Mid Atl. Rest. Corp. v. Gumby 1105, Inc.

MID ATLANTIC RESTAURANT CORP., a North Carolina corporation, Plaintiff and Counter Defendant, v. GUMBY 1105, INC., a North Carolina corporation, and J. DAVID HARRIS, an individual, Defendants, Third-Party Plaintiffs, and Counter Claimants, v. CARY KEISLER, INC., a North Carolina corporation; S.C.N.B. REAL ESTATE SERVICES, LLC, a North Carolina limited liability company; GREGORY MOORE, an individual; JUNIUS MOORE, an individual, and JOHN DOES 1-10, Third-Party Defendants.

No. 5:20-CV-00472-M

United States District Court, E.D. North Carolina, Western Division

August 19, 2021

OPINION AND ORDER

RICHARD E. MYERS II CHIEF UNITED STATES DISTRICT JUDGE.

This order addresses three separate motions currently before the court: Plaintiff Mid Atlantic Restaurant Corporation's ("Plaintiff) Motion for Preliminary Injunction [DE-4] Defendants/Third-Party Plaintiffs Gumby 1105, Inc. and J David Harris' ("Defendants") Renewed Motion for Preliminary Injunction [DE-47], and Third-Party Defendant S.C.N.B. Real Estate Services, LLC's ("S.C.N.B.") Motion to Compel Arbitration [DE-54]. For the reasons discussed below, both motions for preliminary injunction will be denied and the motion to compel arbitration will be granted.

I. Abbreviated Factual and Procedural History

This litigation stems from a personal friendship and business relationship gone sour. Plaintiff is the franchisor of Smithfield's Chicken 'N Bar-B-Q franchise system and filed suit to effectuate the termination of a franchise agreement with one of its franchisees, Defendants. Plaintiff alleges that Defendants are in breach of the agreement due to their failure to maintain an approved lease for the site of the restaurant, which is an express term of the agreement. Though notice of termination was sent to Defendants, Defendants continue to operate a restaurant in Jacksonville, North Carolina, using the Plaintiffs franchise name and trademarks and Defendants have also failed to return Plaintiffs proprietary information. Defendants filed counterclaims and impleaded several third-party defendants alleging an organized scheme, by Gregory Moore and the various entities he operates and controls, to prevent Defendants from securing an approved lease, all in an effort to permanently force Defendants out of business.

Plaintiff filed suit against Defendants on September 2, 2020, alleging breach of contract, trademark infringement, unfair competition, and trade dress infringement [DE-1]. Defendants counterclaimed and impleaded multiple third-party defendants: Cary Keisler, Incorporated ("Cary Keisler") is Plaintiffs management company; S.C.N.B. is the owner and lessor of the commercial property in Jacksonville where Defendants operate their franchise; Gregory Moore is Plaintiffs and Cary Keisler's sole shareholder and S.C.N.B.'s sole member; Junius Moore is the son of Gregory Moore and involved in his father's business dealings; and finally John Does one through ten were named as third-party defendants [DE-42]. Defendants causes of action include specific performance, breach of contract, breach of the duty to negotiate in good faith, breach of the implied covenant of good faith and fair dealing, declaratory judgment, civil conspiracy, unfair and deceptive trade practices, and tortious interference with contract.

Throughout the fall of 2020 the parties were engaged in active motions practice. An early mediated settlement conference held on February 10, 2021, resulted in an impasse [DE-75]. There are currently seven fully briefed motions before the court. The court held a telephonic status conference with the parties on June 9, 2021 [DE-81] at which time the court directed the parties to meet and confer and file a joint status report proposing a course of action for addressing outstanding motions. The parties filed a joint status report on July 8, 2021 [DE-86] proposing different approaches. The court considered the parties positions and set the cross motions for preliminary injunction for hearing via court order on July 14, 2021 [DE-87] which was subsequently postponed to August 12, 2021 [DE-93], pursuant to the parties' consent motion [DE-90]. Due to a medical issue impacting one of the participants, the August 12th hearing was vacated, and the court determined that oral argument would not aid in its decisional process [DE-95]. The court will first address the cross motions for preliminary injunction followed by S.C.N.B.'s motion to compel arbitration of the Defendants' seventh cause of action alleging S.C.N.B. breached the renewal clause of the lease agreement between the parties.

II. Cross Motions for Preliminary Injunction [DE-4, DE-47]

a. Legal Standard

"[Preliminary injunctions are extraordinary remedies involving the exercise of very far-reaching power to be granted only sparingly and in limited circumstances." MicroStrategy Inc. v. Motorola, Inc., 245 F.3d 335, 339 (4th Cir. 2001) (quoting Direx Israel, Ltd. v. Breakthrough Med. Corp., 952 F.2d 802, 816 (4th Cir. 1991)). Generally, preliminary injunctions are designed to preserve the status quo and prevent irreparable harm during the pendency of litigation. J.O.P. v. U.S. Dep't of Homeland Sec, 409 F.Supp.3d 367, 375 (D. Md. 2019). To prevail, a movant must demonstrate: (1) their suit's likelihood of success on the merits, (2) irreparable harm in the absence of the requested relief, (3) that the balance of equities tip in their favor, and finally (4) that issuing the requested preliminary relief is in the public interest. Id. at 376 (citing Winter v. Nat. Res. Def. Council, 555 U.S. 7, 20 (2008)). The movant must establish all four elements in order to prevail. Pashby v. Delia, 709 F.3d 307, 320-21 (4th Cir. 2013). Preliminary injunctions are governed by Federal Rule of Civil Procedure 65, which does not require an evidentiary hearing so long as the non-moving party has a fair opportunity to oppose the injunction and the motion does not turn on a disputed factual issue. S.C. Progressive Network Educ. Fund v. Andino, 493 F.Supp.3d 460, 466-67 (D.S.C. 2020); Arrowpoint Cap. Corp. v. Arrowpoint Asset Mgmt., LLC, 793 F.3d 313, 324 (3d Cir. 2015).

"Trademark law serves the important functions of protecting product identification, providing consumer information, and encouraging the production of quality goods and services." Lamparello v. Falwell, 420 F.3d 309, 313 (4th Cir. 2005). To prevail on a trademark infringement claim, a plaintiff must show that its mark was used in commerce by the defendant without the registrant's consent and that the unauthorized use was likely to deceive, cause confusion, or result in mistake. 15 U.S.C. § 1114(1). Plaintiffs who then seek a preliminary injunction are entitled to a rebuttable presumption of irreparable harm upon a finding of likelihood of success on the merits for a trademark violation. 15 U.S.C. § 1116(a).

Trademark infringement cases can involve unrelated parties. For example in IHOP Corp. v. Langley, this court issued a temporary restraining order in favor of Plaintiff International House of Pancakes Corporation against a man who tried to confuse the public into thinking his restaurant, "It's Hop'n," was an IHOP franchise. No. 5:08-CV-168-BO, 2008 WL 1859340, at *2 (E.D. N.C. Apr. 11, 2008). Among other things, the man had bought a vacant building that was once occupied by an IHOP franchise and subsequently painted the roof a shade of blue similar to the color contained in IHOP's trade dress. Id. Often it is a contract between two related parties that authorizes the use of intellectual property, including trademarks. In McHenry Software, Inc. v. ARAS 360 Techs., Inc., this court issued a preliminary injunction in favor of a trademark holder where the defendant acknowledged the proper termination of a contract that governed the use of the trademark source code and did not argue that it should be allowed to continue use of the intellectual property. No. 5:12-CV-277-BO, 2012 WL 13027554, at *2-3 (E.D. N.C. Nov. 1, 2012). In the franchisor-franchisee context, it is a contract-the franchise agreement-that authorizes the use of trademarks. Courts have found "that the Lanham Act's requirement that a franchisor demonstrate that unauthorized trademark use occurred to prevail on the merits of a trademark infringement claim against a franchisee necessitates 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 Corp. v. Robertson, 147 F.3d 1301, 1308-09 (11th Cir. 1998) (detailing how the franchisee's numerous failures to conform to McDonald's quality, safety, cleanliness, and food-safety standards constituted a material breach of the agreement sufficient to justify termination and thus support the contention that the continued use of trademarks was unauthorized); see also S & R Corp. v. Jiffy Lube Int'l, Inc., 968 F.2d 371, 375-78 (3d Cir. 1992) (finding that (1) the franchise agreement was properly terminated after the franchisee failed to make royalty payments or cure the defect within sixty days of notice and (2) remanding to the district court with instruction to grant the franchisor's request for preliminary injunction because the post-termination use of trademark by the franchisee was unauthorized despite the franchisee's independent claim of breach of the franchise agreement).

b. Discussion

Though the underlying legal claims in this matter are varied, they center on trademark infringement. In its motion, Plaintiff seeks to bar Defendants from the continued use of its trademarks, compel the return of its proprietary information and prevent Defendants from the continued operation of the franchise in contravention of the properly terminated...