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Dunkin' Donuts Franchised Restaurants LLC v. Wometco Donas Inc.

United States District Court, D. Massachusetts

September 11, 2014

DUNKIN' DONUTS FRANCHISED RESTAURANTS LLC and DD IP HOLDER LLC, Plaintiffs,
v.
WOMETCO DONAS INC. and WOMETCO DE PUERTO RICO, INC., Defendants

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[Copyrighted Material Omitted]

Page 223

For Dunkin' Donuts Franchised Restaurants LLC, DD IP Holder LLC, Plaintiffs: David E. Worthen, LEAD ATTORNEY, PRO HAC VICE, Gray, Plant, Mooty, Mooty & Bennett, P.A., Washington, DC; Eric L. Yaffe, LEAD ATTORNEY, Gray Plant Mooty Mooty & Bennett PA, Washington, DC.

For Wometco Donas Inc., Wometco de Puerto Rico, Inc., Defendants: Gordon P. Katz, LEAD ATTORNEY, Holland & Knight, LLP, Boston, MA; Jesus E. Cuza, LEAD ATTORNEY, PRO HAC VICE, Holland & Knight LLP, Miami, FL; Nathaniel F. Hulme, Holland & Knight (B), Boston, MA.

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MEMORANDUM & ORDER

Nathaniel M. Gorton, United States District Judge

This case involves claims of breach of contract, trademark infringement, unfair competition and trade dress infringement by Dunkin' Donuts Franchised Restaurants LLC and DD IP Holder LLC (collectively, " plaintiffs" or " Dunkin'" ) against Wometco Donas Inc. (" Wometco Donas" ) and Wometco de Puerto Rico (" Wometco PR" ) (collectively, " defendants" ) to prevent the continued operation without permission of 18 Dunkin' franchises in Puerto Rico. Pending before the Court is 1) plaintiffs' motion for a preliminary injunction to enjoin defendants from continuing to infringe Dunkin's trademarks, 2) plaintiffs' motion for leave to file an amended complaint and 3) plaintiffs' motion to enjoin Wometco PR from prosecuting a related action.

The crux of the issue before the Court is defendants' failure to pay approximately $196,000 in royalty and renewal fees. Plaintiffs claim that those payments are owed under the Multiple Unit Development and Franchise Agreement (" the Franchise Agreement" ) signed by Dunkin' and Wometco Donas in 2001 and, therefore, seek to terminate the agreement for defendants' failure to pay. Defendants admit that they owe royalties but contend that no renewal fees are owed because the Franchise Agreement is not the operative contract between the parties. Instead, defendants contend that, despite the existence of the signed Franchise Agreement, Wometco PR, not Wometco Donas, actually operates the Dunkin' franchises in Puerto Rico pursuant to an unspecified oral agreement negotiated " some time before 2001." According to defendants, Dunkin's termination of defendants' franchising arrangement

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is therefore without just cause and violates the Puerto Rico Dealer's Act.

For the reasons that follow, the Court will allow plaintiffs' motion and enter a preliminary injunction against defendants. The Court finds that defendants are in breach of their contractual obligations and plaintiffs have, therefore, met their burden of proving a likelihood of success on the merits. The Court also finds that plaintiffs have made the required showings with respect to irreparable harm, the balance of equities and the public interest.

In addition, because of the substantial overlap between this action and the subsequently filed case in the District of Puerto Rico, the Court will allow Dunkin's motion to enjoin Wometco PR from prosecuting its duplicative action in that court.[1]

I. Background

A. The Parties

Plaintiffs are Delaware limited liability companies with their principal place of business in Canton, Massachusetts. Dunkin' is the franchisor of the Dunkin' Donuts System which involves the production, merchandising and sale of doughnuts and related products. Dunkin' owns the trademarks and licenses others to use them and the Dunkin' Donuts trade name.

Defendants Wometco Donas and Wometco PR are both Puerto Rico corporations with their principal places of business in Santurce, Puerto Rico and Guaynabo, Puerto Rico respectively. Under the Franchise Agreement and its addenda, Wometco Donas operates 18 Dunkin' Donuts shops throughout Puerto Rico and its obligations are guaranteed by Wometco PR. Michael S. Brown (" Brown" ) is the president of both companies.

B. Factual Background

On February 26, 2001, the Franchise Agreement was signed by a Dunkin' Donuts representative and Brown on behalf of Wometco Donas. It authorized Wometco Donas to use Dunkin' trademarks, trade names and trade dress in the operation of its franchises in Puerto Rico.

In addition to an initial franchise fee of $25,000 per shop, Wometco Donas agreed to pay Dunkin' a royalty of 5% of each shop's gross monthly sales. The Franchise Agreement provided for an initial term of ten years, after which

if exercised by [Wometco Donas], for any Shop, [Dunkin' Donuts] shall grant to [Wometco Donas] one ten (10) year extended term or renewal for each Shop automatically upon the receipt of payment by [Dunkin' Donuts] from [Wometco Donas] of a renewal fee in an amount equal to...Twelve Thousand and Five Hundred Dollars (US$12,500) for each [Shop].

The Franchise Agreement noted that in the event of a material default by Wometco Donas, Dunkin' could terminate the agreement contingent upon a 30-day notice to cure. It also provided that Wometco Donas was entitled to a ten-day period to cure a failure to pay any amounts due. The Franchise Agreement states that it shall be governed by Massachusetts law.

Exhibit E of the Franchise Agreement was a Guarantee by Wometco PR for

full payment and performance of [Wometco Donas's] obligations under the Franchise Agreement from each Guarantor's own debt.

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The Franchise Agreement was amended in November, 2002 (" the 2002 Amendment" ), to reflect Wometco Donas' purchase of the rights to three Dunkin' shops from CADI Foods, Inc. The 2002 Amendment was signed by a Dunkin' representative and Brown on behalf of Wometco Donas.

The Franchise Agreement was again amended in July, 2011 (" the 2011 Amendment" ) to reflect Wometco Donas' noncompliance with the terms of the Franchise Agreement due to its

limited access to working capital [and its inability to] undertake additional development in the near future.

In general, the 2011 Amendment allowed Wometco Donas to seek third party investment and possible assignment agreements with respect to its franchise operations. It noted that Wometco Donas had " developed and operated a number of Shops in [Puerto Rico] since 2001."

The 2011 Amendment also replaced the previous provision with respect to renewal of the Franchise Agreement with the following language:

Except as otherwise provided herein, the initial term of this Agreement shall expire with respect to a Shop opened hereunder ten (10) years from the opening of such Shop. Upon expiration of the initial term and with the prior written approval of [Dunkin' Donuts], [Wometco Donas] shall have the right to renew the term for a Shop for ten (10) additional years for a renewal fee of (a) US$12,500 for each [Shop] or (b) US$6,250 for each Kiosk.

The 2011 Amendment was signed by a Dunkin' representative and Brown on behalf of Wometco Donas.

In March, 2013, 10 of defendants' 18 shops came up for renewal under the terms of the Franchise Agreement resulting in renewal fees of $125,000 due to Dunkin'. Defendants continued to operate the ten shops but did not pay the renewal fees.

On January 7, 2014, Dunkin' served defendants with a notice of default/notice to cure, advising them that they had 10 days in which to pay outstanding royalty fees of $58,483, renewal fees of $125,000 and interest of $12,502. Defendants failed to cure the default and Dunkin' terminated the Franchise Agreement pursuant to a notice of termination dated January 22, 2014. Defendants have refused to accept termination and are continuing to operate the subject franchises and use Dunkin's trademarks, trade names and trade dress without license.

Notwithstanding Dunkin's termination, the parties stated at oral argument that defendants

could continue to operate [and that Dunkin'] would honor [its] obligations [pending] judicial ratification of that termination.

Dunkin' indicated that it has " done nothing to force [defendants'] operations to shut down in any way, shape or form."

C. Procedural History

On January 23, 2014, plaintiffs filed a complaint in this Court alleging breach of contract (Count I), trademark infringement (Count II), unfair competition (Count III) and trade dress infringement (Count IV). On March 5, 2014, plaintiffs filed a motion for a preliminary injunction against Wometco Donas and Wometco PR.

This Court held a hearing on the subject motion on March 27, 2014. The following day, in light of the parties' representations with respect to possible settlement, the Court directed the parties to submit a status report to the Court with respect to their negotiations on or before April 3, 2014. The parties subsequently moved

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jointly to stay the action, pursuant to which the case was stayed for four weeks. On April 28, 2014, the parties submitted separate status reports indicating that they had been unable to reach a settlement.

In a related development, on March 5, 2014, Wometco PR filed a separate complaint in the District of Puerto Rico against Dunkin', alleging a violation of the Puerto Rico Dealers Act for termination without " just cause" and tortious interference by Dunkin'. The complaint also names Baskin-Robbins Franchising LLC (" Baskin-Robbins" ), the brand of which is owned by Dunkin' and whose stores are often co-located with Dunkin' shops in Puerto Rico.

In the Puerto Rico action, Wometco PR seeks $18 million in damages, a declaration that the Franchise Agreement is null and void and inapplicable to Wometco PR and injunctive relief barring arbitration of the dispute under the Franchise Agreement. On April 3, 2014, Dunkin' and Baskin Robbins filed a motion to dismiss, transfer or stay that case. The parties ...


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