Damon's Restaurants, Inc. v. Eileen K Inc.

• Decision Date: 13 November 2006
• Docket Number: No. C2 04 1028.,C2 04 1028.
• Parties: DAMON'S RESTAURANTS, INC., Plaintiffs, v. EILEEN K INC., et al., Defendants.
• Court: U.S. District Court — Southern District of Ohio

461 F.Supp.2d 607

DAMON'S RESTAURANTS, INC., Plaintiffs, v. EILEEN K INC., et al., Defendants.

No. C2 04 1028.

United States District Court, S.D. Ohio, Eastern Division.

November 13, 2006.

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Thomas Edward Boyle, Jay Bernard Eggspuehler, Mark C. Melko, Wiles Boyle Burkholder & Bringardner, Columbus, OH, for Plaintiffs.

Michael D. Dortch, Kravitz, Brown & Dortch LLC, Columbus, OH, for Defendants.

OPINION AND ORDER

WATSON, District Judge.

This is a trademark action, 15 U.S.C. § 1051, et seq., in which Damon's Restaurants, Inc. (hereinafter "Plaintiff') alleges that Defendant Eileen K has acted in breach of the Franchise Agreements it has entered into with Plaintiff. Eileen K Inc., Dupont Airport Pub, Inc., and Trinity Road Restaurant Assoc. LLC., (hereinafter collectively "Defendants") deny liability and assert counterclaims alleging the wrongful termination of the Franchise Agreements, breach of their right of first refusal, civil conspiracy, breach of duty of good faith, tortious interference, promissory estoppel and unjust enrichment.

Pursuant to 28 U.S.C. § 636(b), this Court referred Plaintiffs Motion for Preliminary Injunction (Doc. 90) and Plaintiffs Motion for Contempt (Doc. 91) to United States Magistrate Judge King for evidentiary hearing and report and recommendation (Doc. 95). An evidentiary hearing was held on June 27, 2006, and based on that hearing and the parties' pre- and post-hearing briefs, the Magistrate Judge issued a Report and Recommendation (Doc. 105), in which she recommended that Plaintiffs Motion for Contempt be granted and that Plaintiffs Motion for Preliminary Injunction be denied without prejudice to refiling should Defendants fail to affirmatively establish that they have satisfied the sanction imposed for their civil contempt.

Before the Court are the September 11, 2006, Objections of Plaintiff to Magistrate Judge King's August 30, 2006, Report and Recommendation (Doc. 109) (hereinafter "Plaintiffs Objections"), and the Objections of Defendants to same (Doc. 110) (hereinafter "Defendants' Objections"). Plaintiff filed a Response in Opposition to Defendants' Objections on September 21, 2006 (Doc. 111). Pursuant to 28 U.S.C. § 636(b)(1), this Court has conducted a de novo review of the Report and Recommendation (Doc. 105). For the reasons set forth below, Plaintiffs and Defendants' Objections are both OVERRULED. The Report and Recommendation is hereby ADOPTED AND AFFIRMED.

I. RELEVANT BACKGROUND

On November 7, 1996, Plaintiff, as the franchisor, and Eileen K, Inc., as the franchisee, entered into a Franchise Agreement to operate a Damon's restaurant on Concorde Drive, Dupont, Pennsylvania (hereinafter "Scranton Restaurant"). (Exhibit A attached to Complaint). On August 27, 2002, plaintiff and Eileen K, Inc., entered into a Franchise Agreement for a Damon's restaurant at 11 Green Pond Road, Rockaway Township, New Jersey (hereinafter "Rockaway Restaurant"). (Exhibit I attached to Complaint).

On October 22, 2004, Plaintiff filed the Complaint in this action, seeking injunctive and declaratory relief terminating the Franchise Agreements governing the Scranton and Rockaway Restaurants because Defendants allegedly repeatedly and successively acted in breach of the Agreements. Should the Franchise Agreements be terminated, Defendants will thereafter be required to cease operating as Damon's franchises and using Damon's trademarks in violation of the Lanham Act, 15 U.S.C. §§ 1051 et seq.

On October 29, 2004, Plaintiff filed its first motion for preliminary injunctive relief with regard to the Scranton Restaurant (Doc. 6). Then, on December 9, 2004, Plaintiff filed its second motion for injunctive relief with regard to the Rockaway Restaurant (Doc. 32). Certain aspects of the first two motions for injunctive relief were resolved by a November 17, 2004, Agreed Order and a December 27, 2004, Agreed Order issued by this Court (Docs.26, 38).

After an evidentiary hearing and consideration of the parties' briefs, this Court issued an Opinion and Order on October 7, 2005, denying Plaintiffs first and second motions for injunctive relief (Doc. 81).

On May 9, 2006, Plaintiff filed a third motion for preliminary injunction (Doc. 90) and also filed a motion for contempt (Doc. 91). On June 27, 2006, Magistrate Judge King held an evidentiary hearing in which Carl Howard, President and Chief Operating Officer of Damon's International, testified on behalf of Plaintiff and Brian Maloney, a member of the partnership among Defendants, testified on behalf of Defendants. (June 27, 2006, Evidentiary Hearing Transcript (hereinafter "Hearing Tr.") at 9, 39). All parties were represented by counsel at the hearing.

On August 30, 2006, Magistrate Judge King issued a Report and Recommendation (Doc. 105) on Plaintiffs Motion for Contempt and on Plaintiffs Motion for Preliminary Injunction. On September 11 2006, Plaintiff and Defendants objected to the Report and Recommendation (Docs.109, 110). Those objections are ripe for review.

II. ANALYSIS

A. Defendants' Objections

Defendants object to five specific portions of the Report and Recommendation.

1. Defendants' failure to pay royalties and production fund fees.

Defendants object to Magistrate Judge King's conclusion that they breached the Franchise Agreements and violated this Court's Agreed Orders by failing to pay royalties and production fund fees to Plaintiff. (Defendants' Objections at 2-4). Although Defendants conceded at the evidentiary hearing and in Defendants' Objections that they have failed to pay royalties and production fund fees, they contend that they were relieved of this obligation through the verbal representations of Bill Burke, a representative of Plaintiff. (Id. at 2-3). In Defendants' Objections, Defendants complain that Mr. Maloney attempted to testify at the evidentiary hearing about this verbal representation, Magistrate Judge King characterized the proffered testimony as irrelevant, which "was clearly in error." (Id. at 3). In addition, Defendants now present testimony by way of affidavit Intended to corroborate Mr. Maloney's assertion that he had been verbally granted permission to withhold "franchise fees." (Affidavit of Christina Moore¹ ¶ 19 attached to Defendants' Objections). After de novo review, however, this Court agrees with Magistrate Judge King's conclusion that the testimony related to a verbal agreement to vary the Franchise Agreements is irrelevant and finds her analysis of the issue correct:

Mr. Maloney attempted to excuse this failure by testifying that he was verbally told by Bill Burke, a representative of plaintiff, that defendants need not pay royalties. Hearing Tr. at 50. Mr. Burke denies that he did so and in fact represents that he had no authority to do so. Affidavit of Bill Burke attached as Exhibit B to Plaintiffs Motion for Preliminary Injunction. In any event, however, Section XXIV of both franchise agreements provides that "no amendment, change or variance from this Agreement shall be binding on either party unless executed and delivered in writing." Exhibits A, I to Complaint; Hearing Tr. at 51-2.

(Report and Recommendation at 11) (emphasis added). Consequently, a verbal agreement under any circumstances simply cannot serve to vary the Franchise Agreements and any testimony related to it is inadmissible parole evidence. Even if the testimony relating to Mr. Burke's alleged verbal representation had been admitted, and even crediting the new affidavit testimony that Defendants present, Defendants still cannot explain how that testimony could disturb the Magistrate Judge's conclusion. Indeed, it is quite clear to this Court that, had the line of questioning relating to the alleged verbal agreement between Mr. Burke and Mr. Maloney been allowed, it would have had no impact on Magistrate Judge King's analysis and would leave her conclusion, with which this Court agrees, undisturbed.

Accordingly, Defendants' Objections to this portion of the Report and Recommendation are without merit and are therefore OVERRULED.

2. Defendants' failure to report sales.

In the Report and Recommendation, the Magistrate Judge concluded that Defendants failed to report sales to Plaintiff as is required by the Franchise Agreements and by this Court's Agreed Orders. (Report and Recommendation at 12-13). Defendants contend that the portion of the "Report and Recommendation regarding the failure of Defendants to report sales is unwarranted under the facts of this case." (Defendants' Objections at 4). Defendants explain that, even though it later "turned out to be true" that the sales had not been reported. "Magistrate Judge King wholly ignores the justifiable reasons for this failure", i.e., an inadvertent failure based on a "computer glitch" that resulted in little hardship to Plaintiff and that has now been cured. (Id.) Defendants' argument is unpersuasive.

At the evidentiary hearing, Mr. Maloney did not deny that Defendants had failed to report sales to Plaintiff in violation of the Franchise Agreements and of this Court's Agreed Orders. Instead, he testified that he was unaware that Plaintiff had not received the reports. (Hearing Tr. at 52). Mr. Maloney asserted that the sales reports had been prepared but he could not explain why Plaintiff had not received those reports. (Id. at 53). Mr. Maloney further testified that, had he been notified that plaintiff had not received the reports, he would "have had them sent out immediately." Id. Assessing the credibility of this testimony, Magistrate Judge King determined:

The Court declines to credit Mr. Maloney's testimony considering that he had in fact been notified on April 11, 2006, that plaintiff had not received sales reports and yet did nothing to remedy the situation for over two months, i.e., the time between the date Mr. Maloney claims he became aware of the reporting default (April 11, 2006) and the...