This case was on the court's calendar on October 26, 2012 for argument on the motion for a preliminary injunction brought by plaintiffs 7-Eleven and TSC Lending Group, Inc. (collectively, "7-Eleven"). As explained below, the court grants 7-Eleven's motion for a preliminary injunction.
7-Eleven "operates, franchises and licenses more than 8,800 7-Eleven® stores in North America." (Hower Decl. ¶ 12, ECF 10.) 7-Eleven has registered with the Principal Register of the United States Patent and Trademark Office several marks that may be used by its franchisees in conjunction with operation of 7-Eleven franchises. (Id. ¶¶ 19-23.)
On March 17, 1997, defendant Brinderjit Dhaliwal entered into a franchise agreement with 7-Eleven (the "Roseville Franchise Agreement") to operate 7-Eleven store #2235-21290D in Roseville, California (the "Roseville Store"). (Dhaliwal Decl. ¶ 2, ECF 18-1; Roseville Franchise Agreement, Ex. A, ECF 18-2.) During his operation of the Roseville Store, Dhaliwal enjoyed business success, and also was active in national and regional 7-Eleven Franchise Owner Associations, working with 7-Eleven management to improve store processes and management generally. (Dhaliwal Decl. ¶¶ 4-5, ECF 18-1.) When the lease agreement between 7-Eleven and the owner of the Roseville Store property ended in or around February 2010, the property owner chose not to renew the lease, causing the Roseville Franchise Agreement to terminate prematurely. (Id. ¶ 7, ECF 18-1.) A provision of the Roseville Franchise Agreement allowed Dhaliwal to elect within 180 days of the termination either a refund of part of his franchise fee or to transfer to "any 7-Eleven Store [Dhaliwal] select[s] . . . which is available for franchise . . . which has been open for business as a 7-Eleven Store for at least twelve (12) months" without paying a new franchise fee. (Roseville Franchise Agreement ¶ 26(e), Ex. B, ECF 18-3.) Dhaliwal informed 7-Eleven that he was interested in transferring to "any reasonable location in the greater Northern California area." (Dhaliwal Decl. ¶¶ 10-11, ECF 18-1.) In a May 10, 2010 email to 7-Eleven President and CEO Joseph DePinto, Dhaliwal explained that David Huey, the former Vice President of 7-Eleven's Northwest Division, had told Dhaliwal that he could move to a new 7-Eleven store in Roseville, but that the store was never constructed. (Id. ¶ 12;Ex. C, ECF 18-4.) Additionally, Dhaliwal informed DePinto he had communicated with Market Manager Chuck Kronyak regarding a store being built in Sacramento, California and that Kronyak had told him "they are considering someone else for a second store for that location." (Id.)
In June 2010, Dhaliwal met with Kronyak, Franchise Sales Representative Tony Varela and Division Vice President Larry Hughes to discuss transferring to another store. (Dhaliwal Decl. ¶ 15, ECF 18-1; Varela Decl. ¶ 4, ECF 21.) Dhaliwal was told that there were no corporate 7-Eleven stores available for franchise in Northern California and he was unwilling to pay the purchase prices that independent 7-Eleven franchise owners were requesting for their stores. (Varela Decl. ¶ 4, ECF 21.) He stated he would be unwilling to move to another region that had corporate stores available for franchise. (Id.) In August 2010, Dhaliwal reiterated his interest in transferring to 7-Eleven Franchise Sales Manager Gary Griffith, who sent Dhaliwal a list of 7-Eleven stores in Northern California that were available for franchise. (See Dhaliwal Decl. ¶ 16; Exs. F-G, ECF 18-4.)
On December 3, 2010, Dhaliwal entered into a second franchise agreement with 7-Eleven to operate 7-Eleven Store No. 2364-34671A in Rocklin, California (the "Rocklin Store"). (Hower Decl. ¶ 3, ECF 10; Rocklin Franchise Agreement, Ex. A, ECF 10-1.) 7-Eleven leased the land and provided Dhaliwal with all the equipment and infrastructure necessary for the operation of the store, as well as authorization to use 7-Eleven's registered marks. (Hower Decl. ¶¶ 4-5, ECF 10.) In exchange for running the Rocklin Store, Dhaliwal was entitled to the store's weekly net income. (Rocklin Franchise Agreement at 26, Ex. A, ECF 10). As the Rocklin Store was a new store, (Varela Decl. ¶ 5, ECF 21), it was ineligible for the franchise fee waiver under the Roseville Franchise Agreement, which 7-Eleven clarified at hearing. Dhaliwal paid a franchise fee of $219,400. (Dhaliwal Decl. ¶ 24, ECF 18-1.) Dhaliwal asserts that "[h]ad 7-Eleven permitted [him] to simply transfer to the Rocklin Store, or to a different store, [he] would not have needed to pay a franchise fee." (Id. ¶ 26.)
Dhaliwal alleges that before he entered into the Rocklin Franchise Agreement Kronyak and Griffith told him he could expect $1,100,000 in annual sales for the Rocklin Store. (Id. ¶ 21.) 7-Eleven disputes that Dhaliwal was given this figure, and notes that the business plan Dhaliwal prepared for the Rocklin Store states he expected $1,239,000 in sales during the first year -- "near the market average" -- and $1,300,000 thereafter. (Pls.' Reply in Supp. of Mot. for Prelim. Inj. at 5, ECF 20; Business Plan, Ex. H at 14, ECF 18-5.) In 2011, the Rocklin Store instead had approximately $550,000 in sales (Dhaliwal Decl. ¶ 27, ECF 18-1) and suffered a loss of $32,453 (id. ¶ 31).
The Rocklin Franchise Agreement required Dhaliwal to maintain a net worth of at least $15,000 at all times. (Rocklin Franchise Agreement at 29, Ex. A, ECF 10.) The reason for the net worth requirement, as clarified at hearing, was to ensure that the franchisee was fully invested in the operation of the store. The Rocklin Store's net worth on November 30, 2011 was negative $1936. (Hower Decl. ¶ 24, ECF 10.) On December 20, 2011, 7-Eleven sent Dhaliwal a "Notice of Material Breach" stating that Dhaliwal had three business days to remedy the Rocklin Store's net worth before 7-Eleven would terminate the Rocklin Franchise Agreement. (Id. ¶ 25, ECF 10 & Ex. D, ECF 10-2.) Dhaliwal was able to raise the net worth of the Rocklin Store by the deadline. (Hower Decl. ¶ 25.) However, the Rocklin Store's net worth again fell below $15,000 and 7-Eleven sent Dhaliwal several more Notices of Material Breach between February and June 2012. (Id. ¶¶ 26-31, ECF 10 & Exs. F, H & J, ECF 10-2.) In response to these notices, Dhaliwal did not raise the Rocklin Store's net worth. (Hower Decl. ¶¶ 26-31, ECF 10.) As of July 31, 2012, the Rocklin Store's net worth was a negative $31,836.08. (Id. ¶ 32, ECF 10.) 7-Eleven sent Dhaliwal its last Notice of Material Breach on August 13, 2012 and terminated the Rocklin Franchise Agreement on August 17, 2012, "[a]s a result of [Dhaliwal's] chronic failure to maintain the required minimum net worth." (Id. ¶ 33, ECF 10.)
Dhaliwal continues to operate the Rocklin Store. (Dhaliwal Decl. ¶ 33, ECF 18-1; Hower Decl. ¶¶ 34-36, ECF 10.) He currently uses 7-Eleven's marks and offers 7-Eleven products. (Hower Decl. ¶ 37, ECF 10.) Dhaliwal maintains that he operates the Rocklin Store "in a cleanly manner and . . . follow[s] 7-Eleven processes." (Dhaliwal Decl. ¶ 33, ECF 18-1.) Moreover, it is undisputed that "[t]he Rocklin Store is inspected on a weekly and monthly basis by a 7-Eleven field consultant, and the store consistently has exceptional marks in all evaluated categories, including cleanliness, planning, execution and guest focus," with its most recent marks received on October 10, 2012. (Dhaliwal Decl. ¶ 34, ECF 18-1; Store Evaluation Reports, Ex. J, ECF 18-5.)
On September 4, 2012, 7-Eleven filed suit against Dhaliwal, alleging that he breached the Rocklin Franchise Agreement by allowing the Rocklin Store's net worth to fall below $15,000 (ECF 1 ¶ 42) and that his continued use of 7-Eleven's marks constitutes trademark infringement and unfair competition under the Lanham Act, 15 U.S.C. §§ 1114(1) and 1125(a) (id. ¶¶ 62, 67), as well as violations of California's Unfair Competition Law, Cal. Bus. & Prof. Code § 17200 (id. ¶¶ 72-73). Dhaliwal filed a counterclaim for breach of contract, intentional misrepresentation, and negligent misrepresentation against 7-Eleven on September 27, 2012. (Def.'s Ans. & Counterclaim, ECF 15.)
On September 25, 2012, 7-Eleven filed a motion for preliminary injunction. (Mot. for Prelim. Inj., ECF 8.) Dhaliwal filed his opposition on October 12, 2012 (ECF 18) and 7-Eleven filed its reply on October 19, 2012 (ECF 20).*fn1 7-Eleven requests that Dhaliwal be ejected from the Rocklin Store, be enjoined from using the 7-Eleven marks or holding himself out as a 7-Eleven franchise, and that he deliver items with 7-Eleven's marks to 7-Eleven. (Mot. for Prelim. Inj., ECF 8.)
As provided by Federal Rule of Civil Procedure 65, a court may issue a preliminary injunction to preserve the relative position of the parties pending a trial on the merits. University of Texas v. Camenisch, 451 U.S. 390, 395 (1981). The party seeking injunctive relief must show that "he is likely to succeed on the merits, that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest." Winter v. Natural Res. Defense Council, Inc., 555 U.S. 7, 20 (2008); Munaf v. Green, 553 U.S. 674, 689-90 (2008).
Before the Winter decision, the Ninth Circuit employed a "sliding scale" or "serious question" test, which allowed a court to balance the elements of the test "so that a stronger showing of one element may offset a weaker showing of another." See Clear Channel Outdoor, Inc. v. City of Los Angeles, 340 F.3d 810, 813 (9th Cir. 2003). Recently, the Circuit found that its sliding scale test survived Winter: a court may issue a preliminary injunction when a plaintiff raises serious questions going to the merits and demonstrates that the balance of hardships tips sharply in his favor, so long ...