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IHOP Restaurants LLC v. Moeini Corp.

United States District Court, S.D. Alabama, Southern Division

February 7, 2018

IHOP RESTAURANTS LLC, a Delaware limited-liability company;
v.
MOEINI CORPORATION, Defendant. and IHOP FRANCHISOR LLC, a Delaware limited-liability company, Plaintiffs,

          ORDER

          KRISTI K. DuBOSE CHIEF UNITED STATES DISTRICT JUDGE

         This action is before the Court on the Complaint, Motion for Preliminary Injunction, and Brief in support filed by Plaintiffs IHOP Restaurants, LLC and IHOP Franchisor, LLC (IHOP), the response filed by Defendant Moeini Corporation, and IHOP's reply (docs. 1-3, 12, 15). The Court heard the parties on January 29 and 30, 2018. Upon consideration of the motion, response and reply and the evidence presented at the hearing, and for the reasons set forth herein, the Motion for Preliminary Injunction is GRANTED.

         I. Factual and procedural background

         Defendant IHOP Franchisor is a franchisor of nationally and internationally recognized restaurants with a system of approximately 400 franchisees operating over 1, 600 restaurants (doc. 3-1; IHOP Senior Manager of Franchise Development hearing testimony). Defendant IHOP Restaurants has adopted and used in interstate commerce and licensed to IHOP Franchisor and indirectly to authorized franchisees certain trademarks (the Marks), which have been registered with the United States Patent and Trademark Office, in connection with the operation of IHOP restaurants (doc. 3-1, p. 3-4).

         Mehdi Moeini began working with IHOP corporation in 1996. After working his way up to a management position, Moeni purchased his first IHOP restaurant franchise in 2004. Moeini Corporation was formed in 2006 and now owns or operates five IHOP restaurants. Two restaurants are located in Florida and three are located in Alabama.

         On November 5, 2010, Moeini and IHOP executed the Franchise Agreement for the restaurant located at 1605 South McKenzie Street, Foley, Alabama. The agreement was later assigned to Moeini Corporation. The parties agreed to an initial term of twenty years after the restaurant opened (doc. 3-2, Exhibit 1). On February 17, 2015, Moeini Corporation and IHOP executed the Franchise Agreement for the restaurant located at 4375 Rangeline Road, Mobile, Alabama. The parties agreed to an initial term that would expire on November 13, 2027 (doc. 3-2, Exhibit 3). On March 13, 2015, Moeini Corporation and IHOP executed the Franchise Agreement for the restaurant located at 30179 Eastern Shore Court, Spanish Fort, Alabama. The parties agreed to an initial term of twenty years after the restaurant opened (doc. 3-2, Exhibit 4).

         IHOP, through the Franchise Agreements licensed Moeini Corporation to use the IHOP Marks to identify the goods and services in the three franchised IHOP restaurants. The Marks distinguish IHOP and its franchisees from others who are not authorized or licensed to use the Marks. To insure uniformity of operation and protection of the Marks, the Franchise Agreements also require Moeini Corporation to strictly comply with IHOP's standard operating procedures, policies and rules, etc., set forth in the Franchise Agreements or in operations manual or operations bulletins. See Franchise Agreements § 10.03, captioned "Compliance with Franchisor's Specifications", § 10.05, captioned "Compliance with Applicable Law and Operations Bulletins". The operations bulletins are defined to "mean the Franchisor's Operations Manual, and all bulletins, notices, and supplements thereto, and all ancillary manuals, specifications and materials, as the same may be amended and revised from time to time." Franchise Agreements § 1.02. These documents are made available to IHOP franchisees through the IHOP password protected website and apply to all aspects of operating an IHOP restaurant.

         Section 10.05 sets forth, in relevant part, as follows:

Franchisee shall operate the Franchised Restaurant in strict compliance with all Applicable Laws and with the standard procedures, policies, rules and regulations established by Franchisor and incorporated herein, or in Franchisor's Operations Bulletins. Such standard procedures, policies, rules and regulations established by Franchisor may be revised from time to time as circumstances warrant, and Franchisee shall strictly comply with all such procedures as they may exist from time to time as though they were specifically set forth in this Agreement and when incorporated in Franchisor's Operations Bulletins the same shall be deemed incorporated herein by reference. By way of illustration and without limitation, such standard procedures, policies, rules and regulations may or will specify accounting records and information, payment procedures, specifications for required supplies and purchases, including Trademarked Products, hours of operation, advertising and promotion, cooperative programs, specifications regarding required insurance, minimum standards and qualifications for employees, design and color of uniforms, menu items, methods of production and food presentation, including the size and serving thereof, standards of sanitation, maintenance and repair requirements, specifications of furniture, fixtures and equipment, flue cleaning, and fire prevention service, appearance and cleanliness of the premises, accounting and inventory methods and controls, forms and reports, and in general will govern all matters that, in Franchisor's judgment, require standardization and uniformity in all IHOP Restaurants. Franchisor or its Affiliate will furnish Franchisee with Franchisor's current Operations Bulletins upon the execution of this Agreement.

Franchise Agreements § 10.05.

         To ascertain whether an IHOP franchisee! restaurant is in compliance with the standards set out in the operations bulletins or policy manuals, IHOP's franchise business consultants perform periodic unannounced operations evaluation (OEs) (except in certain training and instruction circumstances) whereby its franchise business consultants will evaluate the franchisee's restaurant. (IHOP Division Vice President hearing testimony). The franchise business consultants rate all aspects of restaurant operation and during the relevant time period, 80% compliance on the OE is a passing score. IHOP also retains third party contractors, in this instance Ecosure, that periodically inspect food safety and cleanliness and provide an operations assessment report (OAR). As with the OEs, the inspections are unannounced and 80% compliance would pass the inspection.

         At the end of 2016, Moeini Corporation lost 19 employees from the Alabama restaurants. Included were the district manager and two IHOP certified managers who left within a month. The managers then recruited other managers and employees from the restaurants. Moeini Corporation attempted to find new qualified employees to manage and work at the restaurants, but the attempt was not met with great success.

         Immediately, the three restaurants began to experience deficiencies in operation[1] All three restaurants failed the OEs conducted in December 2016 (doc. 3-1, p. 9; 11). All three restaurants passed the announced OEs for February 2017, but then failed the OEs for June and August 2017 (Id.)[2] Also, the Spanish Fort IHOP failed the OARs conducted on August 1, 2017 (doc. 3-1, Exhibit 15).[3] The Mobile IHOP failed the OARs conducted on July 28, 2017 (doc. 3-1, Exhibit 17).[4] The Foley IHOP failed the OARs conducted on June 22, 2017 (doc. 3-1, Exhibit 18).[5]

         Additionally, during 2017, IHOP received 305 customer complaints regarding these three restaurants, which greatly exceeded the national norm for IHOP restaurants. (See Subsection B). The complaints covered many aspects of the restaurants' operations, but of primary concern to IHOP were the complaints related to food preparation, food service, food storage, food safety, cleanliness and sanitation. IHOP's Division Vice President testified that the restaurants licensed to Moeini Corporation had the highest number of complaints in the IHOP system.

         If a franchisee commits a material breach of the franchise agreement, IHOP must provide written notice of the default and a period of time to cure the material breach. See Franchise Agreements § 12.01 "Right of Termination after Notice of Default." If the franchisee fails to cure within the time period, then the franchise agreement terminates at IHOP's election without further notice or opportunity to cure. Id. At this point, the franchisee must, pursuant to the franchise agreements, discontinue use of the IHOP Marks and not operate the restaurants in any manner that would give the public the impression that the restaurant was authorized or licensed by IHOP.

         On June 22, 2017, IHOP wrote Moeni Corporation that the three Alabama restaurants were rated as "F" on IHOP's operation rating system.[6] IHOP pointed out two primary factors that contributed to the rating: The failure to obtain Certified General Managers at the Spanish Fort and Mobile restaurants within the time frame provided and failure of the Corporate owner or its District Manager to visit the restaurants. IHOP stated that it would send consultants to work with Moeini Corporation to improve the restaurants. (IHOP Hearing Exhibit 42).

         On August 4, 2017, IHOP wrote Moeini Corporation that the "results of your Operations are alarming and the Guest Complaints are the highest in the IHOP system. Additionally, your OAR results ... are below IHOP standards[.]" (IHOP Hearing Exhibit 43). Again, IHOP offered assistance to improve the three restaurants. The letter also indicated that IHOP understood that Moeini Corporation was pursuing the sale of its IHOP locations, but to date no sale was indicated. (Id.)

         On August 23, 2017, IHOP sent Moeini Corporation a notice of default letter (doc. 3-4, p. 19-20). IHOP notified Moeini Corporation that it had breached its "obligations under Section 10.05 of the respective Franchise Agreements" because it had failed to "operate the Restaurants in compliance with the standard procedures, policies, rules and regulations established by IHOP" as shown by the failing scores (Id., p. 20).

         IHOP stated as follows:

Pursuant to Section 12.01, you are hereby notified of your default of the Franchise Agreements, and of IHOP's intent to terminate all 3 of your Franchise Agreements if you fail to cure within 30 days of receipt of this Notice. IHOP hereby demands that you fully comply with all terms and conditions of the Franchise Agreements and pass the next OEs for each restaurant to cure.

(Id.).

         All three restaurants failed the OEs conducted in September 2017 (doc. 3-1, p. 8). The Foley IHOP and Spanish Fort IHOP were inspected on September 19, 2017 and the Mobile IHOP was inspected on September 20, 2017. As of late September 2017, after the expiration of the 30-day period to cure, Moeini Corporation had not ...


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