Opinion
CV-05-3200 (SJ) (JMA).
August 8, 2006
Ronald D. Degen, Esq., O'Rourke Degen, PLLC, New York, New York, Attorney for Plaintiff.
REPORT AND RECOMMENDATION
By Order dated February 16, 2006, the Honorable Sterling Johnson, Jr. referred the above-captioned matter to me, pursuant to 28 U.S.C. § 636(b), for a report and recommendation to determine the scope of relief, including injunctive relief, damages, attorney's fees, and costs, owed to plaintiffs Dunkin' Donuts Incorporated ("Dunkin' Donuts") and Baskin-Robbins USA, Co. ("Baskin-Robbins"), following the entry of a default judgment against defendant Peter Romanofsky, Inc. ("Romanofsky"), for alleged violations of sections 32 and 43 of the Lanham Act, 15 U.S.C. §§ 1114, 1125, and breach of contract.
For the reasons set forth below, I respectfully recommend that judgment be entered against defendant in the amount of $44,620.58, reflecting $33,688.83 in actual damages, and $10,931.75 for attorney's fees and costs. I further recommend that plaintiffs' request for a permanent injunction be denied.
I. BACKGROUND
"Where, as here, `the court determines that defendant is in default, the factual allegations of the complaint, except those relating to the amount of damages, will be taken as true.'" Chen v. Jenna Lane, Inc., 30 F. Supp. 2d 622, 623 (S.D.N.Y. 1998) (quoting 10A Charles Alan Wright, Arthur R. Miller Mary Kay Kane, Federal Practice and Procedure § 2688, at 58-59 (3d ed. 1998)).
Plaintiff Dunkin' Donuts is a subsidiary of Dunkin' Brands, Inc. (See Affidavit of Arthur Anastos, dated March 9, 2006 ("Anastos Aff."), ¶ 1.) Dunkin Donuts and its franchisees operate approximately 3,700 shops in the United States and 1,400 shops abroad. (Compl. ¶ 16.) These shops all feature Dunkin' Donuts' trade dress, which includes: a pink and orange color scheme, signage, menu boards, product selection and names, interior design, and doughnut cases. (Id.) Since approximately 1960, Dunkin' Donuts has held the exclusive license to use and allow others to use the Dunkin' Donuts name, trademark, and trade dress. (Id. ¶ 11.) During the past thirty years, plaintiff has spent $875 million promoting and advertising the Dunkin' Donuts name and trademark. (Id. ¶ 15.) Since its inception, Dunkin' Donuts shops have served hundreds of millions of customers. (Id. ¶ 16.)
Plaintiff Baskin-Robbins is also a subsidiary of Dunkin' Brands, Inc. (See Anastos Aff. ¶ 1.) Baskin-Robbins and its franchisees operate approximately 2,300 ice cream shops in the United States and 2,200 shops abroad. (Compl. ¶ 25.) Since approximately 1947, Baskin-Robbins has held the exclusive license to use and allow others to use the Baskin-Robbins name and trademarks. (Id. ¶ 19.) The Baskin-Robbins name has been widely advertised and is recognizable throughout the country. (Id. ¶ 24.) Since its inception, Baskin-Robbins shops have served millions of customers. (Id. ¶ 25.)
Plaintiffs entered into two franchise agreements with Romanofsky. The first franchise agreement authorized defendant to operate a combination Dunkin' Donuts shop and Baskin-Robbins ice cream store at 35-11 Queens Blvd., Long Island City, New York. (Compl. ¶ 28.) The parties signed this agreement on July 31, 2003. (See Long Island City Franchise Agreement ("LIC Contract"), annexed to Affidavit of Ronald D. Degen, dated Mar. 9, 2006 ("Degen Aff.") as Ex. A.) The second franchise agreement authorized defendant to operate a combination Dunkin' Donuts shop and Baskin-Robbins ice cream store at 239 Beach 20th Street, Far Rockaway, New York. (Compl. ¶ 30.) This agreement was signed on November 9, 2004. (See Far Rockaway Franchise Agreement ("Far Rockaway Contract"), annexed to Degen Aff. as Ex. B.) Both franchise agreements included a choice of law provision, which provided that the agreements "shall be governed by the law of the Commonwealth of Massachusetts. . . ." (LIC Contract ¶ 11.3; Far Rockaway Contract ¶ 11.3.)
Pursuant to the terms of the franchise agreements, Romanofsky was obligated to pay plaintiffs franchise fees (royalties) and advertising fees on a weekly basis. (See LIC Contract ¶¶ 4.3 — 4.4; Far Rockaway Contract ¶¶ 4.3-4.4.) Since these fees were based upon the gross sales of the location, defendant was also required to submit weekly sales reports to plaintiffs. (See LIC Contract ¶ 5.2.1; Far Rockaway Contract ¶ 5.2.1.) Defendant agreed to pay any collection costs, attorney's fees, and interest on unpaid weekly fees in the event of a default. (See LIC Contract ¶¶ 4.7, 9.3; Far Rockaway Contract ¶¶ 4.7, 9.3.) In the event that the franchise agreements were terminated, defendant was required to refrain from performing any act that was injurious or prejudicial to the goodwill associated with plaintiffs' names or trademarks. (See LIC Contract ¶ 8.0.1; Far Rockaway Contract ¶ 8.0.1.) Moreover, defendant would have to cease operation of the franchises, discontinue any association with the plaintiffs' names or trademarks, and pay any damages, costs, or expenses (including attorney's fees) associated with plaintiffs' enforcement of the termination. (See LIC Contract ¶¶ 9.4.2-9.4.8; Far Rockaway Contract ¶¶ 9.4.2-9.4.8.)
On May 25, 2005, plaintiffs sent Romanofsky notices of default regarding both franchises. (See Anastos Aff. ¶ 33.) Defendant owed $9,688.96 in weekly fees, late charges, and collection fees for the Long Island City franchise. (See Notice to Cure Letter-Long Island City, annexed to Degen Aff. as Ex. C.) Defendant also owed $8,857.24 in fees for the Far Rockaway franchise. (See Notice to Cure Letter-Far Rockaway, annexed to Degen Aff. as Ex. D.) Pursuant to the franchise agreements, Romanofsky had seven days cure these defaults. Seven days passed without any attempt by defendant to cure the defaults. (See Anastos Aff. ¶ 38.) On June 8, 2005, plaintiffs sent termination notices to Romanofsky regarding both franchises. (Id. ¶¶ 39 — 42.)
Defendant ignored the termination letters and continued to operate the two franchises. Romanofsky failed to submit payments or sales reports during this time period. (See Affidavit of Gary Zullig, date March 6, 2006 ("Zullig Aff."), ¶ 10.) Defendant finally closed and abandoned the franchises during the summer of 2005. (See Anastos Aff. ¶ 47.) Plaintiffs assert that defendant owes $28,913.03 in fees for the Long Island City franchise and $14,147.76 for the Far Rockaway Franchise, exclusive of attorney's fees and costs. (See Accounts Receivable Status Report, annexed to Degen Aff. as Ex. E.)
Since Romanofsky stopped sending sales reports, weekly fees were calculated using prior sales reports. (See Zullig Aff. ¶ 10.)
Plaintiffs commenced the instant action on July 5, 2005. After having been personally served with copies of the Summons and Complaint, defendants failed to answer or otherwise move with respect to the Complaint and the time to do so has expired. On August 3, 2005, plaintiffs filed a motion for default judgement. On August 12, 2005, defendant filed a petition for Chapter 11 protection in the United States Bankruptcy Court for the District of New Jersey, which automatically stayed the proceedings in the instant case. See 11 U.S.C. § 362. On September 26, 2005, United States Bankruptcy Judge Morris Stern lifted the stay and authorized plaintiffs to proceed with the instant action. A notation of default was entered by the Clerk of the Court on December 30, 2005. On February 16, 2006, Judge Johnson granted plaintiffs' motion for default judgment and referred this matter to me to determine the scope of relief, including injunctive relief, damages, attorney's fees, and costs, owed to plaintiffs.
II. DISCUSSION
A. Proof of Damages
Defendant's default amounts to an admission of liability. Therefore, all of the well-pleaded allegations in plaintiffs' Complaint pertaining to liability are deemed true. See Greyhound Exhibitgroup, Inc. v. E.L.U.L. Realty Corp., 973 F.2d 155, 158 (2d Cir. 1992), cert. denied, 506 U.S. 1080 (1993). Plaintiffs, however, must prove damages before the entry of a final default judgment. See Credit Lyonnais Sec., Inc. v. Alcantara, 183 F.3d 151, 155 (2d Cir. 1999); Au Bon Pain Corp. v. Artect, Inc., 653 F.2d 61, 65 (2d Cir. 1981). The district court must conduct an inquiry to ascertain the amount of damages with reasonable certainty. See Transatlantic Marine Claims Agency, Inc. v. Ace Shipping Corp., 109 F.3d 105, 111 (2d Cir. 1997). Rule 55(b)(2) of the Federal Rules of Civil Procedure provides that, when granting a default judgment, if "it is necessary to take an account or to determine the amount of damages or to establish the truth of any averment by evidence . . . the court may conduct such hearings or order such references as it deems necessary and proper. . . ." The Second Circuit has held that, under Rule 55(b)(2), "it is not necessary for the District Court to hold a hearing, as long as it ensured that there was a basis for the damages specified in the default judgment." Transatlantic Marine, 109 F.3d at 111 (citation and internal quotation marks omitted).
Plaintiff submitted the following documentation for the court's review: 1) a Memorandum of Law; 2) an affidavit from Arthur Anastos, Managing Counsel for Dunkin' Brands, Inc.; 3) an affidavit from Gary Zullig, a collections specialist for Dunkin' Brands, Inc.; and 4) an Attorney's Affidavit of Costs and Fees from Ronald D. Degen. I find that these documents constitute sufficient evidence to form the basis for an award of damages.
B. Actual Damages
Plaintiffs seek actual damages for defendant's breach of the franchise agreements. Plaintiffs' claim for breach of the franchise agreements is governed by Massachusetts law. In a diversity action, the effect of a choice of law clause in a contract is determined by applying the choice of law rules of the forum state. See Klaxon Co. v. Stentor Elec. Mfg. Co., 313 U.S. 487, 496 (1941). "In absence of a violation of a fundamental state policy, New York Courts generally defer to the choice of law made by the parties to a contract." Cargill, Inc. v. Charles Kowsky Res., Inc., 949 F.2d 51, 55 (2d Cir. 1991) (citing Woodling v. Garrett Corp., 813 F.2d 543, 551 (2d Cir. 1987) (interpreting New York law)). Accordingly, Massachusetts law governs this breach of contract claim.
Plaintiffs' Complaint also includes claims for trademark infringement, unfair competition, and trade dress infringement pursuant to sections 32 and 43 of the Lanham Act. Plaintiffs, however, have decided to not seek damages under the Lanham Act. (See Pls.' Mem. of Law at 6 n. 2.)
The Complaint asserts that subject matter jurisdiction exists based upon the following grounds: (1) federal question, pursuant to 28 U.S.C. § 1331; (2) diversity of citizenship, pursuant to 28 U.S.C. § 1332; (3) original jurisdiction over patents, pursuant to 28 U.S.C. § 1338; and (4) supplemental jurisdiction, pursuant to 28 U.S.C. § 1367(a). In an action for breach of contract, jurisdiction can be established by diversity alone. Here, the case is between citizens of different states. Plaintiff Dunkin' Donuts is a Delaware corporation with its principal place of business in Massachusetts. Plaintiff Baskin-Robbins is a California corporation with its principal place of business in Massachusetts. Defendant is a New Jersey corporation with its principal place of business in New York. (Compl. ¶¶ 5-7.) In the Complaint, the amount in controversy exceeds $75,000, exclusive of interest and costs, since plaintiffs sought damages for the breach of the franchise agreements and for damages under the Lanham Act. The fact that plaintiffs only elected to receive damages for the breach of the franchise agreements does not destroy jurisdiction. See Hall v. Earthlink Network, Inc., 396 F.3d 500, 506-07 (2d Cir. 2005) ("Generally, for purposes of diversity jurisdiction, the amount in controversy is established as of the date of the complaint and is not reevaluated based on post-filing events[,]" absent a showing of bad faith.).
In the event of a default or franchise termination, defendant was required to pay plaintiffs the costs and expenses associated with the default:
If FRANCHISEE fails to cure a default within any applicable time period following notice . . . or if this agreement is terminated as a result of FRANCHISEE'S default, FRANCHISEE shall pay to FRANCHISOR all damages, costs and expenses . . . incurred by FRANCHISOR as a result of any such default to termination. All such interest, damages, costs and expenses may be included in and form part of the judgment award to FRANCHISOR in any proceedings brought by FRANCHISOR against FRANCHISEE.(LIC Contract ¶ 9.3; Far Rockaway Contract ¶ 9.3.) Plaintiffs seek damages in the amount equal to the unpaid weekly fees and late charges for the period that defendant was still operating the two franchises. Under Massachusetts law, the "rule for damages in a breach of contract case is that the injured party should be put in a position they would have been had the contract been performed." Situation Mgmt. Sys., Inc. v. Malouf, Inc., 724 N.E.2d 699, 704, 430 Mass. 875, 880 (2000) (citations omitted). Here, the damages clause in the franchise agreements serves this objective. The damages that plaintiffs seek are those amounts to which they are entitled to receive for each week that defendant operated the franchises.
To support their claim for damages, plaintiffs have provided an affidavit from Gary Zullig, a collections specialist for Dunkin' Brands, Inc., along with an accounts receivable status report regarding defendant's two franchises. These records show the weekly fee charges for both the Dunkin' Donuts and Baskin-Robbins operations at each franchise. With respect to the Far Rockaway franchise, plaintiffs contend that defendant owes $14,147.76, reflecting $2,962.85 in weekly fees and $230.98 in late charges for the Baskin-Robbins operation, and $10,102.50 in weekly fees and $851.43 in late charges for the Dunkin' Donuts operation. (See Accounts Receivable Status Report, annexed to Degen Aff. as Ex. E.) With respect to the Long Island City franchise, plaintiffs claim that defendant owes $28,913.03, reflecting $1,381.61 in weekly fees and $104.47 in late charges for the Baskin-Robbins operation, and $25,663.16 in weekly fees and $1,763.79 in late charges for the Dunkin' Donuts operation. (See id.)
Plaintiffs state that defendant ceased use of the Dunkin' Donuts and Baskin-Robbins names and trademarks and abandoned both franchises and during the summer of 2005. (See Anastos Aff. ¶ 47.) The accounts receivable status report for the Long Island City franchise, however, indicates weekly fees and late charges from September 2005 through November 2005 for the Dunkin' Donuts operation, and late charges from September 2005 through November 2005 for the Baskin-Robbins operation. (See Accounts Receivable Status Report, annexed to Degen Aff. as Ex. E.) Since plaintiffs contend that defendant ceased using the Dunkin' Donuts and Baskin-Robbins names and trademarks during the summer of 2005, and have offered no evidence to justify the continued charge of weekly advertising and franchise fees, plaintiffs are not entitled to weekly fees or late charges for September 2005 through November 2005. Accordingly, I respectfully recommend that plaintiffs be awarded $33,688.83 in actual damages for defendant's breach of the franchise agreements.
This figure represents the sum of the outstanding weekly fees and late charges for the Dunkin' Donuts and Baskin-Robbins operations at both of the franchise locations after deducting $9,309.74 in weekly fees and late charges for the Dunkin' Donuts operation and $62.22 in late charges for the Baskin-Robbins operation at the Long Island City franchise for September 2005 through and November 2005.
C. Attorney's Fees and Costs
1. Attorney's Fees
Plaintiffs also seek an award of attorney's fees and costs pursuant to the franchise agreements. (See Pls.' Mem. of Law at 6.) Massachusetts has adopted the "American Rule" regarding attorney's fees. Under this rule, a prevailing party is not entitled to attorney's fees, "absent a contract or statute to the contrary." Police Comm'r v. Gows, 705 N.E.2d 1126, 1128, 429 Mass. 14, 17 (1999). Here, the franchise agreements provide that defendant will pay attorney's fees in the event of a default. (See LIC Contract ¶ 9.3; Far Rockaway Contract ¶ 9.3.)
When awarding attorney's fees, the court must ascertain the reasonableness of the award. "What constitutes a reasonable fee is a question that is committed to the sound discretion of the judge." Berman v. Linnane, 748 N.E.2d 466,469, 434 Mass. 301, 302-03 (2001). This determination is based, not upon amount in controversy, but a number of factors, including:
the nature of the case and issues presented, the time and labor required, the amount of damages involved, the result obtained, the experience, reputation and ability of the attorney, the usual price charged for similar services by other attorneys in the same area, and the amount of awards in similar cases.Id. at 469, 434 Mass. at 303. The court may also engage in a "lodestar" analysis to determine what amount is reasonable. T D Video, Inc. v. City of Revere, 848 N.E.2d 1221, 1235, 66 Mass. App. Ct. 461, 476 (Mass.App.Ct. 2006) (citation omitted). Under the "lodestar" method, attorney's fees are determined by taking "the number of hours reasonably expended on the litigation multiplied by a reasonable hourly rate." Hensley v. Eckerhart, 461 U.S. 424, 433 (1983). After making its calculation, "the court then may adjust the fee upward or downward based on other considerations, including the results obtained." T D Video, 848 N.E.2d at 1236, 66 Mass. App. Ct. at 477 (citing Hensley, 461 U.S. at 434-35.)
To support plaintiffs' request for attorney's fees, attorney Ronald D. Degen, of O'Rourke Degen, PLLC, submitted an affidavit and contemporaneous time records. In his affidavit, Mr. Degan affirms that he and Scott G. Goldfinger, expended a total of 42.2 hours during the pendency of this action, amounting to $11,816.00. (See Degen Aff. ¶¶ 10-12.) Mr. Degen bills at an hourly rate of $280.00 and Mr. Goldfinger, an associate, bills at an hourly rate of $230.00. (Id. ¶¶ 7, 9.) The contemporaneous time records, however, reveal that counsel expended a total of only 36 hours, amounting to $10,070.00. (Id., Ex. H.) According to the these records, counsel expended a total of 36 hours, reflecting, inter alia, 8.3 hours in telephone calls, 7.3 hours of correspondence, 5.1 hours reviewing documents, 3.2 hours drafting and filing the Complaint, 1.5 hours drafting and filing plaintiffs' Motion for Default, 7.5 hours drafting, revising, and filing other documents, and 2.7 hours of research. (Id.) Having reviewed the attorney affidavit and contemporaneous time records, I find that both the total hours expended and the hourly billing rates are reasonable. Accordingly, I respectfully recommend that plaintiff be awarded $10,070.00 for reasonable attorney's fees.
Mr. Degen did not submit contemporaneous time records for the 6.2 hours of work completed in March of 2006. Since I am unable to assess the reasonableness of the hours expended and the work performed during this time period, I recommend that these hours be excluded from plaintiffs' fee request. Furthermore, Mr. Degen states that the legal fees incurred from February 15, 2005 through February 28, 2006 amount to $10,080.00 for 36 hours of work. During this time period, however, Mr Degan billed only 35.8 hours at a rate of $280 per hour. The remaining 0.2 hours was billed by Mr. Degan's associate at a rate of $230.00 per hour. Therefore, the correct total of attorney's fees incurred for the period February 15, 2005 through February 28, 2006 is $10,070.00.
It should be noted that the billing records also include eight flat-rate charges of $100 each for the preparation of notices to cure and notices of termination. This $800.00 is not included in plaintiffs' request for attorney's fees. (See Degen Aff. ¶ 12; Pls.' Mem of Law at 6.) Furthermore, Mr. Degen's affidavit states that he "submitted bills [to his clients] for $10,080.00 in legal fees" incurred through February 28, 2006, all of which have been paid. (Id. ¶ 10.) Since there appears to be some discrepancy as to whether Mr. Degen's clients were actually charged for, or paid, this $800.00, I recommend that it be excluded from plaintiffs' award for attorney's fees.
2. Costs
Pursuant to the franchise agreements, plaintiffs seek reimbursement for costs in the amount of $861.75, which includes $250.00 for the court filing fee, $100.00 for service of process, and $511.75 in miscellaneous costs, such as photocopies, overnight mail, and a lien search. (See Degen Aff., Ex. H.) Plaintiffs submitted documentary evidence to substantiate their request for these costs. I find these amounts to be reasonable. Accordingly, I respectfully recommend that plaintiffs' request for $861.75 in costs be granted.
D. Permanent Injunction
Plaintiffs also request a permanent injunction to enforce the termination of the franchise agreements and to enjoin defendant from using plaintiffs' names, trademarks, or trade dress. (See Zullig Aff. ¶ 9).
A court may "issue an injunction on a motion for default judgment provided that the moving party shows that (1) it is entitled to injunctive relief under the applicable statute and (2) it meets the prerequisites for the issuance of an injunction." King v. Nelco Indus., Inc., No. 96-CV-4177, 1996 WL 629564, *1 (E.D.N.Y. Oct. 23, 1996). Section 34(a) of the Lanham Act provides courts with the "power to grant injunctions, according to the principles of equity and upon such terms as the court may deem reasonable . . . to prevent a violation under subsection (a), (c), or (d) of section 1125. . . ." 15 U.S.C. § 1116(a). To obtain a permanent injunction, however, "plaintiff[s] must [also] demonstrate actual success on the merits and irreparable harm." See Hard Rock Café Int'l. (USA) Inc. v. Morton, No. 97-Civ. 9483, 1999 WL 701388, at *4 (S.D.N.Y. Sept. 9, 1999) (citing Wojnarowicz v. Am. Family Ass'n, 745 F. Supp. 130, 148 n. 13 (S.D.N.Y. 1990).
Defendant's default constitutes an admission of liability; therefore, plaintiffs have achieved actual success on the merits. Plaintiffs, however, have failed to establish irreparable harm. "In a trademark case, irreparable injury is established where `there is any likelihood that an appreciable number of ordinarily prudent purchasers are likely to be misled, or indeed simply confused, as to the source of the goods in question.'" Lobo Enters., Inc. v. Tunnel, Inc., 822 F.2d 331, 333 (2d Cir. 1987) (citation omitted). Plaintiffs contend that defendant's continued operation of two franchises following the termination of the franchise agreements caused irreparable harm by reason of trademark dilution and damage to plaintiffs' reputation and goodwill. (See Anastos Aff. ¶ 49.) Plaintiffs also assert that they were irreparably harmed because they lost control over the standard of quality regarding the trademarks and the public was misled into believing that defendant's operations were authorized franchises. (Id.) Defendant ceased operations and abandoned both franchises almost one year ago, therefore, there is no longer a threat of trademark dilution, consumer confusion, or injury to plaintiffs' reputation and goodwill. See e.g., Dunkin' Donuts, Inc. v. N. Queens Bakery, Inc., 216 F. Supp. 2d 31, 40 (E.D.N.Y. 2001) ("if defendants are presently operating . . . as Dunkin' Donuts shops, despite a breach and termination of the franchise agreements, plaintiffs are being irreparably harmed. . . .") (emphasis added). Accordingly, I respectfully recommend that plaintiffs' request for injunctive relief be denied.
III. CONCLUSION
For the above reasons, I respectfully recommend that judgment be entered against defendant in the amount of $44,620.58, reflecting $33,688.83 in actual damages, as well as $10,931.75 for attorney's fees and costs. I further recommend that plaintiffs' request for a permanent injunction be denied.Any objections to this Report and Recommendation must be filed with the Clerk of the Court, with a copy to the undersigned, within ten (10) days of receipt of this Report. Failure to file objections within the specified time waives the right to appeal the District Court's order. See 28 U.S.C. § 636(b)(1); Fed.R.Civ.P. 72, 6(a), 6(e).