Franchisor Retaliation Okay if Franchisor 'More Believable' than Franchisee

In Percy Pooniwala, and Dinaz Pooniwala,v. Wyndham Worldwide Corp., Super 8 Worldwide, Inc., Travelodge Hotels, Inc., and Days Inn Worldwide, the matter was before the Court on Plaintiffs Percy Pooniwala's ("P. Pooniwala") and Dinaz Pooniwala's ("D. Pooniwala") (collectively, "Plaintiffs") Motion for Preliminary Injunction against Defendants Wyndham Worldwide Corp. to enjoin Defendants from taking actions relating to various franchise agreements. For the reasons set forth below, the Court denied the motion.

Plaintiffs had entered into a number of franchise agreements for various hotels with Defendants over the years. Wyndham Hotel Group LLC ("Wyndham Group") is the operating entity associated with Defendants Super 8, Travelodge, and Days Inn, as well as Ramada Worldwide Inc. Generally, Plaintiffs alleged that as a result of a lawsuit between Plaintiffs and Ramada Worldwide Inc. relating to the Ramada Brooklyn Park, also known as Grand Rios Water Park Resort ("Grand Rios"), Defendants were retaliating against Plaintiffs at a number of other properties franchised by Plaintiffs.

The Court considered four primary factors in determining whether any preliminary injunction request should be granted: (1) the threat of irreparable harm to the moving party; (2) the state of balance between the alleged irreparable harm and the harm that granting the injunction would inflict on the other party; 3) the likelihood of the moving party's success on the merits; and (4) the public interest. This analysis, according to the Court, was designed to determine whether the Court should intervene to preserve the status quo until it decided the merits of the case.

The primary focus of Plaintiffs' request for injunctive relief related to violations of the Minnesota Franchise Act. Under the Minnesota Franchise Act, a franchisor can terminate a relationship, but a termination must be proper, and must conform to the requirements of the Minnesota Franchise Act. Specifically, termination must be for good cause. "Good cause" is defined, in turn, by the MFA, as: failure by the franchisee to substantially comply with the material and reasonable franchise requirements imposed by the franchisor including, but not limited to: ... (3) voluntary abandonment of the franchise business; ... or (5) any act by or conduct of the franchisee which materially impairs the good will associated with the franchisor's trademark, trade name, service mark, logotype or other commercial symbol.

Defendants argued that because a franchisor has the power to properly terminate the relationship when the terms of a franchise agreement are violated, and because the franchisors allegedly showed that their terminations were proper and for "good cause," Plaintiffs cannot demonstrate a likelihood of success on the merits. The Court agreed with Defendants. "It is not disputed that Defendants had a right to terminate under the franchise agreements for failure to meet quality standards. At this stage of the litigation, Plaintiffs cannot show a likelihood of success on the merits sufficient to tip the balance in favor of granting an injunction."

In essence, even though the franchisee presented evidence that the QA inspections were defective, the Court refused to credit such evidence. "Though Plaintiffs present evidence that they repeatedly and strenuously contested the QA inspection evaluations and determinations as failing to meet the requirements under the agreement and as not constituting good cause, Defendants present even more evidence supporting their claims of good cause for the terminations. In this regard, the Court stated "Defendants point to a long history of QA inspection failures-six failures for the Super 8 Roseville and eight failures for the Travelodge Burnsville-in support of their claim that the terminations were supported by good cause. Specifically, Defendants present documents showing that the Super 8 Roseville failures date back to January 2012 and continued up to the final failure in December 2013, and that the Travelodge Burnsville failures date back to November 2010 and also continued up to the final failure in December 2013."

The Court also explicitly rejected the franchisee's claim of retaliation: Defendants also present allegations to rebut Plaintiffs' arguments that Defendants' failure to follow proper QA processes and Defendants' improper terminations amount to purposeful retaliation. Defendants allege that Plaintiffs continue to run the Days Inn Burnsville, and continue to be allowed to remedy QA failures at that facility. Plaintiffs also appear to currently continue to operate an entirely different site without QA concerns. Accordingly, the Court concludes that Plaintiffs have failed to sufficiently demonstrate a likelihood of success on the merits and therefore this factor weighs against granting the "extraordinary remedy" of a preliminary injunction.

The Court also concluded that the franchisees were not able to show 'irreparable harm', a requirement to obtain injunctive relief. As the Court stated: "Movant must establish that irreparable harm will result if injunctive relief is not granted and that such harm will not be compensable by money damages. The irreparable harm must be "certain and imminent such that there is a clear and present need for equitable relief."

The Court in turn examined the detailed explanations of each of the parties as to how the granting or denial of the requested preliminary injunctive relief would impact upon them in particular. "In this case, both parties are being significantly harmed by the conduct alleged by the parties. However, the Court concludes that in considering the balance of harms, the scales do not 'tip[] decidedly toward' the moving party. Thus, though Plaintiffs can show irreparable harm, the balance of the harms factor weighs slightly against granting a preliminary injunction."

The Court on this legal issue accepted entirely the franchisor's explanation - and rejected just as completely the franchisee's rendition -- of irreparable harm.

Plaintiffs argue that they will suffer, and are already suffering, irreparable harm unless: (1) the termination of their two franchise agreements is stopped; and (2) the assignment of the outstanding franchise agreement goes forward. Plaintiffs contend that without a preliminary injunction, even if Plaintiffs ultimately win on the merits, the loss of goodwill and customers will not be recoverable and could not be adequately compensated by money damages. Specifically, Plaintiffs point to the damage to their customer relations and loss of customers and goodwill already suffered since Defendants shut down reservation systems and caused a number of customers to be diverted to other hotels. Plaintiffs argue that this is particularly true if they lose large, long-standing, key accounts because customers are being diverted elsewhere. Based on the above, the Court concludes that the loss of goodwill, significant loss of customers, and lost customer relationships are sufficient to constitute irreparable harm.

Defendants, however, counter that when weighing the balance of harms, the scales tip in favor of Defendants. Defendants argue that if a preliminary injunction is granted, they will suffer harm due to the ongoing trademark infringement caused by Plaintiffs' continued use of their marks and names at properties that are associated with poor quality as found in customer reviews and that repeatedly fail QA inspections. The Court agrees that this constitutes harm. Also, where there is a likelihood of confusion by improper use of marks and names, irreparable injury may be established. Finally, allowing Plaintiffs, who allegedly cause the harm outlined above, to obtain a license for a new franchise would cause similar harm to Defendants.

See Percy Pooniwala, and Dinaz Pooniwala,v. Wyndham Worldwide Corp., Super 8 Worldwide, Inc., Travelodge Hotels, Inc., and Days Inn Worldwide, Inc.,¶15,286. U.S. District Court, D. Minnesota. Civil No. 14-778