Jiffy Lube Int’l, Inc., 968 F.2d 371, 379 (3rd Cir. 1992) (upholding preliminary injunction and finding that franchisee’s “self-inflicted harm is far outweighed by the immeasurable damage done Jiffy Lube by the infringement of its trademark”); Burger King Corp. v. Majeed, 805 F. Supp. 994, 1006 (S.D. Fla. 1992) (applying same reasoning in granting preliminary injunction). Although a preliminary injunction may well cause Defendants to suffer financial losses, that harm is a result of Defendants’ own failure to comply with the Agreements.

Official Case Name and Legal Cite:
Tim Hortons United States v. Tims Milner Llc, No. 18-cv-24152-GAYLES/MCALILEY, 2019 U.S. Dist. LEXIS 100978 (S.D. Fla. June 17, 2019)

Please Click on Link Below to Read Full Decision:

Tim Hortons United States v. Tims Milner Llc_ 2019 U.S

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