The Franchise Memorandum

A federal district court in Massachusetts held that a franchisor was entitled to an injunction restraining its former franchisee in Puerto Rico from using its trademarks after termination. Dunkin' Donuts Franchised Rests. LLC v. Wometco Donas Inc., 2014 U.S. Dist. LEXIS 127918 (D. Mass. Sept. 11, 2014). Gray Plant Mooty represents the franchisor in this case. Dunkin' terminated the parties' franchise agreement based on Wometco's failure to pay royalties and renewal fees and brought suit against Wometco and its affiliate, the guarantor of the agreement, to enforce the termination and enjoin their continued use of Dunkin's trademarks at eighteen locations. In opposing Dunkin's motion for a preliminary injunction, Wometco took the position that the written franchise agreement had never been put into effect and that the guarantor was the true distributor of Dunkin's products in Puerto Rico pursuant to an earlier oral contract. They argued that Dunkin' could not base the termination on the terms of the written agreement because those terms did not control the parties' relationship.

In a related development, one month after Dunkin' filed suit in Massachusetts, the guarantor initiated a separate action against Dunkin' in federal court in Puerto Rico, alleging that Dunkin' had violated the Puerto Rico Dealer's Act of 1964 by terminating the parties' relationship without just cause. Dunkin' subsequently moved in the Massachusetts court to enjoin the guarantor's prosecution of the duplicative lawsuit in Puerto Rico.

The Massachusetts court granted both of the requested injunctions, finding that Dunkin' was likely to succeed on the merits of its claims and that the two lawsuits were sufficiently similar to warrant application of the first-to-file rule. The court determined that the written franchise agreement governed the parties' relationship and that the franchisee's nonpayment of fees under that contract provided just cause for termination. With regard to the guarantor's argument about the oral contract, the court found the guarantor's position inherently unlikely and noted that it had failed to describe its alleged oral contract in any detail. The court further concluded that Dunkin' would likely suffer irreparable harm in the absence of an injunction because it had lost control over the use of its trademarks in Puerto Rico. In addition, the court adopted the first-to-file rule, which states that when parallel lawsuits are pending in two federal courts, the court in which the first-filed action was brought has the power to enjoin the parties from proceeding in the second action and should do so absent a showing of special circumstances. The court determined that the two lawsuits shared a common nucleus of operative facts because they both concerned the termination of Dunkin's franchises in Puerto Rico, and that no special circumstances justified upsetting the first-to-file rule. After issuance of this order, the court has denied a motion for reconsideration, and Wometco has appealed to the First Circuit Court of Appeals.