United States District Court, D. South Dakota, Southern Division
OPINION AND ORDER GRANTING REQUEST FOR DAMAGES
ROBERTO A. LANGE, UNITED STATES DISTRICT JUDGE.
Plaintiff American Dairy Queen Corporation ("ADQ") sued Defendants Amy and Gregory Wardlow for operating a Dairy Queen® restaurant and using the Dairy Queen® trademarks despite ADQ having terminated Defendants' right to do so. Doc. 1. This Court entered a default judgment against Defendants under Federal Rule of Civil Procedure 55(b)(2), Doc. 35, and held a hearing on the issue of ADQ's recoverable damages, Doc. 40. For the reasons explained below, this Court grants ADQ's request for damages.
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. 1 at ¶¶ 9-10; 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. 1 at ¶ 10; 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. 1 at ¶ 12; Doc. 10 at 1.
Effective May 14, 2001, Defendants accepted assignment of a Dairy Queen® Operating Agreement dated November 9, 1995 ("Operating Agreement")- Doc. 1 at ¶¶ 13-15; 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. Doc. 1 at ¶¶ 13, 17. 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. Under Article 3(A) of the Operating Agreement, Defendants agreed that ADQ is the exclusive owner of the Marks. 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. Doc. 10-2 at 6.
In return for the right to display ADQ's Marks and participate in the Dairy Queen® franchise system, Defendants agreed to pay certain fees to ADQ. Doc. 1 at ¶¶ 17-20. 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 in an amount determined by ADQ. Doc. 1 at ¶¶ 18-19; 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. 1 at ¶¶ 17, 20; 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 the required sales reports and accompanying licensing and sales promotion fees to ADQ. Doc. 1 at ¶ 21; Doc. 10 at 2. Specifically, Defendants did not 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. 1 at ¶ 21; 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. 1 at ¶ 22; Doc. 10 at 2; Doc. 10-3 at 2. Defendants failed to cure their default within the time provided by ADQ's letter. Doc. 1 at ¶ 23; Doc. 10 at 2. ADQ thus had the right to terminate the Defendants' franchise rights, as provided by Article 12 of the Operating Agreement. Doc. 1 at ¶ 24; Doc. 28 at 29-31. ADQ issued a Confirmation of Termination dated March 26, 2015, with a termination effective date of May 25, 2015. Doc. 1 at ¶ 23; Doc. 10-4.
After a period of negotiation, Defendants agreed to sign a Mutual Cancellation and Release Agreement ("Mutual Cancelation") that avoided immediate termination by giving them until December 1, 2015, to sell their restaurant to another Dairy Queen® franchisee. Doc. 1 at ¶¶ 24-25; Doc. 10 at 3; Doc. 10-5. Defendants executed that Agreement on May 28, 2015. Doc. 1 at ¶ 24; Doc. 10-5. In exchange for ADQ's forbearance from exercising its right to terminate immediately their franchise rights, Defendants 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, Defendants 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. 1 at ¶ 27; Doc. 10-5 at 3. Defendants 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. 1 at ¶ 28; 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.
Defendants breached the Mutual Cancellation by failing to submit all required monthly reports and fees to ADQ. Doc. 1 at ¶¶ 32-33, 65; Doc. 10 at 3. Although Defendants eventually submitted required reports for August and September 2014 (and fees for September 2014), they refused to do so for any subsequent month. Doc. 10 at 2-3. By letter dated July 15, 2015, ADQ advised Defendants that their failure to submit the required reports and fees through June 2015 constituted a breach of the Mutual Cancellation agreement. Doc. 1 at ¶ 32; Doc. 10 at 3; Doc. 10-6. That letter informed Defendants that they must immediately close their Dairy Queen® restaurant. Doc. 10-6. While ADQ remained willing to give Defendants until December 1, 2015, to find a buyer, ADQ was unwilling to permit Defendants to continue operating the restaurant without paying fees to ADQ. Doc. 1 at ¶ 32; Doc. 10-6.
Defendants ignored ADQ's demand and continued operating their restaurant. Doc. 1 at ¶ 32; Doc. 10 at 3. By letter dated July 27, 2015, ADQ's counsel advised Defendants that ADQ would give them 48 hours to either (a) submit all outstanding reports and fees or (b) close the restaurant. Doc. 1 at ¶ 33; 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. 1 at ¶¶ 34-35; Doc. 10 at 3.
By letter dated July 31, 2015, ADQ's counsel advised Defendants that ADQ was exercising its right under the Mutual Cancellation and the Operating Agreement to terminate Defendants' franchise rights due to Defendants' repeated failure to comply with their contractual obligations. Doc. 1 at ¶ 38; Doc. 10-8. That letter repeated ADQ's previous demand that Defendants immediately close the restaurant and advised them that they no longer had any right to sell the restaurant as a Dairy Queen® franchise. Doc. 10-8. ADQ's counsel closed the July 31 letter with another warning that failure to close the restaurant immediately would result in ADQ commencing legal action to enforce its trademark rights. Doc. 10-8.
As with ADQ's prior demands that Defendants cease operating their restaurant under ADQ's trademarks, the July 31 letter went unheeded. Doc. 1 at 1} 39. Defendants continued to operate the restaurant as though it were still a properly licensed Dairy Queen® restaurant. Doc. 1 at ¶ 39. Visits by a representative of ADQ to the restaurant on August 4, 2015, and August 6, 2015, confirmed that Defendants continued to display ADQ's trademarks at the restaurant, including on signage and menu boards. Doc. ...