United States District Court, D. Kansas
IHOP FRANCHISING, LLC, as successor in interest to International House of Pancakes, Inc.; IHOP PROPERTY LEASING, LLC, as successor in interest to IHOP Properties, Inc.; IHOP IP, LLC; and INTERNATIONAL HOUSE OF PANCAKES, LLC, Plaintiffs,
WAJDI TABEL, Defendant.
REPORT AND RECOMMENDATION
TERESA J. JAMES, Magistrate Judge.
The parties are reminded that, within fourteen (14) days after being served with a copy of this Report and Recommendation, any party, pursuant to 28 U.S.C. § 636(b)(1) and Fed.R.Civ.P. 72(b)(2), may file written objections to this Report and Recommendation. A party must file any objections with the clerk of the district court within the fourteen-day period if that party wants to have appellate review of the proposed findings of fact, conclusions of law, or recommended disposition. Failure to file objections may constitute a waiver of those objections on subsequent appellate review.
I. NATURE OF THE MATTER BEFORE THE COURT
On December 16, 2013, Plaintiffs IHOP Franchising, LLC and related entities filed their Verified Complaint against an IHOP franchisee or former franchisee, Defendant Wajdi Tabel. The Verified Complaint alleges claims against the Defendant on seven counts: (1) Breach of Contract-Franchise Documents; (2) Ejectment; (3) Lanham Act-Trademark Infringement; (4) Lanham Act-Unfair Competition; (5) Common Law Trademark Infringement; (6) Common Law Unfair Competition; and (7) Declaratory Judgment.
On December 27, 2013, Plaintiffs filed their Motion for Preliminary Injunction (ECF No. 7). Plaintiffs ask the Court to enter a preliminary injunction pursuant to Fed.R.Civ.P. 65 ordering Defendant Tabel, and those acting in concert with him, to immediately cease operating the IHOP restaurant located at 15410 West 119th Street, Olathe, Kansas ("the Restaurant"), and to surrender possession of IHOP's Marks, and the Restaurant premises, inventory, marketing materials, equipment, and proceeds.
Plaintiffs assert that they are entitled to a preliminary injunction because Defendant breached his IHOP franchise agreement by: (a) failing to honor Plaintiffs' right of first refusal to purchase the Restaurant, and (b) improperly and secretly assigning the Restaurant without Plaintiffs' consent. For these reasons, Plaintiffs terminated Defendant's franchise, which Plaintiffs assert triggered post-termination obligations that Defendant breached and is continuing to breach under the terms of the Franchise Agreement, including namely obligations to cease operation of the Restaurant, to surrender the premises and equipment to Plaintiff, and to discontinue use of Plaintiffs' trademarks, marketing materials, and other items identified in the Franchise Agreement.
On January 7, 2014, Defendant filed a motion to dismiss or in the alternative to stay Plaintiffs' motion for preliminary injunction and verified complaint (ECF No. 12). He argued that Plaintiffs' motion for preliminary injunction and verified complaint were improper and should be dismissed or in the alternative stayed pursuant to the automatic stay provisions of 11 U.S.C. § 362, triggered by his May 24, 2011 Chapter 11 bankruptcy filing (D. Kan. Bankr. Case No. 11-21551). On March 13, 2014, District Judge Vratil overruled the motion to dismiss and referred Plaintiffs' motion for preliminary injunction to the undersigned Magistrate Judge for a Report and Recommendation (ECF No. 16).
On March 26, 2014, the undersigned Magistrate Judge held an evidentiary hearing on the motion. Plaintiffs appeared through counsel and its representatives. Defendant appeared only through counsel. Plaintiffs presented evidence at the hearing consisting of the testimony of three witnesses and 28 exhibits. Although Defendant filed a Witness List (ECF No. 20) listing Defendant Tabel and the Restaurant manager Candy Hill, neither of these witnesses appeared at the hearing. Nor did Defendant offer any exhibits or any other evidence at the hearing. Following presentation of the evidence, the Court took the motion under advisement for the preparation of a Report and Recommendation.
On April 7, 2014, the Court initiated a telephone conference with the parties to discuss whether RR Group LLC and/or Alex Harb, which the evidence indicated might have interests in the Restaurant, were indispensable parties under Fed.R.Civ.P. 19(a)(1), and whether they were entitled to notice as an "adverse party" under Fed.R.Civ.P. 65(a)(1). In addition, the Court obtained clarification from Plaintiffs on the precise relief being requested, and how Plaintiffs contemplate that relief would be enforced. After hearing from counsel on these issues, the Court issued a Notice and Show Cause Order to RR Group LLC and Alex Harb, giving them notice of this action and of Plaintiffs' pending Motion for Preliminary Injunction, along with a deadline by which they must show cause in writing filed with the Court why the preliminary injunction should not issue and identifying their interest, if any, in the Restaurant. On April 10, 2014, RR Group LLC and Alex Harb filed a response to the Show Cause Order (ECF No. 29) stating that they do not have any ownership interest in or operational involvement with the Restaurant and do not have any interest in IHOP's trademarks, inventory, marketing materials, equipment or proceeds located in the Restaurant or associated premises. They further stated they do not object to the issuance of the preliminary injunction.
Defendant's answer was due within fourteen days after the Court denied Defendant's motion to dismiss on March 13, 2014. Although more than fourteen days have passed since his motion was denied, Defendant has not filed an answer. On April 2, 2014, Plaintiffs requested an entry of default against Defendant under Fed.R.Civ.P. 55(a). The Clerk entered Entry of Default against Defendant on April 3, 2014 (ECF No. 24).
It is against this backdrop that the Court now issues this Report and Recommendation on Plaintiffs' Motion for Preliminary Injunction.
II. FINDINGS OF FACT
A. History and Pertinent Provisions of the Franchise Agreement
Plaintiffs are franchisors of the nationally recognized IHOP restaurants. Since 1998, an IHOP franchisee has maintained a restaurant located at 15410 West 119th Street, Olathe, Kansas and identified as IHOP #5321("the Restaurant"). In 2005, the franchisee operating the Restaurant at the time assigned all of his interest in the Restaurant to Defendant Tabel. Pursuant to that assignment, Defendant executed a franchise agreement ("Franchise Agreement") with International House of Pancakes, Inc. ("IHOP") and assumed all of the prior franchisee's duties and obligations under a sublease for the premises and an equipment lease.
Sections 11.02 and 11.03 of the Franchise Agreement permitted Defendant to assign, transfer, or sell his interest in the Franchise Agreement and Restaurant under limited circumstances, subject to the requirements that Defendant serve written notice of the proposed assignment upon IHOP and obtain IHOP's written consent to the assignment. Section 11.03(b)(iii) required the franchisee Defendant to retain at all times legal and beneficial ownership of at least 51% of all outstanding stock of any assignee, absent written agreement by IHOP. Section 11.04 provided IHOP with the right of first refusal for thirty days after receipt of such notice (or thirty days after receipt of requested additional information), which permitted IHOP, at its option, to accept the proposed assignment to itself or its nominee, upon the terms and conditions specified in the notice of proposed assignment.
The Franchise Agreement permitted IHOP to terminate the agreement after providing notice of default and Defendant's failure to cure such default and, in the case of an incurable breach, to terminate immediately and without notice. Under Section 12.02 of the Franchise Agreement, an attempt by the franchisee to assign the Franchise Agreement without prior written consent of the franchisor would constitute an incurable breach permitting IHOP to terminate the agreement immediately without notice. Attempts to assign IHOP's trademarks or to permit another entity to use the trademarks would also constitute an incurable breach.
The Franchise Agreement also imposed certain post-termination obligations on Defendant. Upon termination, Section 16.02 required Defendant to discontinue use of IHOP's trademarks, and to cease operating or doing business under any name or in any manner that might give the impression to the general public that Defendant is continuing to operate an authorized restaurant. The agreement also required Defendant, upon termination of the Franchise Agreement, to refrain from using any trade secrets, procedures, techniques or materials acquired under the agreement, and to return and surrender the trademarks and other items to IHOP. Section 8.09 required that upon termination of the Franchise Agreement, Defendant deliver and surrender to IHOP all manuals, bulletins, instruction sheets, forms, marks, devices, and trademarks.
The Sublease for the Restaurant allows IHOP to terminate the sublease upon "any breach by Subtenant of [the] Sublease, the Franchise Agreement, the Equipment Lease or the promissory note(s)."
B. Touffaha Purchase Agreement
On October 5, 2012, Defendant sent an email to Cathy Celano, an employee in IHOP's franchise administration department, stating that he intended to sell his franchise in the Restaurant to Mohamad Touffaha.
On November 28, 2012, Defendant forwarded to IHOP's franchise department a signed purchase agreement between Defendant, as seller, and Mohamad Touffaha, as buyer ("Touffaha Purchase Agreement"). It purported to provide the terms and conditions under which Defendant sold and assigned the Restaurant to Touffaha, including the Sublease, Equipment Lease, and Franchise Agreement. Section 24 of the Touffaha Purchase Agreement provided that "[i]n the event IHOP International fails to approve of the transfer of the IHOP franchise from Buyer to Seller, then the parties agree the Seller shall transfer to Buyer of [sic] 49% of the subject IHOP franchise." The Touffaha Purchase Agreement was signed by both Defendant and Mohamad Touffaha and dated October 29, 2012.
IHOP notified Defendant by letter dated December 24, 2012 that it would exercise its right of first refusal under the Franchise Agreement to acquire the Restaurant on the terms provided in the Touffaha Purchase Agreement.
On December 28, 2012, Defendant's attorney emailed a letter to IHOP stating that the buyer, Touffaha, had "rescinded and revoked his offer" and "[t]he proposed transaction is null and void of no further force and effect." The letter further stated that Touffaha's revocation "renders the Notice of Exercise of Right of First Refusal no longer effective, " and they anticipated a new purchase agreement submitted for approval in the very near future.
IHOP responded to Defendant's letter and stated that the Touffaha Purchase Agreement executed by both parties "was firm evidence that the offer had been accepted, " and there was no provision giving Touffaha the unilateral right to terminate the agreement without cause. IHOP further advised Defendant that any subsequent agreement to terminate the Touffaha Purchase Agreement did not nullify or invalidate its exercise of the right of first refusal triggered by the October 29 Touffaha Purchase Agreement.
C. 2013 Audit
In June 2013, Plaintiffs attempted to perform an unannounced audit of the Restaurant and requested that Defendant make available for inspection and copying various financial and business documents related to Defendant's operation of the Restaurant. Defendant was unable to produce a majority of the requested documents, so the audit was rescheduled and resumed in July 2013. Plaintiffs' auditor, Chris Guerra, conducted the audit of the documents provided by Defendant or the Restaurant's management staff.
One of the documents provided during the audit was the 2012 federal income tax return for the entity operating the Restaurant. The tax return identified the entity operating the Restaurant as RR Group, LLC with an address of 438 S. Rock Road, Wichita, Kansas, and listing an October 2, 2012 date of incorporation. Schedule K-1 of the return, in the section identifying the company's shareholders and their percentage of ownership, listed Alex Harb as owning 100% of the company's stock ownership for the tax year and identified his address as 438 ...