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Goddard Systems, Inc. v. Gondal

United States District Court, D. Delaware

March 29, 2018


          Douglas E. McCann and Jeremy D. Anderson, FISH & RICHARDSON, P.C., Wilmington, Delaware; Dean T. Fournaris, John M. Doroghazi and Jacob A. Sand, WIGGIN AND DANA LLP, Philadelphia, Pennsylvania, Attorneys for Plaintiff.

          Gary E. Junge, SCHMITTINGER & RODRIGUEZ, P.A., Newark, Delaware; Christopher P. Coval, FENNINGHAM, DEMPSTER & COVAL, LLP, Trevose, Pennsylvania, Attorneys for Defendants.

          Melvyn I. Monzack and Michael C. Hochman, MONZACK MERSKY MCLAUGHLIN AND BROWDER, P.A., Wilmington, Delaware, Attorneys for Intervenors.


          BURKE, United States Magistrate Judge.

         This case, which was filed by Plaintiff Goddard Systems, Inc. ("Plaintiff or "GSI") against Defendants Hina Gondal, Bilal Gondal, and BHSG & Co. ("Defendants"), relates to a Franchise Agreement (the "FA" or "Franchise Agreement") previously entered into between Plaintiff and Defendants. Pursuant to that FA, Plaintiff granted Defendants a preschool franchise located in Middletown, Delaware (the "Middletown Goddard School"). In the instant action, Plaintiff, inter alia, alleges that Defendants have breached various terms of the FA.

         Presently before the Court is Plaintiffs Motion for Preliminary Injunction ("the motion"). (D.I. 8) With that motion, Plaintiff seeks to enjoin Defendants and any other persons "in active concert or participation" with Defendants-including Intervenors Robert Stella and The Gem School, Inc. ("The Gem School, " and together with Mr. Stella, "Intervenors")-from taking certain actions in the future. (D.I. 8-5) Having heard oral argument, having considered the considerable amount of briefing and evidence presented by the parties, (see, e.g., D.I. 8-2, D.I. 18, D.I. 20, D.I. 52, D.I. 53-55, D.I. 57-58), and for the reasons set forth below, the Court DENIES Plaintiffs motion.

         I. BACKGROUND

         A. The Parties

         1. Parties to the Litigation

         GSI is a Pennsylvania corporation with its principal place of business in King of Prussia, Pennsylvania. (D.I. 1 at 1 at ¶ 1) Mrs. Hina Gondal and Mr. Bilal Gondal (collectively, "the Gondals") are a married couple who are residents of Middletown, Delaware. (Id. at 1-2 at ¶¶ 2-3) BHSG & Co. ("BHSG") is a Delaware corporation with its principal place of business in Middletown, Delaware. (Id. at 2 at ¶ 4)

         2. Non-Party Intervenors

         As noted above, the motion includes a request for injunctive relief that specifically names not just Defendants, but also Mr. Stella and The Gem School. (D.I. 8-5) Mr. Stella is a resident of Delaware, and is a real estate developer. (D.I. 53, ex. A (hereinafter, "Tr.") at 94, 162-63) The Gem School is owned by Mr. Stella; it is located in Middletown, Delaware and is run out of the former location of the Middletown Goddard School. (D.I. 18-2, ex. 3, D.I. 40 at 1; Tr. at 129)[1]

         B. Procedural Background

         Plaintiff filed a Complaint against Defendants in the United States District Court for the Eastern District of Pennsylvania on May 5, 2017. (D.I. 1) The Complaint contained nine counts, each brought against all three Defendants: (1) a claim of trademark infringement and unfair competition (Count I); (2) a breach of contract claim based on the violation of a post-term covenant not to compete in the FA (Count II); (3) a breach of contract claim based on the violation of the in-term covenant not to compete in the FA (together with the post-term covenant not to compete, the "covenants not to compete") (Count III); (4) a breach of contract claim based on the violation of a confidentiality provision (the "confidentiality provision") in the FA (Count IV); (5) a breach of contract claim based on the violation of various other provisions of the FA (Count V); (6) a breach of contract claim based on the premature and wrongful termination of the FA and associated lost future royalties (Count VI); (7) a breach of the covenant of good faith and fair dealing (Count VII); (8) a misappropriation of trade secrets claim (Count VIII); and (9) a claim for specific performance (Count IX). (D.I. 1 at 22-33 at ¶¶ 43-102)

         On May 22, 2017, Plaintiff filed the instant motion, (D.I. 8), and briefing on the motion was complete on June 23, 2017, (D.I. 20). The initial round of briefing on the motion did not include Intervenors, as they had not yet moved to intervene in the case. (D.I. 8-2; D.I. 18; D.I. 20)

         The case was subsequently transferred to the United States District Court for the District of Delaware on July 24, 2017, (D.I. 26), and was initially assigned to the Court thereafter. On September 1, 2017, Intervenors moved to intervene in this proceeding, and the Court granted that unopposed motion on September 8, 2017. (D.I. 40) On September 20, 2017, the parties filed a Notice, Consent, and Reference of a Civil Action to a Magistrate Judge, in which they consented to the Court conducting all proceedings in this case, including trial, the entry of final judgment and all post-trial proceedings. (D.I. 48) The District Court ordered that this consent was effective as of September 21, 2017. (D.I. 49)

         The Court scheduled an evidentiary hearing on the motion, which was held on September 15, 2017. The parties and the Intervenors participated in the hearing. On September 19, 2017, the Court set a post-hearing briefing schedule-it called for Plaintiff to file a post-hearing opening brief, Defendants and Intervenors to separately file post-hearing answering briefs, and Plaintiff to file a post-hearing reply brief. Plaintiff filed a post-hearing opening brief on October 2, 2017, (D.I. 52), and Defendants and Intervenors each filed post-hearing answering briefs on October 11 and 12, 2017, respectively, (D.I. 53-54). Then, without leave of Court, on October 12, 2017, Plaintiff filed a supplemental post-hearing opening brief; that brief referenced additional, new evidence purportedly supporting Plaintiffs motion-evidence relating to Intervenors' recent alleged use of Plaintiff s trademarks. (D.I. 55) Intervenors, also without leave of Court, then filed a response to that supplemental post-hearing opening brief on October 17, 2017. (D.I. 57) Lastly, Plaintiff filed its post-hearing reply brief on October 18, 2017, (D.I. 58), such that post-hearing briefing was completed on that date.

         C. Facts Relevant to Resolution of the Motion 1.Goddard School Franchises, the Opening of the Middletown Goddard School and the Gondals' Agreements with GSI

         GSI is the franchisor of THE GODDARD SCHOOL® businesses ("Goddard School(s)"), which specialize in offering to the public preschool early education programs for children. (D.I. 1 at 4 at ¶ 15) GSI enters into a business relationship with its franchisees, which enables each franchisee to operate one or more individual Goddard Schools. (Id. at 6 at ¶ 25) The business relationship between GSI and its franchisees is governed by the terms and conditions of a franchise agreement (like the FA, here). (Id.) As of the date of the filing of the instant motion, there were approximately 465 Goddard School franchisees nationwide, and four such schools operating in the State of Delaware. (D.I. 8-3 at ¶ 3)

         In 2007, Mr. Gondal opened the Middletown Goddard School. (D.I. 18-1 at ¶ 2; Tr. at 170) Mr. Gondal's purchase of the franchise for the Middletown Goddard School is documented in the FA, which was executed by Mr. Gondal and GSI on July 11, 2007. (D.I. 1-1, ex. 1 at 1; D.I. 1 at 8 at ¶ 33) In December 2010, by way of an addendum to the FA, Mrs. Gondal "was added to the Franchise Agreement as a franchisee[.]" (D.I. 1 at 8 at ¶ 34; see also D.I. 1-1, ex. 2) The original term of the FA was 15 years. (D.I. 1-1, ex. 1 at ¶ 2(A))

         The Gondals operated the school through several corporate entities. For example, in July 2013, the Gondals assigned their rights and obligations under the FA to BHSG, which was then owned and controlled by both Mr. Gondal and Mrs. Gondal. (D.I. 1 at 8 at ¶ 35; D.I. 1-1, ex. 3 at 1) Pursuant to that assignment agreement, the Gondals agreed to guarantee BHSG's performance "of its obligations under the Franchise Agreement and to continue to be bound by all of the provisions of the Franchise Agreement." (D.I. 1-1, ex. 3 at 1)

         In January 2016, Mr. Gondal transferred all of his interests in BHSG to Mrs. Gondal, who, Plaintiff asserts, presently owns "all of the shares of BHSG." (D.I. 1 at 8 at ¶ 36; see also D.I. 8-3 at ¶ 24) At that time, "[Mr.] Gondal was removed from the Franchise Agreement and instead executed a Continuing Guaranty and Agreement to be Bound by Franchise Agreement... . and to personally guarantee BHSG's and [Mrs.] Gondal's full performance of all their duties and obligations under the Franchise Agreement." (D.I. 1 at 8-9 at ¶ 37; see also D.I. 1-1, ex. 4)

         2. The School Building and Property

         The Middletown Goddard School was located in a building at 100 Patriot Drive, Middletown, Delaware (the "school building"). Mr. Stella owned the property on which the school building sat, and he had constructed the school building in or around 2006 so that it could be leased to the Gondals for use as a Goddard School. (Tr. at 94-95, 170-71; D.I. 54, ex. C at 20; D.I 56, ex. 10 (July 2006 lease for the school building)) It was one of two buildings that Mr. Stella owned that housed Goddard Schools. (D.I. 54, ex. C at 27)

         Mr. Stella (through a Delaware LLC known as VCII Ventures, LLC) entered into a lease agreement ("the lease agreement") with the Gondals (through a Pennsylvania corporation controlled by the Gondals known as Exquisite, Inc.), by which the Gondals leased the school building. (D.I. 56, ex. 10; Tr. at 96-97) Under the terms of the lease, the Gondals had an option to purchase the building. (D.I. 56, ex. 10 at 19; Tr. at 96-97) According to Mr. Stella, this right to purchase was included in the lease agreement at least in part because GSI liked for its franchisees to have a right to purchase the schools that they run. (D.I. 54, ex. C at 27)

         Starting in 2006, the Gondals paid rent for the school building, pursuant to this lease. (Tr. at 96) These lease payments continued for approximately 11 years. (Id.) Beginning in February 2009 and continuing through 2012, however, Mr. Gondal and Mr. Stella entered into a series of eight lease modification agreements. (D.I. 56, ex. 10) In those lease modification agreements, it was agreed that Mr. Gondal would a pay rent for the school building at a reduced rate (as compared to the rate called for by the lease agreement for that time period). (Id.) In certain of the modification agreements, it was also agreed that: (1) Mr. Gondal would repay certain of the amounts of the overall discounted rent in future lease years or in other ways; and (2) Mr. Gondal also agreed to provide Mr. Stella with monthly enrollment figures for the school. (Id.) According to Mr. Stella, he agreed to these rent discounts because Mr. Gondal "was struggling getting [the Middletown Goddard School] started .... [and] every summer [the school would] get very slow[.]" (D.I. 54, ex. C at 24-25) Mr. Stella testified that "in the even[t] that the Gondals were to exercise their option [to purchase the school building, ]... these [discounted back rent] monies would be owed." (Tr. at 126-27)

         The Gondals told Mr. Stella of their intent to exercise their option to purchase the school building in late 2015. (Tr. at 96-97, D.I. 54, ex. C at 28) On March 4, 2016, Mrs. Gondal-through a Delaware LLC that she controls known as Yellow Grass Investments, LLC ("Yellow Grass")-purchased the school building and property on which it sits from Bluegrass Investments, LLC ("Bluegrass"), a Delaware LLC for which Mr. Stella is the Managing Member. (D.I. 8-3, ex. F at PageID#: 216-18[2]; D.I. 56, ex. 14 at 1; Tr. at 220) The contract sales price for the purchase was $2, 250, 000. (D.I. 56, ex. 14 at 1) In order to finance this purchase, Yellow Grass obtained a mortgage for $2, 133, 100 from Bank of America, N.A, which was secured by the school building/property and the Gondals' home. (D.I. 8-3, ex. F at PageID# 219-20, 238; Tr. atl21;D.1. 52, ex. Bat 171)

         That same day, March 4, 2016, Mr. Stella's lending arm, FCS Lending LLC entered into a loan agreement in the amount of $425, 000 with Yellow Grass and the Gondals.[3] (D.I. 56, exs. 11-13; Tr. at 98-99, 121) The terms of this loan agreement required Yellow Grass and the Gondals to make payments totaling just over $6, 000 per month, for approximately seven years. (Tr. at 128-29) According to Mr. Stella, this loan agreement was not related to the Gondals' purchase of the school building/property. (Tr. at 121-28) Instead, the loan amount in question actually represented monies that the Gondals already owed Mr. Stella as a result of their prior business dealings (including monies representing the discounted rent payments described in the aforementioned lease modification agreements). (Id.) The Gondals paid regularly on this loan until May or June of 2017, at which point they stopped paying on the debt. (Tr. at 145-47)

         3. Quality Assurance Reviews

         In its Complaint, GSI states that in order to maintain the reputation and goodwill associated with Goddard Schools, it is important that each franchisee maintain the highest standards of quality, appearance and service. (D.I. 1 at 5 at ¶ 22) To that end, GSI requires its franchisees to undergo certain "Quality Assurance [or "QA"] standards assessments[.]" (Id. at 14 at ¶ 54)

         On November 20, 2014, the school failed the first of a series of such assessments. (Id.) The school failed two more QA assessments the following year on May 21, 2015 and October 8, 2015. (Id.) On June 10, 2016--just three months after Mrs. Gondal purchased the school building-the school failed its fourth consecutive QA review. (Id.) "As a result, on June 21, 2016, GSI sent [the Gondals] a Notice of Default [as to the FA, hereinafter the "June 21, 2016 Notice"]... for failure to comply with [these] four (4) consecutive GSI Quality Assurance standards assessments[.]" (Id; see also D.I. 1-1, ex. 6) In the June 21, 2016 Notice, GSI asserted that in light of these failures (as well as certain other alleged failures to comply with the requirements of the FA), it had the ability, pursuant to paragraph 13(B) of the FA, to terminate that agreement. (D.I. 1-1, ex. 6 at 2) GSI explained that it might conduct additional unannounced visits to the school, and that if the Gondals did not take certain actions to cure these defaults in the meantime, GSI might thereafter terminate the FA. (Id.)

         On September 26, 2016, GSI conducted another QA review of the school, "which resulted in another Quality Assurance failure, including a poor Health and Safety score of just 66.7%, well below a passing score of 85%." (D.I. 1 at 15 at ¶ 55) According to GSI, this amounted to a failure "to cure the defaults identified in the June 21, 2016 Notice." (Id.)

         4. Franchise Termination and Related Events

         a. The Conditional FA and Second Conditional

         FA On October 10, 2016, GSI notified Defendants that it was terminating the FA, in light of the Gondals' failure to address the issues raised in the June 21, 2016 Notice and the fact that the school did not pass the September 26, 2016 QA review. (D.I. 1-2, ex. 7) Thereafter, on October 28, 2016, the Gondals signed a "Listing Agreement" with GSI, in which the Gondals offered to sell the school and the associated franchise for $850, 000. (Id., ex. 8)

         The parties then had further discussions, and on November 16, 2016, GSI, the Gondals and BSHG entered into a Conditional Reinstatement of the Franchise Agreement (the "Conditional FA"). (Id., ex. 9) By its terms, the Conditional FA states that its "sole purpose" is to allow the Gondals to "transfer their business to an unrelated third party approved by GSI." (Id. at 3-4; see also Tr. at 19) The Conditional FA states that the FA would be conditionally reinstated until February 28, 2017, and that if the Gondals wished to transfer the business to a third-party approved by GSI, they would have to do so within the conditional reinstatement period. (D.I. 1-2, ex. 9 at 4) The Conditional FA contains no right or promise that GSI would later enter into a "full" or non-conditional reinstatement of the FA, and it states that if the Gondals/BSHG did not complete transfer of the business within the reinstatement period, then after notice from GSI, the parties would work to close the school. (Id. at 5; Tr. at 19) Despite this, in an affidavit he filed prior to the evidentiary hearing, Mr. Gondal asserted that "in order to induce us to sign the [Conditional FA, GSI] led us to believe that our franchise would be reinstated upon the curing of the alleged 'quality assurance' deficiencies." (D.I. 18-1 at ¶ 9)[4]After the parties entered into the Conditional FA, GSI thereafter sent a representative to work with the Gondals on improving their QA scores. (Tr. at 184)

         The Conditional FA in fact expired on February 28, 2017. (Tr. at 16, 186) Nevertheless, in March and April 2017, the Gondals continued operating the school as a Goddard School, and continued to pay royalties to GSI. (Id.; D.I. 8-3 at ¶ 41) On March 27, 2017, GSI issued a "Certificate of Compliance" to the school, which stated that the school had "successfully fulfilled the standards, systems and procedures necessary for Quality Assurance Certification by [GSI] as of the date of this certificate." (D.I. 18-1, ex. 1)

         Next, on or about April 4, 2017, GSI sent the Gondals a second proposed Conditional Reinstatement of the FA (the "Second Conditional FA"). (D.I. 1 at 17 at ¶ 61) However, in the interim, Mr. Gondal had discussions with a GSI executive, and learned that GSI would not fully reinstate the FA. (Tr. at 192) Thereafter, the Gondals refused to sign the Second Conditional FA. (Id. at 16, 192; D.I. 8-3 at ¶ 43)

         b. The Gem School's Formation

         At some point in March or April 2017, Mr. Gondal approached Mr. Stella and informed him that Goddard was "yanking his franchise agreement and [Mr. Gondal] could no longer operate [the school]." (D.I. 52, ex. C at 96; see also Tr. at 100-101, 141, 192) Mr. Stella viewed the possible closure of the Middletown Goddard School as a problem, because it would threaten the Gondals' ability to repay the existing debt they owed to him; as a result, it was agreed that Mr. Stella would take over the school in order to further secure the Gondals' debt. (Tr. at 100-02, 141-42) Mr. Stella did not, either at this time or thereafter, pay the Gondals any money in order to take over the school's assets. (Tr. at 143, 211) And Mr. Stella did not give the Gondals any immediate "credit" against their existing debt in return for allowing Mr. Stella to take over the school. (Tr. at 144) Instead, Mr. Stella testified that in light of that existing debt, [5] if he were to later sell the school or otherwise obtain profits due to the school, such monies would then be applied to the Gondals' debt to him. (Id.; see also D.I. 52, ex. C at 89)[6]

         On April 1, 2017, Mr. Stella incorporated The Gem School. (D.I. 18-2, ex. 3) The Gem School filed for a tax number with the IRS on April 5, 2017. (D.I. 18-2, ex. 4)

         c. Mr. Gondal Provides Support to The Gem School Before The Gem School Opens

         During the month of April 2017, Mr. Gondal (and to a lesser extent, Mrs. Gondal, via Yellow Grass) performed a variety of tasks in order to help The Gem School to be prepared to open its doors to students.

         For example, Mr. Gondal contacted his accountant and asked her to help set up The Gem School as a corporate entity. (Tr. at 215) It was this accountant who helped Mr. Stella incorporate The Gem School. (Id.)

         Additionally, on April 11, 2017, Mr. Gondal filed papers with the State of Delaware's Department of Services for Children, Youth and their Families' Office of Child Care Licensing ("OCCL"), in order to obtain a child care license from that agency (hereinafter, the "license") for The Gem School. (D.I. 8-3, ex. B; Tr. at 194-95)[7] Mr. Gondal filed a Renewal/Relocation License Application ("renewal application") and did so listing himself as the "applicant"; in the application, he listed Mr. Stella as the President of The Gem School and himself as "Consultant/V.P." (D.I. 8-3, ex. B at 2) According to the wording on the renewal application, by listing himself as the applicant, Mr. Gondal was stating to OCCL that he was to be an owner of The Gem School. (Id., ex. B at 1; id., ex. C at 1) In this application, Mr. Gondal indicated that he would be on site at the new school and would have access to children there, while Mr. Stella would not be on site. (Id.) Mr. Gondal explained that the reason he filed a renewal application and listed himself as the "applicant" (while noting Mr. Stella's association with The Gem School elsewhere on the application)-as opposed to having Mr. Stella submit an application listing himself as the "applicant"-was because Mr. Gondal understood that doing the former would allow the school to remain open during its transition from the Middletown Goddard School to The Gem School, while doing the latter would require that the school close for two or three months while Mr. Stella's application was reviewed and assessed. (Tr. at 195, 212-13; see also D.I. 8-3, ex. C at 2-3) The OCCL ultimately accepted the renewal application and added Mr. Stella to the license. (D.I. 8-3, ex. C at 1; see also D.I. 8-2 at 11)

         Next, on April 25, 2017, The Gem School leased the property on which the school building is located (at 100 Patriot Drive in Middletown) from Yellow Grass. (D.I. 18-1 at ¶ 17; D.I. 18-2, ex. 5) The lease term was 25 years, to begin on the date that a certificate of occupancy issued for operation of The Gem School. (D.I. 18-2, ex. 5 at PageID# 360) For the first five years, the lease called for The Gem School to make rent payments to Yellow Grass of $14, 000 per month, due in advance on the first day of each month. (Id. at PageID# 366; Tr. at 157) Mrs. Gondal signed the lease on behalf of Yellow Grass. (D.I. 18-2, ex. 5 at PageID#365)

         Additionally, on or around April 28, 2017, Mr. Gondal contacted his insurance vendor, Specht Insurance Group, Ltd. ("Specht"), an entity that was then providing insurance for the Middletown Goddard School. (D.I. 8-3, ex. I; D.I. 53, ex. B at 271) Mr. Gondal informed the Specht representative that he was cancelling his insurance as of May 1, but he also asked if the insurance company would be "interested in quoting the new operation" (i.e., The Gem School); Mr. Gondal stated that this new school would "be the same kids, same everything that he had with Goddard." (D.I. 8-3, ex. I; see also D.I. 53, ex. B at 272) In this conversation, Mr. Gondal also indicated that he had already received a quote from a different insurance company for the new school. (D.I. 8-3, ex. I)

         Lastly, in this same time frame, Mr. Gondal made some additional contacts on behalf of The Gem School. For example, he contacted other vendors, including his sign vendor and his tuition processor, on behalf of the school. (Tr. at 165, 215)

         d. Closing the Middletown Goddard School and the Opening of The Gem School

         On April 28, 2017, Defendants' counsel sent Plaintiff a letter, notifying it that "the school is being shut down effective April 28, 2017." (D.I. 1, ex. 10) The letter further stated that "[a]ll of the proprietary items within [sic] the Goddard name are being removed.[8] Blue Grass Investments, LLC will be leasing this real property." (D.I. 1-2, ex. 10)

         That same day, April 28, 2017, a letter was sent to all families with children attending the Middletown Goddard School (the "April 28 letter"). (D.I. 8-3, ex. H) That letter, which was signed "Sincerely, Management[, ]" informed families that the Middletown Goddard School would no longer be operating "under the Goddard Franchise" as of April 30, 2017. (Id.) The letter continued:

With great excitement, we would like to introduce you to The GEM School! Starting Monday May 1st, 2017, we will officially start operating under the new name. Please recognize that our staff, quality and curriculum will remain the same. The only major change will be our school name. Please ensure to write all checks out to The Gem School when paying your monthly tuition.
On Monday May 1st, 2017 at 6:15 p.m. the Management team will be conducting a meeting to answer all questions and concerns.
We are looking forward to the new and exciting adventures and we hope that you will continue to join as we advance.

(Id. (emphasis in original)) Mr. Gondal stated that he did not draft the April 28 letter, and that he did not review it before it was sent to customers of the Middletown Goddard School. (D.I. 53, ex. B at 268-69) According to Clarissa Patterson (an employee at the Middletown Goddard School who went on to serve as the Operations Manager at The Gem School), she drafted the letter along with a co-worker, Jessica Cioci (who was also an employee at the Middletown Goddard School and who went on to serve as Education Director at The Gem School). (D.I. 53, ex. C at 41-42; D.I. 54, ex. H at 2) However, Ms. Patterson stated that while Mr. Gondal did not type the letter, Mr. Gondal did discuss with her what would be included in the letter, and he "looked [the letter] over" to help catch any typographical errors before it was sent out. (D.I. 53, ex.Cat41-42)[9]

         Mr. Stella testified (and it is not disputed here) that: (1) the Middletown Goddard School in fact did close on Friday, April 28, 2017; and (2) on Monday, May 1, 2017, The Gem School opened in the same location. (D.I. 52, ex. C at 95; see also Tr. at 210) Mr. Stella also testified that, contemporaneous with the closing of the Middletown Goddard School, he had any Goddard School signage or trademarked materials removed from the school building and from a bus that was used to transport students to the school. (Tr. at 104-07; see also Id. at 236; D.I. 18-1 at ¶ 33; D.I.57, ex. C at ¶¶ 7-8)[10]

         On Monday, May 1, 2017, The Gem School held a meeting for parents (the meeting referenced in the April 28 letter). (D.I. 53, ex. B at 270) At the meeting (the "May 1 meeting"), in addition to certain parents, were The Gem School's directors (Ms. Patterson, Ms. Cioci, and Amanda Phillips, who had worked as a lead teacher at the Middletown Goddard School and now serves as Marketing Manager at The Gem School) and Mr. Gondal. (Tr. at 224-25, 241; D.I. 52, ex. D at 45-46)[11] Mr. Gondal told parents that the school now was no longer a Goddard School and was "under the new company name." (D.I. 53, ex. B at 270; see also D.I. 52, ex. D at 46) He acknowledged that during the meeting "I don't think I mentioned that I'm the - you know, I'm not the owner [of The Gem School]." (D.I. 53, ex. B at 270) The directors then went on to tell the parents that while the name of the school was changing, the staff, the quality of care and how the students were to be taught would all remain the same. (Id.; D.I. 52, ex. D at 46-47)

         With perhaps one or two exceptions, the same teachers who worked at the Middletown Goddard School continued to work at The Gem School. (Tr. at 152, 211) And The Gem School used the same equipment (e.g., chairs, toys, cribs, sheets) that had been previously used by the Middletown Goddard School (though there is no written document evidencing the transfer of the Middletown Goddard School's assets to The Gem School). (Id. at 152, 211-12) However, despite what was stated in the May 1 letter, the record does not clearly show that The Gem School used the Goddard School's curriculum to teach its students. Instead, the evidence reliably demonstrates only that, at some point after May 1, The Gem School employed two other curricula-Creative Curriculum and Teaching Strategies Gold. (Tr. at 237, 242)[12]

         On May 4, 2017, GSI sent an e-mail ("the May 4 e-mail") from the Middletown Goddard School's e-mail account[13] to families with children who had attended the Middletown Goddard School. (D.I. 18-2, ex. 8) The e-mail, which bore a "Subject" line reading "Message from Goddard Systems, Inc.[, ]" began as follows:

It is with great sadness that Goddard Systems, Inc. (GSI), franchisor of The Goddard School, announces the closing of the Middletown, DE location. Unfortunately, we found out that the franchisee abruptly left the franchise system over the weekend. This was done without our knowledge or approval. We deeply regret the inconvenience this may be causing your family. Effective May 1, 2017, the building opened as GEM School, which is not affiliated with The Goddard School.

(Id.) The e-mail went on to provide parents with a list of other Goddard Schools in the area and of other childcare facilities in the area that had a "Delaware Star Program 5-star rating[.]" (Id.) In the time period thereafter, the number of students enrolled in The Gem School declined, as compared to the number of students who were enrolled in the Middletown Goddard School prior to its closure. (Tr. at 156) Since the transition, Plaintiff is not aware of any parents of The Gem School students who were confused into thinking that The Gem School was in some way affiliated with GSI. (Id. at 44)

         At the time of the preliminary injunction hearing, 104 students attended The Gem School. (Tr. at 115, 243) Approximately 30 staff members worked at The Gem School as of that date. (Mat 116, 243)

         e. Mr. Gondal's Continued Activity on Behalf of The Gem School After April 28, 2017

         After the Middletown Goddard School closed on April 28, 2017, Mr. Gondal remained involved with The Gem School for a period of time. This involvement came in three forms.

         First, Mr. Gondal assisted The Gem School with its transition during the first two weeks of May 2017. (D.I. 18-1 at ¶ 30; Tr. at 214) The Gem School paid Mr. Gondal $500 for this work. (D.I. 54, ex. E at 37-38) Mr. Gondal testified that he was not expecting this payment and, when he noticed it in his bank account, he later contacted Mr. Stella to inquire as to what it was for. (Id.) Ultimately, Mr. Gondal testified that he kept this money, at least in part because Mr. Stella "owe[d] me" more money than this at the time. (Id.)

         Second, Mr. Gondal continued to have involvement with The Gem School's licensure process. Mr. Gondal was asking Mr. Stella to take Mr. Gondal's name off of The Gem School's license during this time period. (Tr. at 216) In response to Mr. Stella's query as to whose name should go on the license, Mr. Gondal recommended that it be that of Ms. Phillips. (Id.) Mr. Gondal then asked Ms. Phillips to fill out a new license application for The Gem School in her name; Ms. Phillips submitted that application on May 16, 2017. (Id. at 216, 248-49; D.I. 18-2, ex. 6) Later, this May 16, 2017 application was withdrawn, and was supplanted by a new application that The Gem School filed on June 13, 2017. (D.I. 20-1 at ¶ 7 & ex. A) Ultimately, The Gem School was issued its own license by the OCCL on August 18, 2017; between May 2017 and the date that this license issued, Mr. Gondal provided some additional assistance with the licensing process (i.e., he answered certain of the OCCL's questions about the prior Middletown Goddard School license, and he supplied certain documentation to The Gem School regarding that prior license). (Tr. at 150-51, 225-27)[14]

         Third, Mr. Stella occasionally called Mr. Gondal after The Gem School opened to ask about procedures and operations used when the Middletown Goddard School was operating. (D.I. 52, ex. C at 123-24) Mr. Stella asked these questions "more so in the beginning" after The Gem School opened, as compared to the time period nearer to the preliminary injunction hearing. (Id.)

         As of the date of the preliminary injunction hearing, the Gondals were no longer involved in the ownership or operation of The Gem School. (Tr. at 103, 196, 237; D.I. 18-1 at ¶ 30) Their two children continued to attend daycare at the school, and so the Gondals continue to pay tuition to the school and pick up and drop off their children at the school. (Id. at 174, 237; D.I. 54, ex. C at 136)

         f. Defendants' Other Financial Transactions With The Gem School During the Summer of 2017

         Additionally, the record contains evidence that the Gondals, BHSG, and The Gem School were financially intertwined during the summer of 2017. (D.I. 56, ex. 15 (Plaintiffs "Hearing Exhibit 15")) These entanglements relate to at least four different types of payments.

         First, BHSG, the Gondals, and non-party Yellow Grass made payments to third parties between May 2017 and August 2017 that were for expenses related to "something at The Gem School, or on behalf of The Gem School or for an item at The Gem School or for a service provided at The Gem School[.]" (Tr. at 217-18; see also Plaintiffs Hearing Exhibit 15) These payments totaled $14, 927.23. (Plaintiffs Hearing Exhibit 15)

         Second, the State of Delaware had continued to deposit purchase of care and STARS program tuition subsidy payments to BHSG from May 2017 through July 2017. (Plaintiffs Hearing Exhibit 15; Tr. at 162, 219-20; D.I. 54 at 8; id, ex. E at 39-40) These payments totaled $35, 022.52. (Plaintiffs Hearing Exhibit 15) Mr. Gondal testified that at least four of these payments-those made in June and July 2017 (totaling just under $24, 000)-were payments that actually related to time periods when The Gem School was in operation (and the Middletown Goddard School was closed). (Tr. at 218-19; see also Tr. at 164-65) He stated that the payments were made to BHSG only because he and The Gem School had not yet completed the transfer of the school's license from the Gondals to someone associated with The Gem School. (Id. at 219).

         Third (and relatedly), from June to August 2017, BHSG, Mrs. Gondal and Yellow Grass each made one payment apiece to Mr. Stella's loan servicer, FCS Lending LLC. (Id.) Mrs. Gondal also made a payment to one of Mr. Stella's employees in July 2017. (Plaintiffs Hearing Exhibit 15; Tr. at 159) The combined amount of these payments was $27, 000. (Plaintiffs Hearing Exhibit 15) Mr. Stella indicated that these payments represented reimbursement for the monies referenced in the prior paragraph-subsidy payments from the State of Delaware made to accounts related to the Gondals, but that were in fact related to time periods when The Gem School was in operation. (Tr. at 160, 162-63) Thus, Mr. Stella explained that this $27, 000 in payments was made by the Gondals to persons or entities associated with Mr. Stella, in order to transfer these State subsidy payments to their rightful location (i.e., to Mr. Stella and The Gem School). (Tr. at 162-63)

         Fourth, in the months of June 2017 through August 2017, The Gem School paid rent for the school building to Yellow Grass, pursuant to the terms of the previously-referenced lease agreement. (Id. at 160-61, 200) These four payments (three of $15, 000 and one of $12, 000) totaled $57, 000, and they appear to relate to rent payments for the months of June, July, August and September 2017. (Id.; D.I. 56, ex. 17)[15] It does not appear from the record that The Gem School paid Yellow Grass rent for the school building for the month of May 2017. (Plaintiffs Hearing Exhibit 15; D.I. 56, ex. 17; Tr. at 159)


         Preliminary injunctive relief is an extraordinary remedy, which should be granted only in limited circumstances." Ferring Pharms., Inc. v. Watson Pharms., Inc., 765 F.3d 205, 210 (3d Cir. 2014) (internal quotation marks and citation omitted). "A plaintiff seeking a preliminary injunction must establish that he is likely to succeed on the merits, [16] that he is likely to suffer irreparable harm in the absence of preliminary relief, that the balance of equities tips in his favor, and that an injunction is in the public interest." Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 20 (2008).

         "[A] movant for preliminary equitable relief must meet the threshold for the first two 'most critical' factors: it must demonstrate that it can win on the merits ... and that it is more likely than not to suffer irreparable harm in the absence of preliminary relief." Reilly v. City of Harrisburg, 858 F.3d 173, 179 (3d Cir. 2017) (footnotes omitted). "If these gateway factors are met, a court then considers the remaining two factors and determines in its sound discretion if all four factors, taken together, balance in favor of granting the requested preliminary relief." Id. In assessing the four preliminary injunction factors, a court should consider that "[h]ow strong a claim on the merits is enough depends on the balance of the harms: the more net harm an injunction can prevent, the weaker the plaintiffs claim on the merits can be while still supporting some preliminary relief." Id. (citation and internal quotation marks omitted)).

         The moving party "bears the burden of producing evidence sufficient to convince the court that [the preliminary injunction factors weigh in favor of granting an injunction.]" ECRI v. McGraw-Hill, Inc., 809 F.2d 223, 226 (3d Cir. 1987). "[T]he decision whether to grant or deny injunctive relief rests within the equitable discretion of the district courts, and... such discretion must be exercised consistent with traditional principles of equity." eBay Inc. v. MercExchange, L.L.C., 547 U.S. 388, 394 (2006).

         III. ...

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