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In re Arthur Treacher's Franchisee Litigation

decided: June 18, 1982.

IN RE: ARTHUR TREACHER'S FRANCHISEE LITIGATION (D.C. MDL NO. 467) ARTHUR TREACHER'S FISH & CHIPS, INC.
v.
A & B MANAGEMENT CORPORATION V. MRS. PAUL'S KITCHENS, INC. (ADDITIONAL DEFENDANT ON THE COUNTERCLAIMS) (D.C. CIVIL NO. 80-3378) A & B MANAGEMENT CORPORATION, APPELLANT; IN RE: ARTHUR TREACHER'S FRANCHISEE LITIGATION (D.C. MDL NO. 467) ARTHUR TREACHER'S FISH & CHIPS, INC. V. A & B MANAGEMENT CORPORATION V. MRS. PAUL'S KITCHENS, INC. (ADDITIONAL DEFENDANT ON THE COUNTERCLAIMS) (D.C. CIVIL NO. 80-3378) ARTHUR TREACHER'S FISH & CHIPS, INC., PLAINTIFF AND MRS. PAUL'S KITCHENS, INC., THIRD PARTY DEFENDANT, APPELLANTS



On Appeal From The United States District Court For The Eastern District Of Pennsylvania.

Aldisert, Van Dusen and Garth, Circuit Judges.

Author: Garth

Opinion OF THE COURT

GARTH, Circuit Judge.

This appeal presents the question whether the district court erred in awarding Arthur Treacher's Fish & Chips, Inc. (Arthur Treacher's) past and future royalties on its motion for a preliminary injunction against its franchisee, A & B Management Corp. (A&B).

I.

A&B was incorporated in 1974 for the purpose of operating an Arthur Treacher's franchise. On November 22, 1974 A&B signed a Master License Contract with Arthur Treacher's giving it the right to operate Arthur Treacher's restaurants in the City and County of Philadelphia (A. 284a, 463a). On November 21, 1979, Arthur Treacher's was acquired by Mrs. Paul's Kitchen's, Inc. ("Mrs. Paul's"). Pursuant to the franchise agreement, A&B opened seven restaurants in Philadelphia, the last one being opened in May, 1980, with the approval of Mrs. Paul's.

A&B signed a Standard Unit License Contract for each of its restaurants, obligating A&B to pay royalties equal to the greater of $500 or 5% of the monthly gross receipts (A. 2867b, 2877b, 2886b). (The royalty rate was subsequently reduced to 4% in March, 1979 by an agreement between the parties (A. 473b-474b)). The contracts also imposed bilateral obligations on both A&B and Arthur Treacher's designed to insure the integrity of the Arthur Treacher's image and to promote good will. Thus, the agreements recognized that a franchising system required cooperation between the franchisor and its franchisees in promoting good will through systemwide use of high quality and uniform products and processes (A. 468).

In furtherance of these objectives, the Master Agreement and the Standard Unit Licenses required A&B to conform to Arthur Treacher's specifications with respect to products, containers, uniforms, supplies and equipment (A. 2858b, 2867b-68b). In turn, Arthur Treacher's obligated itself to provide services including assistance in opening new restaurants; real estate site selection; training courses; product development and improvement; review of products, equipment, and supplies used by franchisees; field inspections; protection of trademarks; coordination of advertising efforts; and management assistance (A. 468a-69a; A. 2856b-62b; 2867b-71b). In addition to services specifically enumerated in the contract, Arthur Treacher's had traditionally provided additional quality assurance and marketing services, including advertising services, designed to promote the franchisees system (A. 469a; 641b-42b; 1398b).

Arthur Treacher's continued to provide these services until sometime after 1977. To do so, it had a staff of 200-250 persons. Arthur Treacher's itself had an advertising budget of approximately $3,500,000 per year (A. 641b-42b). During this time period A&B, was recognized as an outstanding franchisee by the management of Arthur Treacher's (A. 466a).

Starting in 1978, the level of services provided by Arthur Treacher's steadily declined (A. 470a; 642b-48b; 1004b-2010b; 2613b-1615b). As a result of the cutback in services, and the perception that Arthur Treacher's no longer cared about the franchise system, many franchisees ceased paying royalties (A. 470a). In September of 1979, A&B discontinued its royalty payments in response to the deteriorating condition of the Arthur Treacher's franchise system.

On November 21, 1979 Mrs. Paul's, a company engaged in the business of manufacturing and selling frozen fish products, purchased Arthur Treacher's from its prior owner Orange Company (A. 467a). At the time of the purchase of Arthur Treacher's, the management of Mrs. Paul's knew that Arthur Treacher's books showed $5 million in uncollected royalties.*fn1

According to A&B, after Mrs. Paul's purchased Arthur Treacher's, the services provided to franchisees diminished further. A&B claimed that quality assurance, advertising, field representative and other services were reduced or eliminated by Mrs. Paul's. Brief for Appellants at 11-12. Arthur Treacher's disputed these claims, and asserted that it provided services in full compliance with the franchise agreements, even though the franchisees were not paying royalties. Brief for Appellee at 14.

In addition to the failure to provide services to franchisees, A&B charged that Mrs. Paul's sought to use the franchise system for its own benefit and took steps that were contrary to the interests of the franchisees. A&B charged that after the takeover, Mrs. Paul's terminated Arthur Treacher's suppliers of Icelandic cod, and the franchisees were forced to buy inferior fish products. Furthermore, the new supplier of fish was unable to provide the quantities of fish needed by the franchisees (A. 471a). A&B claims, and the district court found, that in cutting off the suppliers of Icelandic cod, Mrs. Paul's was pursuing a scheme to compel the franchisees to buy their fish from Mrs. Paul's (A. 472).

On July 11, 1980 Arthur Treacher's sent a letter to A&B demanding payment of past due royalties (A. 465a). A&B did not pay the amounts claimed. On August 15, 1980, A&B was notified of its termination as an Arthur Treacher's franchisee and was instructed to remove all Arthur Treacher's trademarks, trade names and identifying characteristics from its premises. (A. 465a). On August 27, 1980 Arthur Treacher's commenced this litigation. (A. 466).

A.

In its four-count complaint Arthur Treacher's charged A&B with infringement of Arthur Treacher's trademarks in violation of the Lanham Trade-Mark Act, 15 U.S.C. § 1121; unfair competition in violation of the Lanham Act, trademark infringement in violation of Pennsylvania law, 73 P.S. § 23, and breach of the franchising contracts (A. 8a-14a). The Complaint sought a judgment,

(1) enjoining Defendant A&B, and all of its officers, employees and agents from any further infringement of the Arthur Treacher's trademarks; (2) ordering A&B to immediately remove all Arthur Treacher's signs and other identifying characteristics from its stores, any goods, materials or products in its possession, custody and control; (3) awarding plaintiff damages caused by A&B's infringement of its trademarks; (4) granting plaintiff attorneys' fees and costs of suit. . . .

(A. 11a, 12a, 13a-14a).

A&B responded by filing an answer and counterclaim against Arthur Treacher's and Mrs. Paul's. A&B alleged inter alia, the wrongful termination of A&B as a franchisee; various contractual breaches, including the failure to provide required franchisee services; and violations of the antitrust laws through tying arrangements and the acquisition of Arthur Treacher's by Mrs. Paul's (A. 22a-61a).*fn2 Arthur Treacher's then filed a motion for a preliminary injunction. It sought an order which would require A&B to "immediately remove all Arthur Treacher's signs and other identifying characteristics from its stores, and any goods, materials or products in its possession, custody or control; and restraining and enjoining A&B from infringing on plaintiff's trademarks in the future." (A.16).*fn3 Significantly, there was no indication in the motion, or in the memorandum filed in support of the motion, that Arthur Treacher's sought an order compelling A&B to pay back royalties at this preliminary stage of the proceedings.

B.

On July 30, 1981 after twelve days of hearings, the district court ruled on Arthur Treacher's motion. Although the court denied the relief sought by Arthur Treacher's in its motion, the district court concluded that "the real relief plaintiff seeks is the payment of these [past and future] royalties", (A. 478) and, thus, entered an order which among other provisions, decreed that:

Defendant, A&B Management Corporation shall, within twenty (20) days of the date of this Order, pay all past due royalties to plaintiff computed on the basis of four (4%) of defendant's monthly gross receipts. Defendant shall continue to pay royalties to plaintiff pending the litigation of this case.*fn4

The key to the district court's decision to award such relief was its view of the comparative hardships faced by the parties. Even though Arthur Treacher's had never sought a preliminary injunction which would require A&B to pay $200,000 in past due and current royalties before trial, the district court nevertheless concluded that Arthur Treacher's would be irreparably harmed without such relief. The predicate for this conclusion was the court's findings respecting Arthur Treacher's financial health:

All parties agree that the royalties are the "lifeblood" of a franchise system. Without these royalties, Arthur Treacher's cannot exist. It has been represented to the court that the company is on the verge of bankruptcy. . . . The Court finds that continued non-payment of royalties pending litigation will inescapably result in the destruction of Arthur Treacher's and this without more, warrants a finding of irreparable harm pendente lite absent the mandatory injunction. If Arthur Treacher's ultimately prevails at trial, any award of money damages could hardly compensate it if it is bankrupt and without a franchise system which took years to develop.

(A. 485a).

In contrast, the district court found that A&B would suffer little if any harm if A&B was required to immediately pay $200,000 in back royalties (A. 485a). Further, the district court expressly declined to find that Arthur ...


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