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American Dairy Queen Corporation v. Wardlow

United States District Court, D. South Dakota, Southern Division

September 4, 2015

AMERICAN DAIRY QUEEN CORPORATION, Plaintiff,
v.
AMY WARDLOW, AND GREGORY WARDLOW, Defendants.

OPINION AND ORDER GRANTING MOTION FOR PRELIMINARY INJUNCTION

ROBERTO A. LANGE, District Judge.

Defendants Amy and Gregory Wardlow have continued to operate a Dairy Queen® restaurant using the Dairy Queen® trademarks despite Plaintiff American Dairy Queen® Corporation ("ADQ") having terminated Defendants' right to do so. Doc. 10 at 2-3. ADQ moved for a preliminary injunction, claiming that the Defendants' actions were causing it irreparable harm. For the reasons explained below, this Court grants ADQ's motion for a preliminary injunction.

I. Facts

ADQ is the owner of the federally registered Dairy Queen® trademark and other trademarks and service marks used in connection with the operation of a Dairy Queen® restaurant. Doc. 10-1. ADQ is the franchisor in the Dairy Queen® franchise system. Doc. 10 at 1. As such, ADQ licenses to others the right to display ADQ's Marks and operate its restaurants as part of the Dairy Queen® franchise system. The Dairy Queen® Marks have been used in connection with the sale of soft serve, frozen, and semi-frozen dairy products, frozen and semi-frozen products, cooked food products, and other products and services throughout the United States. Doc. 10 at 1. ADQ and its related companies have invested millions of dollars in the advertisement and promotion of goods and services sold under the Dairy Queen® Marks. Doc. 10 at 1.

Effective May 14, 2001, the Wardlows accepted assignment of a Dairy Queen® Operating Agreement dated November 9, 1995 ("Operating Agreement"). Doc. 10 at 2; Doc. 10-2. Defendants' Operating Agreement granted them the license and right to display the Dairy Queen® Marks at their restaurant and identify that restaurant as part of the Dairy Queen® franchise system. The agreement made clear, however, that the Dairy Queen® Marks belong solely to ADQ and that Defendants had received only a limited license to display those Marks. Pursuant to Article 3(A) of the Operating Agreement, Defendants agreed that ADQ is the exclusive owner of the Marks.[1] Doc. 10-2 at 5-6. Defendants further agreed that they had the right to display the Marks only in a manner approved by ADQ.

In return for the right to display ADQ's Marks and participate in the Dairy Queen® franchise system, the Wardlows agreed to pay certain fees to ADQ. Specifically, Article 9 of the Operating Agreement required Defendants to pay ADQ a monthly license fee equal to 4% of their monthly gross sales, as well as a separate sales promotion fee. Doc. 10-2 at 16. Those fees, along with required monthly reports showing Defendants' gross sales, were due to ADQ by the tenth day of each month for the previous month's sales. Doc. 10 at 16-19. The Operating Agreement made clear that failure to submit those reports or pay the amounts owed on a timely basis would constitute a breach of the Operating Agreement that could lead to its termination. Doc. 10-2 at 28-29. Under Article 12 of the Operating Agreement, ADQ could terminate Defendants' franchise rights if Defendants failed to cure their defaults within seven days of receiving written notice from ADQ. Doc. 10-2 at 29-30.

Defendants breached the Operating Agreement by failing to submit required sales reports and accompanying fees to ADQ. Doc. 10 at 2. Specifically, Defendants failed to submit the fees owed for the month of August 2014 as well as the fees and reports owed for October 2014 through July 2015. Doc. 10 at 2. On January 22, 2015, ADQ issued a formal Notice of Default, advising Defendants that their franchise rights would be terminated if they failed to timely cure their default by submitting the required reports and fees. Doc. 10 at 2; Doc. 10-3 at 2. Defendants failed to cure their default within the time provided by ADQ's letter. Doc. 10 at 2. ADQ thus had the right to terminate the Wardlows' franchise rights, as provided by Article 12 of the Operating Agreement. ADQ issued a Confirmation of Termination dated March 26, 2015, with a termination effective date of May 25, 2015. Doc. 10-4.

After a period of negotiation, Defendants agreed to sign a Mutual Cancellation and Release Agreement that would give them an opportunity to sell their restaurant to another Dairy Queen® franchisee. Doc. 10 at 3. Rather than face the immediate termination of their franchise rights, the Mutual Cancellation and Release agreement would give Defendants until December 1, 2015, to transfer their restaurant. Doc. 10-5. Defendants executed that Agreement on May 28, 2015. Doc. 10-5. In exchange for ADQ's forbearance from exercising its right to terminate immediately their franchise rights, the Wardlows agreed that going forward they would comply with the Operating Agreement as they attempted to sell their restaurant. Doc. 10 at 3. Article 2(d) of the Mutual Cancellation provides that:

Licensee represents and warrants that they will pay, during the term of this Cancellation, any and all amounts owed by Licensee to ADQ, its affiliates, or suppliers to whom ADQ or any of its affiliates has any contingent liability. Furthermore, Licensee will submit when due all SMRs and accompanying fees during the term of this Cancellation. Failure to comply with the requirements set forth in this paragraph may, in ADQ's sole discretion, result in either ADQ's acceleration of the Termination Date or the requirement that the Restaurant be closed until all SMRs and fees are current.

Doc. 10-5 at 3. Through Article 3, the Wardlows agreed that their failure to comply with any of the terms of the Mutual Cancellation would give ADQ the right to terminate their franchise rights prior to December 1, 2015. Doc. 10-5 at 3.

The Wardlows agreed under the Mutual Cancellation that upon termination of their franchise rights, they would take all steps necessary to de-identify their restaurant from the Dairy Queen® system. Doc. 10-5 at 3. Among other things, Defendants agreed to "remove all trademarks, signs, insignia, proprietary products and ingredients." Doc. 10-5 at 3.

The Wardlows breached the Mutual Cancellation by failing to submit all required monthly reports and fees to ADQ. Doc. 10 at 3. While the Wardlows eventually submitted required reports for August and September 2014 (and fees for September 2014), they refused to do so for any subsequent month. As of today, the Wardlows have failed to submit required reports and fees for ten consecutive months. Doc. 10 at 3. By letter dated July 15, 2015, ADQ advised the Wardlows that their failure to submit required reports and fees through June 2015 constituted a breach of the Mutual Cancellation agreement. Doc. 10 at 3; Doc. 10-6. That letter informed the Wardlows that they must immediately close their Dairy Queen® restaurant. Doc. 10-6. While ADQ remained willing to give the Wardlows until December 1, 2015, to find a buyer, ADQ was unwilling to permit the Wardlows to continue operating the restaurant without paying fees to ADQ. Doc. 10-6.

The Wardlows ignored ADQ's demand and continued operating their restaurant. Doc. 10 at 3. By letter dated July 27, 2015, ADQ's counsel advised the Wardlows that ADQ would give them 48 hours to either (a) submit all outstanding reports and fees or (b) close the restaurant. Doc. 10-7. That letter warned Defendants that failure to comply would lead ADQ to terminate the Mutual Cancellation agreement and commence legal action against them. Doc. 10-7. Again, Defendants ignored ADQ's warning and continued operating their restaurant. Doc. 10 at 3.

By letter dated July 31, 2015, ADQ's counsel advised Defendants that ADQ was exercising its right to terminate the Mutual Cancellation and the Operating Agreement due to Defendants' repeated failure to comply with their contractual obligations. Doc. 10-8. That letter repeated ADQ's previous demand that the Wardlows immediately close the restaurant and advised them that they no longer had an opportunity to sell the restaurant as a Dairy Queen® franchise. Doc. 10-8. ADQ's counsel closed the July 31 letter with another warning that ...


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