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Jack in the Box Inc. v. Mehta

United States District Court, N.D. California, San Jose Division

June 21, 2016

JACK IN THE BOX INC., Plaintiff,
DEEPAK MEHTA, et al., Defendants.



         This action is one between a franchisor and its former franchisees. Plaintiff Jack in the Box, Inc. ("JIB"), a corporation engaged in the "highly-competitive quick-service restaurant business" alleges that Defendants Deepak Mehta ("D. Mehta"), Kiran Mehta ("K. Mehta"), Mehta Enterprises, Inc. and Deepak Enterprises, Inc. (collectively, "Defendants") breached several provisions of the written agreements that enabled Defendants to operate Jack in the Box restaurants throughout Northern California.

         Presently before the court is JIB's Motion for Summary Judgment and for Partial Summary Judgment on its first, third and fourth causes of action for breach of contract and violations of the Lanham Act, 15 U.S.C. 1051 et seq., as asserted in its First Amended Complaint. Dkt. No. 205. JIB also moves for summary judgment on Defendants' counterclaim for breach of contract, breach of the implied covenant of good faith and fair dealing, promissory estoppel, and negligent interference with contract and economic advantage. Defendants have filed written opposition to the motion. Dkt. Nos. 215, 216.

         Having carefully considered this matter, the court finds that JIB is entitled to partial summary judgment on its cause of action for breach of contract, is entitled to summary judgment on its causes of action for trademark infringement and unfair competition, and is entitled to summary judgment on Defendants' counterclaim. Accordingly, JIB's motion will be granted in its entirety for the reasons explained below.


         A. The Franchise Agreements

         The details of JIB's relationship with Defendants were primarily outlined in 19 written Jack in the Box Restaurant Franchise Agreements, which the parties executed between September 22, 1992, and May 19, 2011. Decl. of Connie Rand ("Rand Decl.), Dkt. No. 205, at ¶¶ 5-7, Exs. 1-3. Although JIB initially entered into the agreements with D. Mehta and K. Mehta, the parties subsequently agreed to assign the rights of those individuals to Mehta Enterprises, Inc. and Deepak Enterprises, Inc. Id. at Exs. 2, 3. Thus, all Defendants became jointly and severally liable for the performance of the agreements' terms and conditions. Id.

         Generally, the Franchise Agreements authorized Defendants to utilize JIB's commercial marks, format and restaurant operating system in exchange for Defendants' monthly payment of royalty and marketing fees. Id. at Ex. 1, § 1. They also obligated Defendants to, among other duties, maintain and submit certain records to JIB, pay all state and federal taxes associated with operation of the restaurants, and to "comply and perform all covenants contained in any other agreement, instrument or other document" between JIB and Defendants, including any other franchise agreement, lease agreement or note. Id. at Ex. 1, §§ 7, 8, 16.

         In addition, the Franchise Agreements contained a termination clause. Id. at Ex. 1, § 17. Defendants would "be deemed to be in default . . . and all rights granted [would] immediately terminate automatically and without notice" if Defendants became "insolvent" such that they failed or were unable to pay obligations in the regular course of business as they became due." Id. Additionally, upon the occurrence of other "default" events, JIB could terminate the Franchise Agreements at its option. Id. The following occurrences could permit termination:

Franchisee fails for a period of ten (10) days to pay any of the fees required under this Agreement;
Franchisee fails to pay any federal or state income, sales or other taxes due on the Restaurant's operations . . . . Franchisee will have five (5) days to correct such condition.
Franchisee fails to make regular payments to JIB or any Vendor for any monies due and owing. Franchisee will have thirty (30) days to correct such condition.
Franchisee fails to comply with any other provision of this Agreement or defaults under any other franchise agreement, development agreement, lease agreement, note, or any agreement or account for the purchase of products or services between JIB and Franchisee, whether or not pertaining to the premises. Franchisee will have thirty (30) days to correct such condition.


         Other provisions specified the Franchise Agreements were fully integrated contracts, and could only be modified by a signed writing. Id. at Ex 1, § 19.

         B. The Lease Agreements

         Defendants, as tenants, and JIB, as landlord, also entered into Lease Agreements in connection with the Franchise Agreements. Id. at Ex. 4. The Lease Agreements required Defendants to pay a fixed amount of monthly rent, along with an additional amount of rent based on the percentage of gross sales, in exchange for Defendants' use of the property for the operation of franchised restaurants. Id. at Ex. 4, § 3. The lease agreements also required Defendants to pay any taxes levied against the property, to make all utility payments, to maintain and pay for insurance coverage, and prohibited Defendants from encumbering the property. Id. at Ex. 4, §§ 6, 7, 9, 21.

         The Lease Agreements could be terminated by JIB if Defendants failed to pay rent within 5 days of a demand to cure, or if Defendants defaulted on the Franchise Agreement or any other "lease, note, or other agreement" between JIB and Defendants. Id. at Ex. 4, § 23.

         C. Defendants' Defaults under the Agreements

         Between September 1, 2011, and August 22, 2012, Defendants failed to pay rent, royalties, marketing fees and other charges due to JIB under the Franchise and Lease Agreements in the total amount of $567, 092.45. Decl. of Keith Guilbault ("Guilbault Decl."), Dkt. No. 205, at ¶ 5-7, Exs.

         I, 3; Rand Decl., at ¶ 11, Ex. 7. The parties eventually attended a mediation to address these defaults, which resulted in a written Promissory Note (the "2012 Note") in the amount of $576, 173 payable to JIB, as well as a General Release. Rand Decl., at ¶ 13, Exs. 9, 10. D. and K. Mehta signed both documents on November 28, 2012. Id. By doing so, they agreed to remit to JIB an expected rebate from the Coca-Cola Company within 7 days of receiving it, and to pay off the 2012 Note by April 15, 2013. Id. Through the General Release, they agreed to discharge JIB from any liability arising out of any matters prior to November 28, 2012. Id.

         However, not addressed by the 2012 Note were two notices of lien recorded on September II, 2012, by the Contra Costa County Tax Collector against Defendants' personal and real property for failure to pay property taxes. Decl. of Robert S. McWhorter ("McWhorter Decl.), Dkt. No. 205, at ¶ 3, Ex. 3.[1] Neither was a UCC Financing Statement that was recorded against Defendants' personal property by MGI Group, LLC on October 23, 2012. Id. at Ex. 10. Thereafter, the California State Board of Equalization also recorded liens against Defendants on February 5, 2013 and March 5, 2013, for unpaid sales tax in the total amount of $648, 400.10. Id. at Exs. 1, 2. Additionally, Coca-Cola notified Defendants that it was mailing a rebate to them on February 23, 2013, but Defendants failed to pay the rebate to JIB pursuant to the 2012 Note. Decl. of Shane Paul ("Paul Decl."), Dkt. No. 205, at ¶ 9, Ex. 4.

         Beginning on March 27, 2013, JIB served several Notices of Default upon Defendants, and eventually extended the date on which most of the Franchise and Lease Agreements would terminate to September 17, 2013. Rand Decl., at Exs. 12-24. The agreements for one store, No. 578, were scheduled to terminate on September 5, 2013. Id. at Ex. 25. The Notice of Default dated August 16, 2013, informed Defendants they owed $1, 993, 415.15 to JIB as of August 15, 2013. Id. at Ex. 23.

         D. Defendants' Efforts to Obtain Financing and Termination of the Agreements

         In May, 2013, Defendants began working with Bank of America about refinancing existing debt. Decl. of Anna-Marie E. Mundle ("Mundle Decl."), Dkt. No. 205, at ¶ 3. On July 13, 2013, Bank of America issued a conditional Commitment Letter to Defendants for a loan of $7.8 million, with contained a representation that Defendants would sell 5 restaurants and use the proceeds to pay any outstanding debt owed to JIB. Id. at ¶ 4, Ex. 2. Defendants did not, however, initially notify Bank of America of their defaults under the Franchise and Lease Agreements. Id.; McWhorter Decl., at Ex. 13, 75:4-8, 12:15-20, 122:14-123:2.

         On July 17, 2013, [2] Steven Brigandi of JIB sent a "good standing letter" to Bank of America which stated that Defendants were in default under their agreements with JIB. Mundle Decl., at Ex. 3. Brigandi further stated that JIB "believed" the default would be "cured from the proceeds of the sale of five restaurants to another existing Jack in the Box franchisee, in conjunction with the proposed refinancing." Id. Bank of America learned for the first time through Brigandi's letter that Defendants were in default. Id. at ΒΆ 7; McWhorter Decl., at Ex. 13, 122:14-25. D. Mehta ...

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