AZ Court Grants Injunctive Relief to Garduno in Restaurant Trademark Suit Versus Tortilla, Inc.

Holding:

In this dispute over the restaurant mark "Garduno's," the U.S. District Court for the District of Arizona issued injunctive relief to plaintiff Garduno's of Arizona, LLC. Defendant Tortilla, Inc. was the owner of this disputed mark, and licensed defendant to use it in the latter's chain of restaurants. Claiming that plaintiff had failed to pay royalties, defendant sent a letter purporting to terminate the license agreement. In response, plaintiff filed the instant suit, arguing that defendant should be restrained from terminating its right to use the "Garduno's" name. The district court granted plaintiff's motion for preliminary injunction, concluding that it had established a probability of success on the merits and the prospect of irreparable harm. In addition, the district court found that plaintiff was able to demonstrate that the hardship of forcing to close its restaurants outweighed the hardship defendant would incur if plaintiff would continue operating under the "Garduno's" name.

Detailed Summary:

Plaintiff Garduno’s of Arizona, LLC, operated three restaurants in Maricopa County, Arizona, using the “Garduno’s” name. Defendant Tortilla, Inc., a New Mexico corporation, owned the rights to the Garduno’s name and had licensed them to plaintiff. Opinion, p. 2.

Defendant argued that plaintiff has breached the terms of the license agreement by failing to pay royalties owed to defendant. Plaintiff responded by filing this lawsuit, alleging that defendant has engaged in various wrongs and should be enjoined from terminating plaintiff’s right to use the Garduno’s name. Id.
Plaintiff filed an Application for Preliminary Injunction to prevent defendant from terminating the license. Id.

Plaintiff asserted that defendant’s attempt to terminate the license agreement was invalid. Id., p. 3. Plaintiff also argued that it entered into the license agreement on January 1, 2003, and agreed to pay a royalty fee of 1% of all sales at plaintiff’s Arizona stores. Id.

On the other hand, defendant argued that plaintiff’s purported license agreement was a fraud and that the parties in fact entered into a different license agreement that called for the payment of 4% of sales. Id. On May 29, 2008, defendant sent plaintiff a letter (the “Notice Letter”) demanding the payment of $1,377,315.88 in delinquent fees and threatening to terminate plaintiff’s rights in the Garduno’s name if the fees were not paid. When plaintiff did not make the payment, defendant sent plaintiff a June 17, 2008 letter purporting to terminate the license agreement and plaintiff’s right to use the Garduno’s trademarks, trade name, and trade dress (the “Termination Letter”). Id.

The parties sharply disagreed on whether plaintiff’s or defendant’s version of the license agreement was valid. Each party accused the other of forgery. Id.The parties did not dispute, however, that they entered into an earlier agreement, in 1995, that licensed to plaintiff the right to use the Garduno’s name. Their disagreement was over which version of the license agreement replaced the 1995 contract. Id.

Resolving the contending positions of the parties, the district court found that the factors of irreparable harm and balance of hardship weighed in plaintiff’s favor. On this basis, it granted plaintiff’s application for preliminary injunction.

With regard to the factor of irreparable, the district court specifically found that plaintiff’s restaurants have been in business for some years and have generated substantial customer good will. This good will is associated with plaintiff’s Arizona business operations and quality, not just with the Garduno’s name owned by defendant.

Courts have recognized that “the loss of such good will could not readily be recouped and is mostly noncompensable. That, plus the more compelling prospect of the loss of livelihood on the part of [Plaintiff’s] employees tips the balance on the issue of irreparable harm[.]” Id., p. 4, citing American Standard, Inc. v. Meehan, 517 F. Supp.2d 976, 989 (N.D. Ohio 2007).

With regard to the factor of balance of hardship, the district court found that it should weigh in favor of plaintiff.  The district court reasoned that defendant’s termination seeks to prevent Plaintiff from using the Garduno’s name and to require plaintiff to change its menu and decor. Such a termination would compel plaintiff to revamp the restaurants that have engendered substantial good will, restaurants in which plaintiff had invested millions of dollars. Id.  The district court thus concluded that the hardship of forcing plaintiff to close its restaurant substantially outweighs the hardship defendant would incur if plaintiff continues operating under the Garduno’s name.

On the basis of the foregoing, the district court granted plaintiff’s application for injunctive relief.  The preliminary injunction shall be effective upon the posting of a security in the amount of $10,000.00.

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