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Morris CM Enterprises, LLC v. Wingstop Franchising LLC

United States District Court, E.D. California

January 3, 2020

MORRIS CM ENTERPRISES, LLC, Plaintiff,
v.
WINGSTOP FRANCHISING, LLC, Defendants. WINGSTOP FRANCHISING LLC, Counter-Claimant,
v.
MORRIS CM ENTERPRISE, LLC, and MICHAEL MORRIS, Counter-Defendants.

          ORDER

         On December 20, 2019, the court heard defendant and counterclaimant Wingstop Franchising LLC's motion for a preliminary injunction against counter-defendants Morris CM Enterprise LLC and Michael Morris. At hearing, Karen Marchiano appeared for Wingstop Franchising LLC. Counsel for Morris CM Enterprise and Michael Morris did not appear. Having considered the moving papers and the arguments of counsel, the court now GRANTS the motion.

         I. FACTUAL BACKGROUND

         On November 15, 2019, defendant and counterclaimant Wingstop Franchising LLC (“Wingstop”) removed from Sacramento County Superior Court the suit filed there by plaintiff and counter-defendant Morris CM Enterprises, LLC (“Morris CM”) for wrongful termination of Morris CM's franchise, breach of the covenant of good faith and fair dealing and interference with economic relations. Not. of Removal, ECF No. 1. The same day, Wingstop counterclaimed for violations of the Lanham Act and breach of contract, adding Michael Morris, the principal officer of Morris CM as a counterdefendant. ECF No. 5. On November 19, 2019, Wingstop moved for a preliminary injunction. ECF No. 8. Morris CM and Michael Morris (“the Morris Parties”) did not timely file an opposition and as noted have not otherwise appeared.

         In 2008, Morris CM entered into a franchise agreement with Wingstop Restaurants Inc., a national restaurant franchise specializing in chicken wings. Compl., ECF No. 1 ¶ 6. Wingstop Restaurants Inc. subsequently assigned its interest in the franchise agreement to Wingstop Franchising LLC, the counterclaimant in this action. Countercl., ECF No. 5 ¶ 23. The franchise agreement granted Morris CM the right to operate a Wingstop restaurant at 3541 N. Freeway Blvd., Suite 115, Sacramento, California. Compl. ¶ 6; Countercl. ¶ 20. The parties renewed their agreement under a renewal rider on December 6, 2017. Countercl. ¶ 20. Michael Morris was a guarantor of Morris CM's obligations under the franchise agreement. Id. ¶ 6.

         Wingstop, Inc. owns a variety of trademarks and copyrights used to denote its restaurants. Id. ¶¶ 10-19. In the franchise agreement and subsequent renewal, Wingstop granted Morris CM a license to use various components of Wingstop's intellectual property. Id. ¶¶ 20, 24; Franchise Agreement, ECF No. 8-7 at 22-25.[1] Wingstop granted Morris CM the use of several federally registered trademarks to distinguish its restaurant. Countercl. ¶ 11. Wingstop also furnished Morris CM with a license to use copyright protected operations and advertising materials and protected trade secrets (collectively the “Wingstop System”) in operating its restaurant. Id. ¶¶ 15-16.

         Wingstop alleges Morris CM agreed to discontinue use of all Wingstop intellectual property on termination of the franchise agreement. Id. ¶ 25. The Franchise Agreement states, in relevant part,

Upon the expiration or termination of the franchise, Franchisee must immediately discontinue all further uses of the Marks and Copyrighted Materials and take appropriate action to remove the Marks from the premises in which the Restaurant is located, to cancel any advertising relating to Franchisee's use of the Marks or the Copyrighted Materials, including yellow pages listings, and to cancel or withdraw any assumed or fictitious name filings covering Franchisee's use of Company's trade name. Franchisee acknowledges and agrees that failure or refusal to comply fully with these requirements will constitute willful trademark and copyright infringement.

         Franchise Agreement at 12(a)(10).

         Morris CM agreed it would take these remedial steps within seven days of any termination of the franchise. Countercl. ¶ 29; Franchise Agreement at 17(a). If it did not, Wingstop would be entitled to injunctive relief without the necessity of posting a bond. Franchise Agreement at 17(c), (h).

         Wingstop further alleges Morris CM agreed to comply with all federal, state and local laws and regulations applicable to the operation of the restaurant. Countercl. ¶ 28; Franchise Agreement at 7(c)(20). The franchise agreement obligated Morris CM to pay Wingstop weekly royalties of 5 percent of gross sales and contribute 4 percent of gross sales to an advertising fund. Countercl. ¶¶ 26, 27; Franchise Agreement, 8(a)(1); 10(a), (b).

         Morris CM allegedly breached these provisions of the franchise agreement by failing to pay royalties when due and failing to contribute to the ad fund since May 2019. Countercl. ¶¶ 30, 31; Declaration of Steven Link (“Link Decl.”), ECF No. 8-2, ¶ 26; Ex. H, ECF No. 8-11. Wingstop also alleges Morris CM failed to pay approximately $450, 000 dollars in sales taxes owed to the California Department of Tax and Fee Administration, putting Morris CM in breach of the clause requiring compliance with state law, including tax law. Countercl. ¶¶ 32-34.

         On April 25, 2019, Wingstop received a notice from the California Department of Tax and Fee Administration (CDTFA) that Morris CM's seller's permit had been suspended for failure to pay sales tax. Link Decl., ECF No. 8-3, ¶ 24; Ex. F, ECF No. 8-9. On May 20, 2019, Wingstop sent a notice of default to Michael Morris noting low operational assessment scores, failure to pay ad fund contributions and royalties, and failure to pay expenses such as rent, point-of-sale service provider fees and sales taxes. Link Decl. ¶ 25; Ex. G, ECF No. 8-10.

         On September 10, 2019, Wingstop sent another notice of default to the Morris Parties, this time focused on the failure to pay ad fund contributions and royalties, as well as the tax delinquency. Countercl. ¶ 35; Ex. D to Countercl., ECF No. 5-4; Link Decl. ¶ 27; Ex. I, ECF No. 8-12. The Morris Parties did not cure the defaults. Countercl. ¶ 36; Link Decl. ¶ 28.

         On October 11, 2019, Wingstop notified the Morris Parties the franchise agreement was terminated based on the failure to cure the defaults. Countercl. ¶ 37; Ex. E to Countercl., ECF No. 5-5. The notification letter told the Morris Parties to comply immediately with the post-termination obligation to remove Wingstop trade dress from the restaurant and discontinue use of Wingstop's trademarks and other intellectual property. Link Decl. ¶ 29 & Ex. J, ECF No. 8-13.

         Wingstop alleges Morris CM continues to use the Wingstop marks, the Wingstop System, display Wingstop trade dress and hold the restaurant out as a Wingstop franchisee. Countercl. ¶ 38. Morris CM has taken none of the agreed-upon steps to remove trade dress and marks identifying the restaurant as a Wingstop franchisee. Id. ¶ 45. Steven Link avers he visited the restaurant on November 7, 2019, nearly a month after the termination letter, and found it still operating using Wingstop trademarks and identifiers. Link Decl. ¶¶ 33-35.

         As a result, Wingstop alleges Morris CM and Michael Morris have violated the Lanham Act by continuing to use Wingstop's intellectual property after termination of the franchise. Countercl. ¶ 49. It claims such acts constitute trademark infringement and unfair competition under 28 U.S.C. § 1114(1) and 28 U.S.C. § 1125(a), respectively. Id. ¶¶ 49, 54. Wingstop alleges the infringement causes irreparable injury necessitating injunctive relief. Id. ¶¶ 50-52, 55-57. Wingstop also alleges breach of contract. Id. ¶ 59. On November 19, 2019, Wingstop brought this motion for a preliminary injunction.

         II. LEGAL STANDARD

         A preliminary injunction preserves the relative position of the parties until trial on the merits or the case is otherwise concluded. Univ. of Texas v. Camenisch, 451 U.S. 390, 395 (1981). “A preliminary injunction is an extraordinary remedy never awarded as of right[, ]” Winter v. Natural Res. Def. Council, Inc., 555 U.S. 7, 24 (2008), and “should not be granted unless the movant, by a clear showing, carries the burden of persuasion[, ]” Lopez v. Brewer, 680 F.3d 1068, 1072 (9th Cir. 2012) (quoting Mazurek v. Armstrong, 520 U.S. 968, 972 (1997) (emphasis in original)). In determining whether to issue a preliminary injunction, federal courts must consider whether the moving party “[1] is likely to succeed on the merits, . . . [2] is likely to suffer irreparable harm in the absence of preliminary relief, . . . [3] the balance of equities tips in [the movant's] favor, and . . . [4] an injunction is in the public interest.” Winter, 555 U.S. at 20.

         The Ninth Circuit sometimes employs an alternate formulation of the Winter test, referred to as the “serious questions” test. Farris v. Seabrook, 677 F.3d 858, 864 (9th Cir. 2012). “‘A preliminary injunction is appropriate when a plaintiff demonstrates… that serious questions going to the merits were raised and the balance of hardships tips strongly in the plaintiff's favor.'” Alliance for the Wild Rockies v. Cottrell, 632 F.3d 1127, 1134-35 (9th Cir. 2011) (quoting Lands Council v. McNair, 537 F.3d 981, 986-87 (9th Cir. 2008)) (internal quotations omitted)). Under the “serious questions” approach to a preliminary injunction, “[t]he elements of the preliminary injunction test must be balanced, so that a stronger showing of one element may offset a weaker showing of another.” Lopez v. Brewer, 680 F.3d 1068, 1072 (9th Cir. 2012). Winter was decided after the initial articulation of the “serious questions” test, but does not overrule it. Cottrell, 632 F.3d at 1135. However, the “serious questions” test must be applied in conjunction with review of the other two Winter factors, likelihood of irreparable injury and whether the injunction is ...


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