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Dunkin' Donuts Franchised Restaurants LLC v. Rijay

May 16, 2007

DUNKIN' DONUTS FRANCHISED RESTAURANTS LLC, ECF CASE A DELAWARE LIMITED LIABILITY COMPANY, BASKIN-ROBBINS FRANCHISED SHOPS LLC, A DELAWARE LIMITED LIABILITY COMPANY, DB REAL ESTATE ASSETS I LLC, A DELAWARE LIMITED LIABILITY COMPANY, DD IP HOLDER LLC, A DELAWARE LIMITED LIABILITY COMPANY, BR IP HOLDER LLC, A DELAWARE LIMITED LIABILITY COMPANY, PLAINTIFFS,
v.
RIJAY, INC., A NEW YORK CORPORATION, MAHENDRA G. PATEL, A RESIDENT OF NEW YORK, NITA PATEL, A RESIDENT OF NEW YORK, DEFENDANTS.



The opinion of the court was delivered by: Conner, Sr. D.J.

OPINION AND ORDER

Plaintiffs Dunkin' Donuts Franchised Restaurants LLC ("Dunkin' Donuts"),*fn1 Baskin-Robbins Franchised Shops LLC ("Baskin-Robbins"),*fn2 DB Real Estate Assets I LLC ("DB Real Estate"),*fn3 DD IP Holder LLC ("DD IP Holder")*fn4 and BR IP Holder LLC ("BR IP Holder")*fn5 bring this action against Rijay, Inc. ("Rijay"),*fn6 Mahendra G. Patel ("M. Patel") and Nita Patel ("N. Patel")*fn7 for breach of contract, as well as unfair competition and trademark and trade dress*fn8 infringement in violation of the Lanham Act, 15 U.S.C. §§ 1051, et seq.*fn9 Plaintiffs allege that Rijay entered into franchise agreements with Dunkin' Donuts and Baskin-Robins pursuant to which it operated Dunkin' Donuts and Baskin-Robins franchise stores, and that they subsequently terminated the agreements because of defendants' repeated failures to comply with labor and tax laws governing the stores' operations. Plaintiffs claim that defendants have continued to operate their stores with the use and enjoyment of the Dunkin' Donuts and Baskin-Robins trademarks, trade names and trade dress in violation of the agreements and the Lanham Act.

Defendants commenced a related action in New York State Supreme Court seeking, inter alia, a declaratory judgment that they are not in breach of the franchise agreements and an injunction preventing the termination of the contracts. Defendants now move to dismiss this action in favor of the parallel state court proceeding, or, in the alternative, defendants request that we stay this litigation pending the resolution of the state court action. For the foregoing reasons, defendants' motion is denied.

BACKGROUND

Plaintiffs' Complaint alleges the following facts. Rijay, as a franchisee of plaintiffs, operated Dunkin' Donuts shops in Goshen, New York (the "Goshen shop") pursuant to a franchise agreement dated April 7, 2003 (the "Goshen Franchise Agreement"), and in Harriman, New York (the "Harriman shop") pursuant to a franchise agreement dated November 27, 2004 (the "Harriman Franchise Agreement"). (See id. ¶ 7.) In addition, Rijay operated "combo" shops*fn10 offering both Dunkin' Donuts and Baskin-Robins' products in Chester, New York (the "Chester Shop") pursuant to a franchise agreement dated June 17, 2003 (the "Chester Franchise Agreement"), and in New Paltz, New York (the "New Paltz Shop") pursuant to a franchise agreement dated June 17, 2003 (the "New Paltz Franchise Agreement"). (See id. ¶ 8.)

Pursuant to each franchise agreement, defendants were granted the right to use the trademarks, trade names and trade dress of each respective establishment. (See id. ¶¶ 7-8.) Each franchise agreement contained a provision providing that the "'FRANCHISEE shall be in default under this Agreement . . . [i]f any other franchise agreement between FRANCHISEE and FRANCHISOR or any affiliated entity is terminated by reason of FRANCHISEE's default thereunder . . . .'" (See Complt. ¶ 28 (alterations in original).) Thus, the breach and resulting termination of one franchise agreement constituted grounds for the termination of all the other franchise agreements and each of them individually. (See id.) The agreements also contained cross-guarantee clauses under which defendants are each jointly and severally liable for each other's defaults. (See id. ¶ 30.)

In addition, DB Real Estate leased to defendants the premises where the New Paltz Shop was located, and the lease (the "New Paltz Lease") provided DB Real Estate the right to terminate the lease upon the termination of the New Paltz Franchise Agreement. (See id. ¶ 31.) Upon termination of the New Paltz Lease, plaintiffs have the right to physically repossess the premises at which the New Paltz shop is located. (See id. ¶ 32.) Defendants are obligated to pay DB Real Estate all damages, with interest, costs and expenses, including reasonable attorneys' fees, incurred by reason of any default or termination of the New Paltz Lease, which M. Patel agreed to personally guarantee. (See id. ¶¶ 33-34.)

Plaintiffs allege that defendants have materially breached the franchise agreements, thereby allowing plaintiffs' to terminate the agreements. (See id. ¶ 40.) Specifically, they allege that defendants have repeatedly and knowingly "participated in a fraudulent scheme to avoid paying federal and state payroll taxes due and owing to the [Internal Revenue Service] and the State of New York, in violation of employee income tax withholding laws and regulations." (See id. ¶ 37.) Plaintiffs also allege that defendants have repeatedly and knowingly failed to pay their employees overtime compensation for work in excess of forty hours per week in the franchised shops. (See id. ¶ 36.) Lastly, they allege that defendants "repeatedly failed to maintain accurate financial records each week." (See id. ¶ 38.)

Consequently, plaintiffs sent to defendants a "Notice of Default and Termination" (the "Notice") terminating each of the franchise agreements effective immediately upon defendants' receipt of the Notice. (See id. ¶ 41.) The Notice stated the aforementioned grounds for termination and requested that defendants immediately comply with their post-termination obligations as set forth in the respective franchise agreements.*fn11 (See id.) Plaintiffs allege that, despite the Notice, defendants have continued to use the trademarks, trade names and trade dress of both Dunkin' Donuts and Baskin-Robins, and that their continued use violates the Lanham Act. (See id. ¶¶ 42, 53, 57, 62.)

Plaintiffs filed this action on October 10, 2006 and served the Summons and Complaint on all defendants on October 13, 2006. The Complaint seeks: (1) a declaratory judgment stating that defendants' conduct violated the terms of the franchise agreements and constitutes grounds for termination of the agreements and the New Paltz Lease; (2) an injunction enforcing the termination of the franchise agreements and New Paltz Lease, enjoining defendants from using the Dunkin' Donuts and Baskin-Robins trademarks, trade names and trade dress and directing defendants to comply with all of their post-termination obligations as provided in the franchise agreements and the New Paltz Lease; (3) prejudgment interest in accordance with 15 U.S.C. § 1117; (4) costs and attorneys' fees incurred in connection with this action as provided for under the franchise agreements and the Lanham Act, 15 U.S.C. § 1117; and (5) such other relief that the Court deems just and proper. (See id. (Prayer for Relief).)

On September 29, 2006, shortly before the filing of the present action, defendants filed a related action in New York Supreme Court, entitled Rijay, Inc., Mahendra Patel and Nital Pitel v. Dunkin' Brands, Inc., Dunkin' Donuts, Inc., Sean Riley and Richard Basgen,*fn12 but did not serve the Complaint upon the defendants until November 1, 2006. (See Pls. Mem. Opp. Defs. Mot. at 10.) Defendants' state court action seeks a declaratory judgment that they are not in breach of the franchise agreements and an injunction enjoining their termination. In addition to Dunkin' Donuts, it names as defendants Sean Riley*fn13 and Richard Basgen, the Franchise Service Manager for Dunkin' Brands, Inc. On November 21, 2006, Dunkin' Donuts and Basgen moved to dismiss the state court action pursuant to N.Y. C.P.L.R. 3211(a)(4), which provides for dismissal or other appropriate relief when "there is another action pending between the same parties for the same cause of action in a court of any state or the United States." (See Pls. Mem. Opp. Defs. Mot., Ex. 1.) Apparently, the state court has not decided their motion, and the state action is essentially at the same stage of litigation as this one. Defendants in this case now request that we dismiss or, in the alternative, stay the present action under the Colorado River abstention doctrine. See Colorado River Water Conservation Dist. v. United States, 424 U.S. 800 (1976).

DISCUSSION

"Abstention under Colorado River applies where, as in the instant case, 'state and federal courts exercise concurrent jurisdiction simultaneously.'"*fn14 Vill. of Westfield v. Welch's, 170 F.3d 116, 120 (2d Cir. 1999) (citation omitted). Abstention is an "extraordinary" and "narrow exception" to the duty of a federal district court to adjudicate a controversy properly before it and is justified only in "exceptional circumstances." Colorado River, 424 U.S. at 813 ("Abstention from the exercise of federal jurisdiction is the exception, not the rule."); Welch's, 170 F.3d at 121; Inn Chu Trading Co., Ltd. v. Sara Lee Corp., 810 F. Supp. 501, 507 (S.D.N.Y. 1992).*fn15 Indeed, "as between state and federal courts, the rule is that 'the pendency of an action in the state court is no bar to proceedings concerning the same matter in the Federal court having jurisdiction . . . .'" Colorado River, 424 U.S. at 817 (quoting McClellan v. Carland, 217 U.S. 268, 282 (1910)). This rule "stems from the virtually unflagging obligation of the federal courts to exercise the jurisdiction given them." Colorado River, 424 U.S. at 817. "Abdication of the obligation to decide cases can be justified under this doctrine only in the exceptional circumstances where the order to the parties to repair to the state court would clearly serve an important countervailing interest." Id. at 813 (quotation marks omitted). Thus, abstention is appropriate only if the balance of the following factors overcomes the strong presumption in favor of exercising jurisdiction: (1) the assumption of jurisdiction by either court over any res or property; (2) the inconvenience of the federal forum; (3) the order in which jurisdiction was obtained; (4) the avoidance of piecemeal litigation; (5) whether state or federal law supplies the rule of decision; and (6) whether the state court proceeding will adequately protect the rights of the party seeking to invoke federal jurisdiction. See Moses H. Cone Mem'l Hosp. v. Mercury Constr. Corp., 460 U.S. 1, 16 (1983); Colorado River, 424 U.S. at 818-19; Welch's, 170 F.3d at 121; United States v. Pikna, 880 F.2d 1578, 1582 (2d Cir. 1989). "[T]he decision whether to dismiss a federal action because of parallel state-court litigation does not rest on a mechanical checklist, but on a careful balancing of the important factors as they apply in a given case, with the balance heavily weighted in favor of the exercise of jurisdiction." Moses H. Cone, 460 U.S. at 16; see also Pikna, 880 F.2d at 1582 ("On a motion for abstention under Colorado River, the presumption is in favor of the federal court's retaining jurisdiction, not yielding it.") (citations omitted); Laikin v. Paprin, No. 83 Civ. 8946, 1984 WL 364, at *2 (S.D.N.Y. May 10, 1984) ("In balancing these factors, there is a presumption in favor of assuming jurisdiction."). "Thus, only a demonstration of [] clear and convincing circumstances by the moving party will warrant a stay." Laikin, 1984 WL 364, at *2 (citing Colorado River, 424 U.S. at 818).

Moreover, the Supreme Court has made clear that "a stay is as much a refusal to exercise federal jurisdiction as a dismissal." Moses H. Cone, 460 U.S. at 28; see also Royal & Sun Alliance Ins. Co. of Canada v. Century Int'l Arms, Inc., 466 F.3d 88, 96 (2d Cir. 2006); Pikna, 880 F.2d at 1582; Sara Lee Corp., 810 F. Supp. at 507. As one district court stated: "It is beyond belief that this weighty obligation[, the exceptional-circumstances test,] can be escaped by a court that chooses not to exercise its jurisdiction but gives the label of 'stay' to what will in effect be a ...


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