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Damon's Restaurants, Inc. v. Eileen K Inc.

August 30, 2006

DAMON'S RESTAURANTS, INC., PLAINTIFFS,
v.
EILEEN K INC., ET AL., DEFENDANTS.



The opinion of the court was delivered by: Judge Michael H. Watson

Magistrate Judge Norah McCann King

REPORT AND RECOMMENDATION

This matter is before the Court on the Motion of Plaintiff Damon's Restaurants, Inc. for Preliminary Injunction Terminating Rockaway and Scranton Franchise Agreements ("Plaintiff's Motion for Preliminary Injunction"), Doc. No. 90, and on the Motion of Plaintiff Damon's Restaurants, Inc. for an Order Requiring Defendants to Show Cause Why They Should Not Be Held in Contempt of the Court's November 17, 2004 Agreed Order ("Plaintiff's Motion for Contempt"), Doc. No. 91. Pursuant to 28 U.S.C. § 636(b), these two motions were referred to the undersigned for evidentiary hearing and report and recommendation. Doc. No. 95. An evidentiary hearing was held on June 27, 2006, and based on that hearing and the parties' preand post-hearing briefs, the Court RECOMMENDS that Plaintiff's Motion for Contempt be GRANTED and that Plaintiff's Motion for Preliminary Injunction be DENIED without prejudice to renewal should defendants not affirmatively establish, within thirty (30) days, satisfaction of the recommended remedy for their contempt.

I. RELEVANT FACTS AND PROCEDURAL HISTORY

On November 7, 1996, the parties entered into a franchise agreement to operate a Damon's restaurant on Concorde Drive, Dupont, Pennsylvania ("Scranton restaurant"). Exhibit A attached to Complaint. On August 27, 2002, the parties entered into a franchise agreement for a Damon's restaurant at 11 Green Pond Road, Rockaway Township, New Jersey ("Rockaway restaurant"). Exhibit I attached to Complaint.

On October 22, 2004, plaintiff filed the Complaint in this action, seeking injunctive and declaratory relief terminating the franchise agreements governing the Scranton and Rockaway restaurants because defendants allegedly repeatedly and successively acted in breach of the agreements. Should the franchise agreements be terminated, defendants will thereafter be required to cease operating as Damon's franchise and using Damon's trademarks in violation of the Lanham Act, 15 U.S.C. §§ 1051 et seq.

On October 29, 2004, plaintiff filed a motion for preliminary injunctive relief with regard to the Scranton restaurant. Doc. No. 6. Then, on December 9, 2004, plaintiff filed a motion for injunctive relief with regard to the Rockaway restaurant. Doc. No. 32. Certain aspects of these motions for injunctive relief were resolved by a November 17, 2004, Agreed Order ("First Agreed Order") and a December 27, 2004, Agreed Order ("Second Agreed Order"). Doc. Nos. 26, 38. In the First Agreed Order, the parties agreed and the Court ordered, inter alia, that the parties would "abide by each parties' rights and obligations under the respective Franchise Agreements . . . ." First Agreed Order at 2. Also, the parties agreed and the Court ordered that defendants offer and serve only Damon's approved food products. Id. 1-2.

In the Second Agreed Order, the parties agreed and the Court ordered defendants to "accurately report to [plaintiff] all sales made at the Scranton (Pennsylvania) Restaurant and Rockaway (New Jersey) Restaurant and pay to Damon's all royalties and production fund fees based on gross sales at these restaurants." Second Agreed Order at 1.

After an evidentiary hearing and consideration of the parties' briefs, the Court issued an Opinion and Order on October 7, 2005("October 7, 2005, Opinion and Order"), denying the remaining portions of plaintiff's motions for injunctive relief. Doc. No. 81. In the October 7, 2005, Opinion and Order, the Court set out the following facts:

1. Scranton Restaurant

Plaintiff maintains that since the execution of the Scranton Restaurant Franchise Agreement, Eileen K defaulted and has been otherwise deficient on numerous occasions. Said acts involved one or more incidents of a failure to pay royalties and production fees, and other acts of failing to comply with the Franchise Agreement and operating guidelines by, inter alia, offering and serving unapproved food products. Plaintiff maintains from 1998 to the present it issued six Notices of Default, sent a number of letters and e-mails and, conducted several on site inspections, all of which placed Eileen K on notice of the numerous alleged violations and defaults.

On October 19, 2004, Plaintiff served Eileen K with a Notice of termination of the Scranton Restaurant Franchise Agreement. . . .

2. Rockaway Restaurant

Similar to the Scranton Restaurant, Plaintiff alleges, since the execution of the Rockaway Restaurant Franchise Agreement, Eileen K committed numerous acts of default and deficiency, including failure to pay royalties and production fees and failure to comply with the Franchise Agreement and operating guidelines by, inter alia, offering and serving unapproved food products. As such, Plaintiff sent a Notice for Default to Eileen K. Subsequently, on October 19, 2004, Plaintiff served Eileen K with a Notice of Termination for the Rockaway Restaurant Franchise Agreement.

Id. at 2-3.

On April 11, 2006, plaintiff again served defendants with notices of termination of the franchise agreements for the Scranton and Rockaway restaurants. June 27, 2006, Hearing Transcript ("Hearing Tr.") Exhibits 91, 92.

On May 9, 2006, plaintiff filed Plaintiff's Motion for Preliminary Injunction, requesting the following injunctive relief:

1. Terminating the Franchise Agreements between Damon's and Defendant Eileen K, Inc. (hereinafter "Eileen K") relating to the Scranton and Rockaway Restaurants and ordering Defendants to immediately cease all activity relative to operation of the restaurants, and to undertake all actions necessary and required by the Franchise Agreements to decharacterize the restaurants and comply with §XVII(A)(1)-(8) of the Franchise Agreements, and to cease all operations as a Damon's franchisee; and further that Defendants be enjoined from using confidential, trade secret, and/or proprietary information of Damon's, and to be enjoined from using the trademark and/or trade dress of Damon's, or trademarks or trade dress confusingly similar to that of Damon's for any promotion, advertising, offering, or the rendering or offering of any restaurant services to the public;

2. Ordering Defendants to properly terminate the restaurants, as Damon's Restaurants, ordering the preservation of all financial records and Point of Sale records (both electronic and hardcopy), and ordering an audit of the sales for an accounting of amounts due and owing relative to the operation of the restaurant through the termination of the Franchise Agreements;

3. Prohibiting Defendants from violating 15 U.S.C. §1125(a), et seq. [Section 43 of Lanham Act, 15 USCS §§ 1051 et seq., creates statutory tort of false representation of goods in commerce] ;

4. Enjoining Defendants, their agents, servants, employees, attorneys and all those persons in active concert or participation with them from using the trademark "Damon's" or any confusingly similar designation, alone or in combination with other words, as a trademark, trade name component, domain name, or otherwise to market, advertise or identify restaurant services, and related products and services;

5. Enjoining Defendants from infringing Damon's mark;

6. Enjoining Defendants from unfairly competing with Damon's in any manner whatsoever;

7. Enjoining Defendants from causing likelihood of confusion, injury to business reputation, or dilution of the distinctiveness of Damon's symbols, labels or forms of advertisement;

8. Requiring that Defendants file with the Court and serve on Damon's within thirty (30) days after the injunction is issued a written report under oath setting forth in detail the manner and form in which they have complied with the injunction;

9. Requiring Defendants to deliver up and destroy all literature, advertising, and other material bearing the infringing designation;

10. Requiring Defendants to take any and all steps necessary to insure that their agents do not sell or offer for sale restaurant services and related products/services, bearing said infringing mark; and

11. Requiring Defendants to account for and pay to Damon's any and all fees due under the Franchise Agreements until the date of cessation of operation of the restaurants.

Plaintiff's Motion for Preliminary Injunction at 8-9. Additionally, on May 9, 2006, plaintiff filed Plaintiff's Motion for Contempt, based on defendants' alleged violations of the First Agreed Order. Doc. No. 91. Defendants failed to respond to either of these motions within rule. See S.D. Ohio L.R. 7.2(a)(2).

On June 22, 2006, plaintiff filed Plaintiff Damon's Restaurant Inc.'s Supplemental Brief in Support of its Motions for Preliminary Injunction and Contempt, alleging that defendants had still not paid royalties since the filing of ...


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