The Franchise Memorandum

A federal court in California enjoined the brother of a former franchisee from continuing to use marks similar to the franchisor’s—even though the franchisor’s application to register the mark was denied, and even though the restaurant was in Miami while the franchisor’s system otherwise consists of a single forthcoming restaurant in California. Shawarma Stackz LLC v. Jawad, 2021 WL 5827066 (S.D. Cal. Dec. 8, 2021). In early 2020, Hussam “Sam” Jawad, a regular at the Tahini Restaurant in San Diego, entered into a franchise agreement with Shawarma Stackz, a company formed by Tahini’s owners to franchise the restaurant concept. Jawad opened the franchise in Miami in June. Jawad then told Shawarma that he had transferred the franchise (without authorization) to his brother, and the franchise cut off all communications and Shawarma’s access to its sales data. It never paid royalties or its training fees. Shawarma sent a default notice on August 7; the next day it received an email threatening to publish its recipes and saying it was “better for everyone to walk away.” Shawarma terminated the franchise and initiated arbitration against Jawad; one of its recipes was then posted on Tahini’s Yelp page. Shawarma won damages and an injunction against Jawad’s disseminating its confidential information. The franchise changed its name from “Shawarma Stackz” to “The Stackz Shawarma House” and continued to operate. In July 2021, Shawarma sued Jawad’s brother and a company the pair used to operate the franchise, alleging unfair competition, conversion, and intentional interference with contractual relations. The defendants moved to dismiss the lawsuit for want of personal jurisdiction and Shawarma moved to enjoin them from operating the restaurant or otherwise infringing its marks.

The court found it did have jurisdiction over the defendants, based largely on their conduct expressly aimed at California. It also granted Shawarma’s preliminary injunction motion, finding Shawarma to have a cognizable interest in the marks. The court found that Shawarma was using the marks in commerce because of its existing agreement for another franchisee to open a location in California, showing that Shawarma was actively expanding the franchise network. The court found the Miami restaurant’s branding to be largely the same as the Shawarma marks and gave little weight to the fact that the USPTO had denied Shawarma’s application to register the marks. The court did not discuss the geographic distance between the Miami restaurant and Shawarma’s current operations in California but found Shawarma likely to succeed on the merits of its unfair competition claims. The court found Shawarma’s forthcoming franchise in California sufficient to carry its burden as to irreparable harm, and dismissed the harm faced by the defendants as a result of the injunction as self-imposed. The court also imposed a $20,000 bond and denied defendants’ motion to stay the injunction pending appeal.