The opinion of the court was delivered by: JOSEPH E. IRENAS
Defendants are the owners of a Jiffy Lube rapid lubrication service center operated under the terms of a franchise agreement with the plaintiff. The terms of the agreement require the defendant franchisee to pay a monthly royalty fee to the plaintiff based on a percentage of gross sales.
Because the relief sought amounted to an economic death penalty for defendants' business, the court deferred action on the application for a TRO and scheduled a preliminary injunction hearing for the following day. Defendants filed a comprehensive answering affidavit, and at the hearing on September 29, 1993, both parties were given an opportunity to present live testimony or offer additional evidence.
On the record presently before the court we find that plaintiff has demonstrated a likelihood of success on the merits and the probability of irreparable harm if a preliminary injunction is not granted.
1. Plaintiff, Jiffy Lube International, Inc. ("Jiffy Lube"), is a corporation organized under the laws of the state of Nevada with its principal place of business in Houston, Texas. Plaintiff's franchisees operate Jiffy Lube Service Centers, which provide rapid lubrication and oil change services throughout the United States and certain foreign countries.
2. To identify service centers which operate within its system, Jiffy Lube has extensively employed and caused to be advertised and publicized throughout the United States its Jiffy Lube marks. Plaintiff is the owner of the marks, has registered the marks with the United States Patent and Trademark Office, and has continually used the marks in connection with the service centers of its system. Although the marks are used as both service marks and trademarks, we shall refer to them in this Order, from time to time, as trademarks.
3. Jiffy Lube franchisees are licensed to use the Jiffy Lube trademarks in connection with their operation of service centers, and are trained to operate these centers using a business plan developed by Jiffy Lube. In exchange, under the terms of their franchise agreements, Jiffy Lube franchisees are required to pay royalties calculated as a percentage of gross sales and to fulfill other obligations to Jiffy Lube. Franchise Agreement at P 4; License Agreement at P 4.
4. Essential to nationwide franchise systems, such as that operated by Jiffy Lube, is the prompt and precise communication of accurate financial information between the franchisor and franchisee.
5. On or about July 30, 1990, defendant Weiss Brothers, Inc. ("Weiss Brothers"), a corporation organized under the laws of the state of New Jersey, became a Jiffy Lube franchisee authorized to operate a Jiffy Lube Service Center at 795 Black Horse Pike, Turnersville, New Jersey (the "Turnersville site").
6. The Turnersville site had previously been operated by a former franchisee, Paul LoPresti, Sr. and Sons, Inc. ("LoPresti") . On July 30, 1990, Weiss Brothers executed an Assignment of License Agreement ("Assignment") by which it agreed to accept the terms and conditions of the License Agreement between LoPresti and Jiffy Lube. Weiss Brothers agreed to pay LoPresti $ 500,000 for the franchise, of which $ 350,000 was paid in cash with the balance in a purchase money promissory note. At present the balance due on that note is about $ 66,000. Affidavit of Alfred Weiss Affidavit ("Weiss Affidavit") at 2, P 4.
7. Weiss Brothers later executed a Franchise Agreement with Jiffy Lube, although the parties dispute the actual date of signing. Defendant Alfred Weiss avers that, though the agreement is dated as of July 30, 1990, it was not signed by Jiffy Lube until August or September of 1992. Weiss Aff. at 2. We find that, irrespective of the date of signing, defendants had knowledge of, and were not surprised by, the contents of the Franchise Agreement, which was attached as Exhibit B to the Assignment signed July 30, 1990. The Assignment provides: "Assignee hereby agrees to execute the replacement Franchise Agreement attached hereto as Exhibit B." Thus, the parties understood, from the outset of their relationship, that the terms of the Franchise Agreement would control that relationship.
9. Paragraph 11 of Addendum B to the License Agreement also deals with the grounds for default and termination. It provides, in pertinent part, that the licensee would be in default if "Licensee knowingly makes any false statements in any reports submitted to Jiffy Lube," and that Jiffy Lube would be entitled to terminate the License Agreement if licensee failed to cure the default within thirty (30) days.
10. Paragraph 21(B) of the Franchise Agreement executed between the parties provides, in pertinent part, that a franchisee would be in default if "Franchisee repeatedly fails to make timely payments of royalties and any monies owing to JIFFY LUBE, any subsidiary of JIFFY LUBE, or a Cooperative," and that Jiffy Lube would be entitled to terminate the Franchise Agreement upon default without giving the franchisee an opportunity to cure.
11. Paragraph 21(B) of the Franchise Agreement also provides that a franchisee would be in default if "Franchisee knowingly makes any false statements in any reports or financial information submitted to JIFFY LUBE," and that Jiffy Lube would be entitled to terminate the Franchise Agreement upon default without giving the franchisee an opportunity to cure.
12. Paragraph 22 of the License Agreement delineates the licensee's "covenants not to compete," which take effect upon the termination of the franchise. These covenants contain geographic and temporal restrictions, whereby the licensee covenants that for a period of three years following the termination of the License Agreement, licensee will not own, operate, or have an interest in a business which is the same or substantially similar to that detailed in the License Agreement, and which is within a ten-mile radius of the location of the business operated under the License Agreement or any other Jiffy Lube Service Center. Defendant Weiss Brothers consented to this provision when it executed the Assignment of License Agreement on July 30, 1990.
13. Paragraph 23 of the Franchise Agreement also contains covenants not to compete, with the very same geographic and temporal restraints. Weiss Brothers consented to this provision when it signed or became aware of the Franchise Agreement on July 30, 1990.
14. On August 6, 1992, Jiffy Lube and Weiss Brothers executed an Amendment to the License Agreement ("Amendment"). Paragraph 17.1 of the Amendment provides:
The undersigned shareholders or partners of Franchisee hereby acknowledge and agree to be bound individually by all covenants not to compete applicable to Franchisee under the terms of the Agreement. . . .
The three Weiss brothers signed the Amendment. Above their signatures is the following provision:
Each undersigned individual represents and warrants to JLI that the undersigned individuals are all of the shareholders or partners of Franchisee as of the date of this Amendment and that the officer who has executed this Amendment on behalf of Franchisee is duly authorized to bind Franchisee to the terms of this Amendment.
15. At the time Weiss Brothers became a franchisee, an ongoing dispute existed between Jiffy Lube and several of its franchises regarding the proper accounting of certain national or "fleet" customers. Rather than pay the individual franchisees, fleet customers were billed directly by Jiffy Lube's corporate headquarters, which later credited franchisees' accounts after deducting royalties and processing costs. Franchisees generally, and Weiss particularly, disputed the method of accounting used by Jiffy Lube in calculating the credits owed franchisees and also disputed the timing of the credits. Weiss argued that by delaying the granting of the credits Jiffy Lube deprived franchises of the opportunity to pay only a 4% "prompt payment" royalty, rather than the usual 5%. Weiss also argues that it was forced to pay excess interest charges because of the alleged delay in credits. Weiss Aff. at 7-8, 14, 16.
16. A class action lawsuit was instituted by the JLAF, an association of Jiffy Lube franchisees. The lawsuit was settled in mid-1992. It was asserted at oral argument, and not disputed, that the execution of the Amendment was in part a result of the settlement of that suit. Paragraphs 19 and 20 of the Amendment, in fact, provide for mutual releases which were executed and are attached as Exhibit 4 to the Amendment. These releases reference the litigation.
17. Sometime in early 1993 (or late 1992) Jiffy Lube established a centralized point of sale ("POS") computer system (the "J-SMRT") for use by all franchises. As each sale is made, sales information is entered into the computer and transmitted daily from the individual service centers to the corporate headquarters in Houston. Weiss Aff. at 8; Plaintiff's Exhibit P-4; Defendant's Exhibits D-1 to D-3. The implementation of J-SMRT helps both franchisor and franchisee. By providing timely and accurate sales data it allows both parties to have confidence in the financial data on which the calculation of mutual debits and credits depends.
18. Installation of the J-SMRT system at the Weiss Brothers' facility was fraught with difficulties. Apparently, Weiss Brothers maintained its own system, and feared that installation of the J-SMRT would have adverse effects on existing data. Plaintiff's Exhibit P-7. In March of 1993, Weiss Brothers was informed that its intransigence with respect to the computer system was construed as a default under the License and Franchise Agreements, and that it would be given thirty days to cure the default. Plaintiff's Exhibit P-4. Finally, the defendants' site was placed "on-line" and, after initial difficulties with data transmission, the defendants began relaying daily sales information to Houston.
19. Notwithstanding the settlement of the litigation, defendants continued to feel as though Jiffy Lube was incorrectly computing the fleet credits to which Weiss was entitled. In fact, as late as June of 1993, defendants were still inquiring about "confusion" in their royalty accounts. Defendant's Exhibits D-3, D-4. We find that, throughout the length of the franchise, defendants had a dispute with plaintiff regarding the accounting for royalty payments and fleet credits. Weiss Brothers genuinely believed that it was not receiving the credits to which it was entitled and did not fabricate this claim only when caught underreporting sales to Jiffy Lube.
20. On or about March 2, 1993, Weiss Brothers submitted a Monthly Statistical Report to Jiffy Lube which misrepresented that it had achieved $ 67,833.29 in gross sales for the month of ...