United States District Court, S.D. New York
OPINION AND ORDER
KATHERINE POLK FAILLA, District Judge.
Sammy Hinnawi, individually and through his corporations Sunni, LLC, and Sunni III, LLC, owns and operates three Edible Arrangements franchise stores in Manhattan and the Bronx. In January 2012, Hinnawi pleaded guilty in New York State Supreme Court to two felonies stemming from his filing of false tax returns for, and his theft of sales tax revenues from, multiple Edible Arrangements franchises over multiple years. In October 2013, shortly after receiving a copy of Hinnawi's plea agreement in the criminal case, Edible Arrangements, Inc. ("EA") notified Plaintiffs that it was terminating or not renewing their franchise agreements because of Hinnawi's felony convictions.
Plaintiffs filed an action for injunctive relief in New York State Supreme Court; Defendant then removed the action to this Court. Plaintiffs now move for a remand, contending that this Court lacks subject matter jurisdiction. Failing that, Plaintiffs move for a preliminary injunction to bar Defendant from terminating the relevant franchise agreements, until the parties' disputes can be arbitrated. Plaintiffs' motion to remand is denied because Defendant has demonstrated to a reasonable probability that the amount in controversy requirement is satisfied. Plaintiffs' motion for a preliminary injunction is also denied, because Plaintiffs have failed to demonstrate that they would suffer irreparable harm, or that their claims have a likelihood of success on the merits.
A. Factual Background
1. The Parties
Plaintiffs own and operate three Edible Arrangements franchises in New York City. Sunni, LLC operates a franchise at 620 West 38th Street, New York, New York (Store #135); Sunni III, LLC operates a franchise at 2571 Broadway, New York, New York (Store #200); and Hinnawi operates a franchise located at 3530 Johnson Avenue, Bronx, New York (Store #489). (Pl. PI Br. 1; Def. PI Ex. A, B, C). Hinnawi is a co-owner of all three franchises. ( Id. ). Defendant EA is a Delaware corporation, with its principal place of business in Wallingford, Connecticut. (Notice of Removal (Dkt. #1) ¶ 7).
2. Plaintiffs' Franchise Agreements
Plaintiffs entered into 10-year franchise agreements with EA in 2003 (for Sunni, LLC), 2007 (for Hinnawi), and 2009 (for Sunni III, LLC) (collectively, the "Agreements"). (Def. PI Opp. 2; Def PI. Ex. A, B, C). The Agreements are governed by Connecticut law ( see Pl. PI Br. 9 n.4), and provide in relevant part that:
The Franchisee shall maintain the condition and appearance of all store locations consistent with EA standards, and if at any point EA deems that store not in compliance, EA will notify the store of the deficiency so that the Franchisee may correct it.
The Franchisee shall maintain the highest moral standards of the community and as set forth by EA.
EA may terminate the agreement upon delivery of written notice of termination if the Franchisee or any of its owners (i) is or has been convicted of or pleads guilty to a felony; (ii) engages in any dishonest or unethical conduct which, in EA's opinion, adversely affects the reputation or the goodwill of the Names and Marks or the reputation of EA; or (iii) fails to pay any federal or state income taxes.
EA would not waive any right the agreement reserves due to any custom or practice at variance with the agreement's terms, or any failure to exercise a right provided for under the agreement.
The Franchisee shall operate the business in full compliance with all applicable laws.
(Def. PI Ex. A at 22, 25, 27-28, 43-44).
3. Hinnawi's Criminal Convictions
In January 2012, Hinnawi pleaded guilty, pursuant to a plea agreement with the Office of the District Attorney for the County of New York (the "D.A.'s Office"), to criminal tax fraud in the second degree, a felony, related to the theft of sales taxes collected from customers of his three EA stores, as well as his brother's three EA stores, from approximately 2004 to 2011. (Def. PI Opp. 4; Def. PI Ex. I). Hinnawi also pleaded guilty to criminal tax fraud in the fourth degree, also a felony, related to his filing of a false tax return for one of his EA stores. ( Id. ). Hinnawi paid over $750, 000 in back taxes, interest, and penalties, and served intermittent jail time. (Def. PI Opp. 4; Def. PI Ex. I).
Hinnawi testified that he provided a copy of his plea agreement in April 2012 to Caroline Gilroy, EA's general counsel, by fax, though he has no proof of having done so. (Mar. 3 Tr. 30-31, 64-66). However, both EA witnesses testified that Gilroy was not affiliated with EA until at least July 2012. (Mar. 3 Tr. 123, 143). EA alleges that it first became aware of "Mr. Hinnawi's legal troubles" two months later, in June 2012. (Def. PI Opp. 4). That same month, Frank Garrido, EA's Vice President of Operations, asked Hinnawi to provide EA with a copy of his plea agreement. (Mar. 3 Tr. 115-17). Thereafter, Hinnawi e-mailed a version of the plea agreement to Garrido. (Def. PI Opp. 4; Def. PI Ex. F; Mar. 3 Tr. 68, 117-18).
As it happened, the version of the plea agreement that Hinnawi mailed to Garrido was neither complete nor final. It was a modifiable Word document that was not on official letterhead; it was unsigned; it omitted a number of pages; and it was dated five days before Hinnawi's actual guilty plea. (Mar. 3 Tr. 81-83, 120-21). On these bases, Garrido believed the plea agreement to be incomplete or altered, and followed up at least three times with Hinnawi shortly thereafter to request the final version. (Mar. 3 Tr. 120-21, 131-33, 136-37; but see Mar. 3 Tr. 75 (Hinnawi testifying to not altering the document, and to passing along only what his criminal attorney had provided to him)).
Importantly, the incomplete plea agreement that Hinnawi forwarded to Garrido omitted the page that contained Hinnawi's allocution. Consequently, it failed to disclose, among other things, the fact that Hinnawi had stolen sales tax revenues from his brother's three EA stores, the exact stores from which he had stolen sales tax revenues, the years in which the theft and underreporting had occurred, and the amount of money that had been stolen or underreported. ( Compare Def. PI Ex. F and I; Mar. 3 Tr. 81-83). After following up with Hinnawi throughout July 2012, and receiving assurances that Hinnawi would provide the complete plea agreement, Garrido forwarded the incomplete plea agreement to EA's finance department for their follow up. (Mar. 3 Tr. 137, 139-40). Regrettably, the record reflects that no one from EA's finance department, or from any department, followed up with Hinnawi regarding the plea agreement until nearly a year later, in June 2013.
4. The Parties' Discussions Concerning the Renewal of the Sunni, LLC Franchise
On May 22, 2013, Karalyn Mendes, a construction services coordinator at EA, sent Hinnawi an e-mail detailing the repairs he would need to complete to bring the Sunni, LLC store (Store #135) into compliance with EA standards. (Def. PI Ex. G). Per the terms of the Agreements, Plaintiffs' stores were only eligible for renewal if they complied with EA standards; moreover, they were required to adhere to EA's standards at all times, irrespective of renewal. (Def. PI Opp. 5 (citing Def. PI Ex. A); Mar. 3 Tr. 121-23). Hinnawi testified that he completed these repairs and modifications at a cost of "thousands of dollars, " yet introduced no evidence to corroborate his assertion. (Pl. PI Br. 2; Mar. 3 Tr. 47).
In June 2013, other divisions at EA began to examine those franchises that were eligible for renewal, including Store #135. (Def. PI Opp. 5; Mar. 3 Tr. 144). Around that time, Sarju Patel, EA's Vice President of Compliance, spoke with Hinnawi by phone. (Mar. 3 Tr. 144-45). Hinnawi informed Patel that he was not sure whether he intended to renew or sell his franchise; Patel sent him the renewal paperwork, in case Hinnawi chose that route. ( Id. at 144-45, 167; Def. PI Ex. H). Patel also outlined the steps involved in the renewal process, including refurbishment of the store. (Mar. 3 Tr. 107-08). Patel and Hinnawi also discussed Hinnawi's criminal convictions. ( Id. at 145). In particular, Hinnawi informed Patel that his plea agreement "was not relevant" and "was past him, " but that he would "try to get a copy" of the complete plea agreement. ( Id. ).
On June 19, 2013, Patel sent Sunni, LLC a letter inviting it to apply to renew the Agreement. (Pl. PI Br. 2; Def. PI Opp. 5; Def. PI Ex. H). The letter stated "[t]o let us know that you plan to renew your franchise, all you need to do is complete the attached form and return it to me.... Congratulations to you and your team on your outstanding achievement! We look forward to hearing from you soon, and to renewing your integral role in the World of Edible Arrangements." (Def. PI Ex. H). The attached form, dated June 21, 2013, was signed by Hinnawi and his co-owner, and stated:
I want to renew the franchise for a 10-year term. I acknowledge that this notice is an expression of my current intent only, and does not create any binding obligation on me or Edible Arrangements International, LLC. A binding obligation will only be created if and when Edible Arrangements International, LLC and I both sign a written agreement and after satisfaction of any conditions required by Edible Arrangements International, LLC.
( Id. ).
On August 6, 2013, EA sent Sunni, LLC a letter entitled "Re: EAI Franchise Agreement." (Def. PI Ex. J). The letter began "You should not execute the EDIBLE ARRANGEMENTS franchise agreement and related documents until the closing.... Do not sign any document until we instruct you to do so during the closing. " ( Id. (emphasis added)). The next day, Hinnawi received two e-mails from EA. One, with the subject line "Edible Arrangements International, LLC - Franchise Agreement Activated, " was sent by Don Schmidt, a franchise development coordinator at EA; it noted, "We are very excited to be at the final stage of you officially becoming an Edible Arrangements franchise owner! Just a few more signatures and you will be joining a very unique and time-tested team of franchise professionals." (Pet. Ex. 6). The e-mail contained a link to access "[a] copy of your Edible Arrangements Franchise Agreement, " and closed by noting "I will be reaching out to you shortly to walk you through the acceptance of this document and to schedule a signing date." ( Id. ). Shortly thereafter, Sarju Patel e-mailed Hinnawi, with the subject line "FW: Edible Arrangements International, LLC - Franchise Agreement Activated, " and attached execution copies of, among other documents, the renewal contract for Sunni, LLC. Patel's e-mail stated, in relevant part, "I am very happy to be... working with you on renewing your franchise agreements... [and] I will be in touch to schedule a time to sign the documents before the expiration date which is October 11, 2013. ( Id. ).
In connection with the instant motions, Plaintiffs contend that the word "activated" meant that this e-mail constituted an "offer, " which Sunni, LLC accepted. (Pl. PI Br. 2, 10; Mar. 3 Tr. 109-11). Defendant responds that at this time, it had no intention to be bound, and had not yet reached a decision about renewal because EA was still investigating the scope of Hinnawi's criminal convictions. (Def. PI Opp. 6; Mar. 3 Tr. 140-41, 146-47, 165). And, indeed, during that time, EA repeatedly requested a copy of the complete plea agreement, which Hinnawi ultimately provided on September 17, 2013. (Def. PI Opp. 6; Mar. 3 Tr. 36-37).
Hinnawi's convictions constituted a ground upon which Defendant could terminate the Agreements. (Mar. 3 Tr. 149-50). Hinnawi also breached the terms of the Agreements requiring him to "operate the business in full compliance with all applicable laws, " and to pay all relevant state taxes. ( See, e.g., Def. PI Ex. A). Accordingly, and given the information contained in the plea agreement, EA felt that termination of its relationship with Hinnawi was its only option. (Def. PI Opp. 7; see also Mar. 3 Tr. 138-39 (Garrido testimony regarding EA policy to terminate franchise agreements if franchisee obtained a felony criminal conviction, but not if franchisee was merely the subject of a criminal investigation); id. at 149-50, 152-53, 155-56 (Patel testimony regarding EA policy of terminating franchise agreements because of criminal convictions)).
5. EA's Efforts to Terminate the Franchise Relationships
Several weeks later, on October 10, 2013, Defendant, through outside counsel, notified Hinnawi that it would not renew the Agreement with Sunni, LLC (Store #135), and that it would terminate the Agreements with Sunni III, LLC (Store #200) and Hinnawi (Store #489). (Def. PI Ex. D, K, L). EA notified Hinnawi that it was exercising its contractual right to sever their relationship, given his "egregious, admitted criminal conduct." ( Id. ). EA gave Hinnawi until January 17, 2014, to sell his interests in the franchises to new owners, and notified Hinnawi that he could have no part in the franchises on an ongoing basis. ( Id. ). The letters further advised
As you should know, there is nothing more important to the EDIBLE ARRANGEMENTS brand than the regard in which it is held by the public and franchisee compliance with all applicable laws. So important are the reputation of the EDIBLE ARRANGEMENTS and the integrity of the franchisees that all franchise agreements in the system, including your Franchise Agreement, expressly allow EAI not to ...