Case Report – June 2022

Kahala Franchising, LLC v. Real Faith, LLC, 2022 U.S. Dist. LEXIS 91420 2022 WL 1605377 (Case No. 2:21-cv-08115-ODW(SKx) C.D. Cal.) Decided May 20, 2022 

The Court denied plaintiff franchisor Kahala Franchising, LLC’s (“Kahala”) motion for preliminary injunction against defendant holdover Pinkberry frozen yogurt franchisee Real Faith, LLC (“Real Faith”) primarily on the basis that Real Faith overcame Kahala’s rebuttable presumption of irreparable harm.        

Factual and Procedural Overview

Kahala is the franchisor for, among others, Pinkberry frozen yogurt brand, which was founded in Los Angeles in 2005 and has over 100 locations.  In 2019, Kahala and Real Faith executed a franchise agreement for Real Faith to operate a Pinkberry franchise in Beverly Hills.  At that time, Mrs. Bernadine Jackson was the managing member of Real Faith. Two months after executing the franchise agreement, Mrs. Jackson passed away.

In accordance with the franchise agreement, Mrs. Jackson’s son, defendant D’Mari Jackson (“Jackson”), continued Real Faith’s operation of the franchised location in Beverly Hills.  Jackson spoke with a Kahala representative about the transfer process, which under the franchise agreement had to be completed within 90 days of Mrs. Jackson passing away.  The parties did not complete the transfer process because the transfer cost was, in Jackson’s estimate, too high.  During the ninety-day window, Real Faith, acting through Jackson, executed a promissory note with Kahala for roughly $181,000 to cover past unpaid rents, royalties, advertising fees, and transfer fees. Real Faith was to make twenty-four monthly payments of $7,500.  Real Faith failed to make any payments on the note.  Moreover, since August 2020, Real Faith had not made any royalty payments.  And since October 2020, Real Faith had not paid any rent to Pinkberry, Inc., the landlord. 

On June 18, 2021, Kahala sent Jackson a Notice of Termination for failure to pay royalties, advertising fees, and rent.  Pursuant to the express terms of the franchise agreement, this Notice terminated Real Faith’s license to use Kahala’s Pinkberry trademarks. Nonetheless, Real Faith continued to operate the Pinkberry store in Beverly Hills using the Pinkberry trademarks.  On October 1, 2021, Kahala’s attorney visited the location and noted “long lines of customers” and employees “busy serving customers with PINKBERRY products.”   

On October 12, 2021, Kahala filed this action, setting forth claims for trademark infringement and related claims under federal and state law. On October 15, 2021, Kahala filed its motion for preliminary injunction.  “Kahala’s central allegation is that Defendants improperly continue to use the Pinkberry trademarks in breach of the parties’ license agreement and are therefore infringing those trademarks.”  After Kahala filed the motion for preliminary injunction, Defendants Real Faith and Jackson defaulted, but the Court set aside the default, reset the briefing schedule, and let Defendants oppose the motion.

Legal Analysis

The Court noted that a preliminary injunction is an “extraordinary remedy” intended to prevent immediate and irreparable injury.  To obtain a preliminary injunction, the plaintiff has the burden of establishing: (1) a likelihood of success on the merits; (2) that plaintiff will suffer irreparable harm if the relief is not granted; (3) that the balance of equities tips in the plaintiff’s favor; and (4) that the injunction is in the public interest.”  The Court found that while Kahala had established a likelihood of prevailing on the merits, it did not meet its burden on the other three prongs.

Likelihood of Prevailing on the Merits. 

The Court found in Kahala’s favor on this issue but noted that Real Faith’s defenses of force majeure and waiver potentially have merit.

To prove a claim of trademark infringement, a plaintiff must show that: (1) it has a valid, protectable trademark, and (2) defendant’s use of the mark is likely to cause confusion. The Court found Kahala demonstrated a “moderately strong likelihood” of success on the merits, as Real Faith did not dispute that it owed Kahala money and that Kahala had provided Real Faith a notice of termination, which, if enforceable, would make Real Faith a holdover franchisee who would not be entitled to the continued use of the franchisor’s trademarks. 

The Court noted, however, that Real Faith presented defenses which, if meritorious, could mean that Real Faith never lost its license to use the Pinkberry trademarks. Real Faith argued the force majeure clause in the franchise agreement excused it from paying royalties and other fees.  The Court stated that there are weaknesses in this defense but concluded that “it is possible that some COVID-19-related loss of profits could be found to result from ‘acts of God’ (the second part of the force majeure clause), which in turn would ‘excuse performance,’ in whole or part, as may be ‘reasonable,’ under the franchise agreement.”

Defendants also asserted that Kahala waived its right to terminate the franchise agreement on the basis of failure to transfer from Mrs. Jackson to Jackson, because, for over a year after any breach of the transfer terms, Kahala continued to accept payments from Real Faith and allowed it to operate the franchise. The Court noted that “[t]his argument has substantial merit,” concluding that “[t]he Court could find, on this basis, that terminating the franchise agreement on the basis of failure to transfer was inappropriate.”  Nevertheless, because Defendants did not as strongly rebut the other basis for termination – nonpayment of rent – the Court concluded that Kahala did have a “moderately strong likelihood” of succeeding at demonstrating trademark infringement.

Irreparable Harm

Since the Court found Kahala had established a likelihood of success on the merits, pursuant to 15 U.S.C. § 1116(a), Kahala was entitled to a rebuttable presumption of irreparable harm. But the Court concluded that Real Faith presented evidence to rebut the presumption of irreparable harm. 

The Court found no indication that Real Faith was running the franchise in a way that failed to meet Kahala’s standards and expectations regarding the Pinkberry brand, “such as by, for example, selling inferior yogurt or allowing the premises to fall into disrepair.”   The Court contrasted these facts with Wetzel’s Pretzels, LLC v. Johnson, 797 F.Supp.2d 1020 (C.D. Cal. 2011), noting that Wetzel’s Pretzels also involved a terminated holdover franchisee against whom the franchisor moved for a preliminary injunction to stop the holdover franchisee from continuing to use the franchisors trademarks.  In that case, the District Court granted the franchisor’s preliminary injunction, “but the key distinguishing fact was that the franchisor had submitted evidence showing that the franchisee had not complied with upkeep and maintenance of the store so as to conform to standards set forth in the franchise agreement.”  “Without any evidence indicating that Defendants are running the franchise in a deficient manner, the Court cannot conclude that the harm arising from Defendants’ continued use of the Pinkberry trademarks is irreparable or otherwise more than merely pecuniary.”  The Court concluded that while Kahala may, after trial, be entitled to a permanent injunction, at this stage, given that Real Faith had met its burden of production in rebutting the presumption of irreparable harm, the potential for irreparable harm was too weak to support injunctive relief.

Balance of Equities and Public Interest

The Court found that the balance of equities “slightly favors” Real Faith, because if the Court granted the motion, Real Faith would likely have to cease operating a Pinkberry franchise, which, the Court stated, “would have negative consequences on both Kahala and Defendants: Kahala, because it would no longer earn any royalties or other compensation from operation of the location, and Defendants, because it would effectively eliminate most or all of their business income.”

The Court found that franchisee losing its franchise “would also have a negative impact on the public interest, which generally favors continuity of business operations, especially when the business is a successful franchise of a popular yogurt brand in a prime location.” The Court thus found that the public interest factor also slightly favored Defendants. The Court concluded that “[n]othing suggests that Defendants’ operation of the franchise is deficient, and everyone stands to gain some sort of benefit by allowing operations to continue, at least for the moment.”

David M. Greeley, Esq. of Greeley Thompson, LLP prepared this Case Report. Mr. Greeley’s practice focuses on representing franchisors and franchisees in disputes. He may be reached at dgreeley@greeleythompson.com.