1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA 8
C21FC LLC, et al., ) No. CV-22-00736-PHX-SPL ) 9 ) 10 Plaintiffs, ) ORDER vs. ) ) 11 ) NYC Vision Capital Incorporated, et ) 12 al., ) 13 ) ) 14 Defendants. )
15 Before the Court is Plaintiffs’ Motion for Temporary Restraining Order (“TRO”) 16 (Doc. 13), which the Court construed as both a Motion for TRO and Motion for 17 Preliminary Injunction. On June 7, 2022, the Court denied the Motion for TRO. (Doc. 18 14). For the following reasons, the Court also denies the Motion for Preliminary 19 Injunction. 20 I. BACKGROUND 21 On April 29, 2022, Plaintiffs C21FC LLC and C21VX LLC initiated this action 22 against Defendants NYC Vision Capital Incorporated (“NYCVC”), Wali and Syeda 23 Mondal, Dr. Elie Islam, and Shafi Karim. (Doc. 1). Plaintiff C21FC is a Delaware LLC 24 that franchises retail optical stores, while Plaintiff C21VX is a Delaware LLC that 25 operates retail optical stores. (Doc. 11 at 1). Non-party Alan Singer is the principal 26 member and manager of both Plaintiffs. (Doc. 11 at 18). Defendant NYCVC is a New 27 York corporation. (Doc. 11 at 2). The Mondal Defendants each have 49.5% ownership of 28 NYCVC, and Defendant Islam, an optometrist, owns the remaining 1%. (Doc. 11 at 2). 1 Defendant Karim is the spouse of Dr. Islam and the son of the Mondals, who are a 2 married couple. (Doc. 11 at 2). 3 In 2020, Dr. Islam and Mr. Karim began looking into opening an optometry 4 practice in New York City. (Doc. 22-15 at 3). They looked into the Century 21 Vision 5 Express franchise—optical stores within Century 21 department stores, for which C21FC 6 was the franchisor—and paid a $30,000 franchise fee to Plaintiffs before Century 21 7 declared bankruptcy in mid-2020. (Doc. 22-15 at 3). In November 2020, Singer instead 8 proposed franchising The Eye Man, an existing optometry store that was for sale on the 9 Upper West Side. (Doc. 22-15 at 3–4). 10 On May 23, 2021, C21FC provided Defendants with a Franchise Disclosure 11 Document (“FDD”) for The Eye Man (Ex. 23), and on June 29, 2021, C21FC and 12 NYCVC executed a Franchise Agreement (Ex. 112). Two weeks later, on July 13, 2021, 13 the sellers of The Eye Man and C21VX executed an Asset Purchase Agreement (“APA”) 14 for the sale of The Eye Man. (Exs. 4, 115).1 The Eye Man’s sellers and Mr. Singer also 15 executed a Trademark Assignment to assign all rights and interests in The Eye Man 16 trademark, goodwill, and business (the “Marks”) to Mr. Singer. (Doc. 11 at 40). 17 NYCVC, however, had applied for a loan from Celtic Bank to finance the 18 transaction. (Doc. 11 at 7). To ensure that NYCVC would own the loan collateral, the 19 bank requested documentation that the assets purchased under the APA would be owned 20 by NYCVC. (Doc. 11 at 7). Thus, the same day that the APA was executed, July 13, 21 2021, The Eye Man, C21VX, and NYCVC also executed an Amendment to the APA 22 substituting NYCVC as the “Buyer” in the APA in place of C21VX. (Ex. 113). The 23 Amendment is central to this case, as Plaintiffs argue that it inadvertently failed to 24 differentiate between the physical assets, which were to be transferred to NYCVC, and
25 1 It appears The Eye Man and C21VX may actually have executed two different 26 versions of the APA—one introduced into evidence by Plaintiffs stating a purchase price of $375,000 (Ex. 4), and one introduced into evidence by Defendants stating a purchase 27 price of $430,000, which they received from Celtic Bank (Ex. 115). While this is certainly suspect, it is unimportant to the resolution of this Motion. As this is Plaintiff’s 28 Motion, the Court will cite to Exhibit 4 when referring to the APA. 1 the Marks, which were to be owned by C21VX (Doc. 11 at 8), while Defendants argue 2 that it effected the sale of all The Eye Man’s assets to Defendants (Doc. 22 at 3–4). 3 Closing took place about a week later, on or about July 20, 2021. (Ex. 106). 4 On July 26, 2021, NYCVC opened The Eye Man store, still operating as though it 5 were a franchise. (Hearing Tr. at 166:6–7). Disputes quickly arose between Plaintiffs and 6 Defendants, and in April 2022, NYCVC sent C21FC a notice of rescission of the 7 Franchise Agreement based on alleged misrepresentations. (Hearing Tr. at 197:23–25). 8 On June 9, 2022, NYCVC reopened The Eye Man across the street from the original 9 location. (Hearing Tr. at 213:23–214:3). 10 On June 6, 2022, Plaintiffs filed a First Amended Complaint alleging six counts: 11 (1) breach of contract; (2) breach of the covenant of good faith and fair dealing; 12 (3) declaratory relief; (4) lien foreclosure; (5) trademark infringement and false 13 registration; and (6) reformation. (Doc. 11). On June 7, 2022, Plaintiffs filed the Motion 14 for Temporary Restraining Order (“TRO”) and Motion for Preliminary Injunction (Doc. 15 13). The Court denied the Motion for TRO on notice grounds and set an expedited 16 briefing schedule and hearing on the Motion for Preliminary Injunction. (Doc. 14). The 17 Motion is fully briefed (Docs. 22, 26), and the Court held an evidentiary hearing on June 18 15, 2022 at which it heard testimony from Mr. Singer and Dr. Mondal and received 19 dozens of exhibits into evidence (Doc. 29). Based on the briefing, the parties’ arguments, 20 and the evidence in the record, the Court now addresses the Motion for Preliminary 21 Injunction. 22 II. LEGAL STANDARD 23 A preliminary injunction is “an extraordinary remedy that may only be awarded 24 upon a clear showing that the plaintiff is entitled to such relief.” Winter v. Nat. Res. Def. 25 Council, Inc., 555 U.S. 7, 22 (2008). An injunction may be granted only where the 26 movant shows that (1) he is likely to succeed on the merits; (2) he is likely to suffer 27 irreparable harm absent such relief; (3) the balance of equities tips in his favor; and (4) an 28 injunction is in the public interest. Id. at 20. The Ninth Circuit observes a “sliding scale” 1 approach that balances these elements “so that a stronger showing of one element may 2 offset a weaker showing of another.” All. for the Wild Rockies v. Cottrell, 632 F.3d 1127, 3 1131 (9th Cir. 2011). Thus, an injunction can issue where there are “‘serious questions 4 going to the merits’ and a balance of hardships that tips sharply towards the plaintiff . . . 5 so long as the plaintiff also shows that there is a likelihood of irreparable injury and that 6 the injunction is in the public interest.” Id. at 1135. Still, “[l]ikelihood of success on the 7 merits is the most important Winter factor; if a movant fails to meet this threshold 8 inquiry, the court need not consider the other factors in the absence of serious questions 9 going to the merits.” Disney Enters., Inc. v. VidAngel, Inc., 869 F.3d 848, 856 (9th Cir. 10 2017) (internal citations and quotation marks omitted). 11 III. ANALYSIS 12 Plaintiffs seek two forms of injunctive relief: (1) an injunction restraining 13 Defendants from using the Eye Man trademark based on the trademark infringement 14 claim; and (2) an injunction restraining Defendants from operating a retail optical store 15 within certain geographic limits and from taking client information based on the breach 16 of non-compete covenant claim. Ultimately, Plaintiffs’ entitlement to both turns largely 17 on a single question: who owns The Eye Man? The Court finds that Defendants are the 18 likely owners, that all of the Winter factors favor Defendants, and that the Motion for 19 Preliminary Injunction must therefore be denied. 20 a. Likelihood of Success on the Merits 21 i. Trademark Infringement 22 To succeed on a trademark infringement claim, “a party must prove: (1) that it has 23 a protectible ownership interest in the mark; and (2) that the defendant’s use of the mark 24 is likely to cause consumer confusion.” Network Automation, Inc. v. Advanced Sys. 25 Concepts, 638 F.3d 1137, 1144 (9th Cir. 2011) (internal quotation marks omitted). Only 26 the ownership element is disputed in this case. 27 Four contracts are most relevant to determining the likely ownership of the Marks: 28 (1) the Franchise Agreement, which provides that NYCVC’s right to use the Marks 1 derives solely from the Franchise Agreement and that the Franchise Agreement does not 2 confer any interest in the Marks to NYCVC (Doc. 11 at 103); (2) the APA, which 3 provides that The Eye Man “agree[s] to transfer to Buyer at Closing all . . . intangible 4 assets” related to The Eye Man business, including the Marks (Doc. 11 at 24); (3) the 5 Amendment to the APA , which provides that “the Parties, in an effort to complete the 6 purchase contemplated by the APA wish to substitute the Replacement Buyer [NYCVC] 7 for the Former Buyer [C21VX] in all respects” (Doc. 11 at 144); and (4) the Trademark 8 Assignment, which provides that The Eye Man assigns all rights and interests in the 9 Marks to Mr. Singer (Doc. 11 at 40). 10 The Court’s analysis must begin with the language of the contracts. See Apollo 11 Educ. Grp., Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 480 P.3d 1225, 1228 12 (Ariz. 2021). The Franchise Agreement clearly establishes that NYCVC would have 13 limited rights to use the Marks in accordance with the Agreement. (Ex. 112 at Bates 15). 14 But the APA, executed two weeks later, unequivocally states that The Eye Man would 15 transfer the Marks to “Buyer” at closing (Ex. 4 at Bates 9), and the Amendment, executed 16 the same day and a week before closing, made NYCVC the “Buyer” (Ex. 113). Plaintiffs’ 17 argument that the APA and Amendment are not sufficiently clear is unavailing; although 18 the Amendment does not specifically mention the Marks, its substitution of NYCVC for 19 C21VX “in all respects” unmistakably encompasses the sale of the intangible assets. Still, 20 the Trademark Assignment, executed the same day as the APA and the Amendment, 21 plainly provides for transfer of The Eye Man Marks to Mr. Singer. (Doc. 11 at 40). 22 Plaintiffs argue that all four documents must be read harmoniously because they 23 were executed contemporaneously. Obviously, the APA and the Amendment to the APA 24 must be read together, as the former is “included and made a part” of the latter by 25 reference. (Ex. 113 at 1). But the Franchise Agreement was signed two weeks prior, 26 which is not “substantially contemporaneous” such that it must be read in harmony with 27 the APA and Amendment. Cf. United Bank of Ariz. v. Allyn, 805 P.2d 1012, 1019 (Ariz. 28 Ct. App. 1990) (holding that two instruments executed on the same day were 1 substantially contemporaneous); Childress Buick Co. v. O’Connell, 11 P.3d 413, 414–15 2 (Ariz. Ct. App. 2000) (same); Realty Assocs. of Sedona v. Valley Nat’l Bank of Ariz., 738 3 P.2d 1121, 1125 (Ariz. Ct. App. 1986) (same). Two weeks is more than enough time for 4 intervening events to change the nature of a transaction and the intentions of the parties to 5 it—as appears to have been the case here—such that the contracts need not be 6 harmonious. And while the Trademark Assignment was executed in close temporal 7 proximity to the APA and the Amendment, Defendants were not a party to the 8 Assignment. As a result, it need not be read in harmony, either. See Smith v. Superior 9 Equip. Co., 428 P.2d 998 (Ariz. 1967) (“It is settled . . . that[ ] when two instruments are 10 entered into between the same parties concerning the same subject matter, . . . they may, 11 under some circumstances, be regarded as one contract and construed together.” 12 (emphasis added) (internal quotation marks omitted)); Realty Assocs. of Sedona, 738 P.2d 13 at 1125 (“Under Arizona law, substantially contemporaneous instruments will be read 14 together to determine the nature of the transaction between the parties.” (emphasis 15 added)). A contrary holding would allow, in general, for two parties to a tri-party contract 16 to finagle with the meaning of the contract by executing a separate contract on the same 17 day without the third party’s knowledge.2 Thus, the Court reads the Amendment—the 18 only one of the relevant agreements to be signed by all three parties and the last of them 19 to be executed—to do exactly what it says it does: to substitute NYCVC as the Buyer in 20 the APA in all respects, including as the buyer of The Eye Man’s intangible assets. There 21 is no ambiguity. 22 That brings the Court to Plaintiffs’ argument for reformation of the Amendment. 23 Under Arizona law, “[a] party seeking reformation of a written agreement must show that 24 a definite intention on which the minds of the parties had met pre-existed the written 25 instrument and that the mistake occurred in its execution.” SWC Baseline & Crimson 26 Invs., LLC v. August Ranch Ltd. P’ship, 265 P.3d 1070, 1078 (Ariz. Ct. App. 2011)
27 2 Notably, there is no evidence that Defendants had any knowledge of the 28 Trademark Assignment. 1 (internal quotation marks omitted). Mutual mistake must be shown by clear and 2 convincing evidence in order to achieve reformation. See Long v. City of Glendale, 93 3 P.3d 519, 532 (Ariz. Ct. App. 2004). Here, then, to achieve reformation, Plaintiffs would 4 need to show by clear and convincing evidence that prior to execution of the 5 Amendment, Plaintiffs and Defendants had a shared intent that Defendants would be 6 substituted as “Buyers” in the APA only as to the purchase The Eye Man’s physical 7 assets, while Plaintiffs would own the Marks. Plaintiffs make no meaningful argument 8 that this was the case. 9 Even assuming that Plaintiffs can make such a showing with respect to their own 10 intent,3 Plaintiffs have failed to demonstrate any likelihood that they can make the 11 requisite showing with respect to Defendants’ intent. Mr. Singer presented Defendants 12 with an Amendment, drafted by his own attorney, apparently with no explanation and 13 without Defendants having seen the underlying APA, and told them to sign it in order for 14 the bank to approve their loan. (Hearing Tr. at 59:16–24, 161:14–25). Reading the plain
15 3 It is not a forgone conclusion that this was Plaintiffs’ definite intent, as Plaintiffs’ 16 conduct throughout The Eye Man transaction is suspect. In addition to the two versions of the APA, discussed supra note 1, Mr. Singer appears to have made two separate offers 17 on the same day, December 11, 2020, to buy The Eye Man—one on C21FC’s behalf for $375,000 (Ex. 1) and one on Defendants’ behalf for $430,000 (Ex. 102)—both of which 18 the sellers of The Eye Man appear to have accepted. Further, the Disbursement Request and Authorization and the ALTA Settlement Statement for the Celtic Bank loan both 19 state that at closing, $430,000 went to Eye Man LTD for “Business Acquisition.” (Exs. 106, 116). Mr. Singer, however, testified that upon closing, the loan money was wired to 20 the escrow agent, the law firm representing Mr. Singer. (Hearing Tr. at 102:24–103:11). Mr. Singer then instructed the firm to disburse $187,500 to The Eye Man LTD and some 21 indeterminate amount—apparently in the tens of thousands of dollars—to himself. (Hearing Tr. at 103:20–104:16). Defendants had no knowledge that the loan proceeds 22 would go to anyone except The Eye Man LTD and believed that it would have gone against the terms of the loan for the proceeds to go elsewhere. (Hearing Tr. 165:3–166:5). 23 To be clear, given the lack of clarity about the financial details of the transaction, the Court draws no conclusions based on this information at this time besides limiting Mr. 24 Singer’s credibility. 25 Moreover, in general, the Court found much of Mr. Singer’s testimony to be not credible, as it was often vague, unclear, and inconsistent. With respect to the Amendment 26 specifically, his explanation that the Amendment should have made NYCVC the “Replacement Borrower” rather than the “Replacement Buyer” makes little sense because 27 the only use of the word “Borrower” in the APA is in reference to “Seller,” The Eye Man LTD, being the Borrower with respect to a PPP Loan that The Eye Man had previously 28 obtained. (Hearing Tr. at 60:13–14; Ex. 4 at Bates 10). 1 language of the Amendment, Dr. Islam testified that Defendants suspected that NYCVC 2 becoming the Buyer “in all respects” meant exactly that: that NYCVC would purchase all 3 of The Eye Man’s assets. (Ex. 113; Hearing Tr. at 161:18–162:3, 194:3–6). The other 4 language of the Amendment supports the credibility of her testimony: it would not make 5 sense for NYCVC to “accept the obligations of Buyer as defined in the [APA]” without 6 limitation if it were not also receiving all of the benefits without limitation.4 (Ex. 113). As 7 Dr. Islam testified, prior to signing the Amendment, NYCVC had no obligations to The 8 Eye Man LTD; it merely had the Franchise Agreement with C21FC. (Hearing Tr. at 9 162:8–24). Thus, to Defendants, their agreement to “accept the obligations of Buyer” to 10 the Seller, The Eye Man LTD, in place of Plaintiffs completely changed the deal. 11 (Hearing Tr. at 162:25–163:10). There is no reason to believe that Defendants intended 12 for the Amendment to apply only to The Eye Man’s physical assets. 13 To be sure, Defendants did not know with certainty that by signing the 14 Amendment, they were buying the Marks.5 But that fact does not amount to evidence that 15 they shared Plaintiffs’ asserted intent that the Amendment would apply only to The Eye 16 Man’s physical assets. Likewise, the Court gives no weight to the fact that Defendants 17 continued to operate as though NYCVC was a franchisee of Plaintiffs from the time they 18 signed the Amendment until they finally received the APA from Celtic Bank in 19 September 2021; during that time, they were trying to get a copy of the APA from Mr. 20 Singer to confirm their suspicion that the Amendment had made NYCVC the buyer of the 21 Marks, but he refused to provide one. (Hearing Tr. at 161:25–162:7; 194:20–24). The 22 Court also gives little weight to the fact that Defendants continued to pay royalties to 23 24 4 In general, the Court found Dr. Islam’s testimony to be highly credible, consistent, and detailed. 25 5 Not only did Dr. Islam testify to this fact (Hearing Tr. at 194:12–15), but 26 Defendants’ legal counsel stated in a demand letter to Mr. Singer on November 23, 2021 that “unbeknownst to [Defendants],” The Eye Man trademark and goodwill were 27 included among the assets purchased pursuant to the APA and Amendment. (Ex. 6 at Bates 175). Still, counsel’s statement is not inconsistent with Dr. Islam’s testimony that 28 Defendants suspected that NYCVC may have purchased the Marks. 1 Plaintiffs after receiving the APA: at that point, it appears that they quickly hired counsel, 2 and, notably, registered the Marks. (Hearing Tr. at 197:5–15; Doc. 11 at 147). 3 Accordingly, Plaintiffs have shown no likelihood that they can present clear and 4 convincing evidence that prior to executing the Amendment, the parties had a meeting of 5 the minds that the Amendment would substitute NYCVC as the APA’s “Buyer” only 6 with respect to The Eye Man’s physical assets. 7 The existence of the Franchise Agreement and the Trademark Assignment do not 8 compel a contrary conclusion. As to the Franchise Agreement, “[a] binding integrated 9 agreement discharges prior agreements to the extent that it is inconsistent with them.” 10 Restatement (Second) of Contracts § 213 (1981); see Dunn v. FastMed Urgent Care PC, 11 424 P.3d 436, 440 (Ariz. Ct. App. 2018). And even assuming that the Trademark 12 Assignment effected a transfer of the rights to the Marks to Mr. Singer,6 it is likely void 13 against Defendants pursuant to 15 U.S.C. § 1060(a)(4). That statute provides that “an 14 assignment shall be void against any subsequent purchaser for valuable consideration 15 without notice, unless the prescribed information reporting the assignment is recorded in 16 the United States Patent and Trademark Office within 3 months after the date of the 17 assignment or prior to the subsequent purchase.” Mr. Singer admits that he did not record 18 the Assignment (Hearing Tr. at 56:4–8), and instead Plaintiffs argue that “after more than 19 six months of negotiations and signing the FDD and Franchise Agreement, Defendants 20 were clearly put on notice of the Assignment of the Marks to Plaintiffs.” (Doc. 26 at 7). 21 But when Defendants signed the FDD and Franchise Agreement on June 29, 2021, there 22 had been no assignment of the Marks to Plaintiffs; the Trademark Assignment was 23 executed two weeks later, on or about July 13, 2021. (Doc. 11 at 40). While Mr. Singer 24 had represented to Defendants that he or his affiliated entities owned the Marks before 25 that date, there had been no such assignment. (Hearing Tr. at 157:19–158:9) Defendants
26 6 This is not necessarily a valid assumption, as the APA provides that “Seller . . . 27 agree[s] to transfer to Buyer at Closing” The Eye Man’s intangible assets, including the Marks. (Ex. 4 at Bates 9 (emphasis added)). By the time of closing, NYCVC had been 28 substituted as the Buyer by the Amendment. 1 could not have been on notice of an assignment that had not occurred. There is also no 2 evidence that Defendants because aware of the Trademark Assignment between the 3 execution of the Assignment and the execution of the Amendment, or even Defendants’ 4 recordation of the Marks with the Patent and Trademark Office. 5 In sum, the plain language of the APA and the Amendment clearly states that 6 NYCVC purchased the Marks, and Plaintiffs have failed to demonstrate any likelihood 7 that the Amendment should be reformed. As such, there is no serious question that 8 Plaintiffs lack a protectible ownership interest in the Marks and thus also lack a 9 likelihood of success on their trademark infringement claim. Accordingly, the Court need 10 not address the remainder of the Winter factors in order to deny injunctive relief on these 11 grounds, see Disney Enters., Inc., 869 F.3d at 856, but will nonetheless do so after 12 addressing the merits of the breach of covenant claim. Still, Plaintiffs are not entitled to 13 an injunction based on the trademark infringement claim. 14 ii. Breach of Covenant Not To Compete 15 The parties’ Franchise Agreement provides that during the term of the Agreement, 16 Defendants may not “perform services for, or have any direct or indirect interest . . . in, a 17 Competitive Business.”7 (Doc. 11 at 106). It further provides that for one year after 18 termination or expiration of the Agreement, Defendants may not “engage in a 19 competitive business within ten (10) miles of” The Eye Man store. (Doc. 11 at 106). 20 Restrictive covenants are disfavored, particularly when applied to medical 21 professionals. Valley Med. Specialists v. Farber, 982 P.2d 1277, 1282 (Ariz. 1999). Still, 22 covenants not to compete are enforceable if they are “ancillary to contracts for 23 employment or sale of a business,” to include the sale of a franchise. Gann v. Morris, 596 24 P.2d 43, 44 (Ariz. Ct. App. 1979); Fitness Together Franchise Corp. v. C.P. Body 25 Design, Inc., No. CIV-09-02230-MHM, 2010 WL 11628010, at *8 (D. Ariz. Feb. 24, 26 27 7 The Agreement defines a “Competitive Business” as one that derives more than $10,000 of revenue per year “from providing products and services similar to the 28 products and services offered by The Eye Man . . . .” (Doc. 11 at 106). 1 2010). A covenant not to compete is unreasonable, and therefore unenforceable, if 2 “(a) the restraint is greater than is needed to protect the promisee’s legitimate interest, or 3 (b) the promisee’s need is outweighed by the hardship to the promisor and the likely 4 injury to the public.” Fearnow v. Ridenour, Swenson, Cleere & Evans, P.C., 138 P.3d 5 723, 725 (Ariz. 2006) (quoting Restatement (Second) of Contracts § 188 (1982)). 6 In the franchise context, courts have held that “[l]egitimate business interests 7 include protecting confidential information, trade secrets, and business goodwill.” ReBath 8 LLC v. New Eng. Bath Inc., No. CV-16-01700-PHX-DLR, 2016 WL 8670165, at *3 (D. 9 Ariz. July 15, 2016). These interests are protectible through restrictive covenants because 10 if franchisees were permitted to simply switch business names, it might signal to 11 customers that the franchisee has lost faith in the franchisor’s brand or suggest that 12 franchisees can simply leave the franchise and immediately start competing if they are 13 dissatisfied. Id. 14 It is not entirely clear what interests Plaintiffs claim the non-compete provision 15 protects. To the extent they claim an interest in The Eye Man’s customer list, goodwill, 16 and other such intangibles, there is a glaring problem: it is unlikely that Plaintiffs are or 17 ever were the owners of those intangibles for the reasons discussed above.8 Pursuant to 18 the APA and the Amendment, it is likely that Defendants bought those assets directly 19 from The Eye Man’s sellers. Thus, Plaintiffs likely have no interest in protecting those 20 assets, and no matter how narrowly the Court could construe the non-compete provision, 21 it would still be unreasonable under the first Fearnow prong. 22 Plaintiffs likely do, however, have an interest in their own so-called “secret 23 sauce”—that is, the training and knowledge that Mr. Singer and his associates provided 24 to Defendants while opening The Eye Man—no matter how stale Defendants believe it to 25 be. The Court credits Dr. Islam’s testimony that the information imparted by Plaintiffs
26 8 Plaintiffs claim that they owned The Eye Man, at minimum, from the time the 27 APA was signed until the Amendment was signed. Not so. The APA provides that The Eye Man’s assets would be transferred at closing, not upon execution of the APA. (Ex. 4 28 at Bates 8–9). 1 was cursory, basic, and had little value such that Plaintiffs’ interest is very weak. 2 (Hearing Tr. at 172:13–176:1). Even if the scope of the non-compete provision is 3 unreasonable as written, however, Plaintiffs highlight a clause of the Franchise 4 Agreement providing that if the non-compete provision is found unenforceable, it will be 5 deemed modified to the extent necessary to make it enforceable—which would certainly 6 apply to opening a store across the street two months after termination of the Agreement. 7 (Ex. 112 at Bates 34). 8 Still, Defendants argue that they have validly rescinded the Franchise Agreement, 9 to include the non-compete provision, pursuant to the New York Franchise Sales Act 10 (“NYFSA”), N.Y. Gen. Bus. L. § 691(1), which provides for rescission upon willful and 11 material violations of specified statutes.9 Defendants allege several such violations, but 12 the Court need only consider one to determine that the Franchise Agreement is likely 13 rescinded: § 683(1) prohibits selling or offering to sell a franchise without registering 14 with the State. Plaintiffs do not dispute that they violated the statute nor that the violation 15 was willful, instead arguing that the violation was not material. (Doc. 13 at 15). 16 To the contrary, the Court finds that Plaintiffs’ failure to register likely was 17 material. Under New York law, an act or omission is material if a party would have acted 18 differently but for that act or omission. See Fed. Deposit Ins. Corp. v. Murex LLC, 500 F. 19 Supp. 3d 76, 112 (S.D.N.Y. 2020). Here, Dr. Islam testified that Defendants asked Mr. 20 Singer prior to executing the Franchise Agreement whether the franchise was registered, 21 and he answered affirmatively. (Hearing Tr. at 158:10–20). She further testified that, had 22 Defendants known that Plaintiffs had not registered the franchise, they would not have 23 signed the Franchise Agreement because they would not have wanted to work with 24 someone who was not abiding by the law. (Hearing Tr. at 158:21–24); cf. A Love of Food 25 I, LLC v. Maoz Vegetarian USA, Inc., 70 F. Supp. 3d 376, 409 (D.D.C. 2014) (holding 26 27 9 New York law applies to this issue because the Franchise Agreement provides that it is governed by Arizona law, except with respect to the law governing franchises 28 and the relationship of franchisors and franchisees. (Ex. 112 at Bates 36–37). 1 that there was not a triable issue of fact regarding materiality on a NYFSA claim where 2 there was no evidence that the franchisee would not have gone forward with the sale if 3 they had known the franchise was unregistered); Baker Boys of Glendale, Inc. v. 35-63 4 82nd St. Corp., 560 N.Y.S.2d 465, 467 (N.Y. App. Div. 1990); BMW Co., Inc. v. 5 Workbench, Inc., No. 86 CIV. 4200 (RO), 1988 WL 45594, at *2 (S.D.N.Y. Apr. 12, 6 1988). The Court found Dr. Islam’s testimony credible. Accordingly, the Court finds that 7 Plaintiffs likely violated § 683(1) willfully and materially, making them liable for 8 rescission pursuant to § 691(1). As a result, the Franchise Agreement is likely void, and it 9 is as though there was never a non-compete covenant in the first place. See Broder v. 10 Pallotta & Assocs. Dev., Inc., 130 N.Y.S.3d 75, 79 (N.Y. App. Div. 2020) (“The effect of 11 rescission is to declare the contract void from its inception and to put or restore the 12 parties to status quo.”). Plaintiffs are unlikely to succeed on their claim for breach of the 13 covenant not to compete given that there is no such enforceable covenant between the 14 parties. 15 Nonetheless, Plaintiffs argue that they are still entitled to an injunction because, 16 given that Defendants cannot give back the training and knowledge they received from 17 Plaintiffs, the best way to restore the parties to their original positions is to enforce the 18 non-compete provision.10 But this argument goes to the appropriateness of equitable 19 relief—not whether Plaintiffs are likely to succeed on the merits of their breach of 20 covenant claim.11 At this stage, the appropriateness of equitable relief is determined
21 10 Plaintiffs also make an argument that if the Franchise Agreement is rescinded, 22 the Court should “put[ ] the parties in the positions they were in before June 29, 2021 (the execution date of the Franchise Agreement) when Plaintiffs owned the Marks (pursuant 23 to their binding agreement with The Eye Man of December 22, 2020),” and thus Plaintiffs are entitled to injunctive relief as to the Marks. (Doc. 26 at 2). This argument is 24 unfounded for multiple reasons, most obviously because an agreement to purchase something, even if binding, is not equivalent to ownership of it. 25 11 To be sure, rescission itself is an equitable remedy, but it was appropriate for the 26 Court to consider the availability of rescission to Defendants in order to determine whether there is an enforceable non-compete covenant and thus whether Plaintiffs’ claim 27 for breach of that covenant is likely to succeed. See Beck Chevrolet Co., Inc. v. Gen. Motors LLC, 787 F.3d 663, 680 (2d Cir. 2015); see also Mister Softee, Inc. v. Tsirkos, 28 No. 14 Civ.1975(LTS)(RLE), 2014 WL 2535114, at *6–7 (S.D.N.Y. June 5, 2014) 1 through the Winter factors. Thus, the Court gives weight to Plaintiffs’ restoration 2 argument in conjunction with the appropriate factors, but it does not affect the Court’s 3 conclusion that Plaintiffs’ breach of covenant not to compete claim is unlikely to succeed 4 on the merits. 5 b. Irreparable Harm 6 A plaintiff seeking a preliminary injunction must “demonstrate that irreparable 7 injury is likely in the absence of an injunction.” Winter, 555 U.S. at 22. Irreparable harm 8 is harm “that cannot be redressed by a legal or equitable remedy following trial.” Premier 9 Nutrition, Inc. v. Organic Food Bar, Inc., 475 F. Supp. 2d 995, 1007 (C.D. Cal. 2007) 10 (internal quotation marks omitted). 11 Here, Plaintiffs argue that they will suffer irreparable harm based on loss of 12 clientele, business, and goodwill, and from losing control of the Marks and of The Eye 13 Man brand.12 “Evidence of loss of control over business reputation and damage to 14 goodwill could constitute irreparable harm,” but “[t]hose seeking injunctive relief must 15 proffer evidence sufficient to establish a likelihood of irreparable harm.” Herb Reed 16 Enters., LLC v. Fla. Ent. Mgmt., Inc., 736 F.3d 1239, 1250–51 (9th Cir. 2013) (emphasis 17 added) (holding that platitudes about goodwill and reputation, not grounded in evidence, 18 are insufficient to establish a likelihood of irreparable injury in a trademark case). 19 Considering all of the evidence proffered, the Court finds that Plaintiffs have failed to 20 establish such a likelihood. There is no evidence that The Eye Man has lost customers 21 under Defendants’ operation nor that the store’s reputation has suffered. Plaintiffs have 22 offered no evidentiary support for their assertion that Defendant Karim has been offering 23 (considering the defendant’s rescission argument in evaluating the likelihood of success 24 of the plaintiff’s breach of covenant not to compete claim). In other words, the rescission issue must be accounted for in evaluating Plaintiffs’ likelihood of success on the breach 25 claim, whereas Plaintiffs’ argument as to equitable restoration flows from those issues rather than preceding them. 26 12 Plaintiffs also argue that they are entitled to a presumption of irreparable harm 27 pursuant to 15 U.S.C. § 1116(a), but that presumption arises only where a party has shown a likelihood of success on the merits of a trademark infringement claim. As 28 discussed, Plaintiffs have not shown such a likelihood. 1 optician services despite not being licensed. Rather, Dr. Islam credibly testified that 2 Defendants have had no trouble keeping or attracting patients or finding vendors. 3 (Hearing Tr. at 177:2–184:14). There is some evidence that Defendants’ business strategy 4 differs from Plaintiffs’ by prioritizing patient needs over sales, but the Court finds that 5 evidence insufficient to establish a likelihood of harm. The different business strategies 6 also bely Plaintiffs’ claim that that an injunction is necessary to protect the training and 7 knowledge that they provided to Defendants and Plaintiffs’ ability to compete. To the 8 extent any significant training and knowledge was actually imparted, which is doubtful, it 9 is apparent that Defendants are largely not using it. In sum, the Court finds that Plaintiffs 10 have failed to establish a likelihood of irreparable harm. 11 c. Balance of Equities 12 Plaintiffs argue that the balance of the equities tip in their favor because Plaintiffs 13 are not imminently in a position to make use of the Marks,13 so even if Defendants are the 14 true owners of the Marks, an injunction will cause them no harm because there is no 15 immediate threat of anyone else using the Marks. (Doc. 13 at 11). Likewise, Plaintiffs 16 argue that if the non-compete clause is enforced, Defendants will still be able to operate a 17 retail optical store outside of the 10-mile radius. (Doc. 13 at 14). On the other hand, 18 Defendants argue that an injunction would destroy their business that they have spent 19 hundreds of thousands of dollars on—that they would have to lay off staff, cancel 20 appointments, and sit on inventory while continuing to make rent and loan payments. 21 (Doc. 22 at 5, 11). 22 The Court finds Defendants’ argument to be the stronger one. Plaintiffs’ 23 arguments ignore the reality of the circumstances to minimize the hardships an injunction 24 would place on Defendants. While Plaintiffs may have some speculative harm based on 25 the difficulty of competing with a retail optical business that may have some knowledge 26 27 13 Mr. Singer’s own testimony partially contradicted this argument, however, as he stated that Plaintiffs would be in a position to open a retail optical store immediately 28 upon signing a lease. (Hearing Tr. at 81:15–19). 1 that Plaintiffs themselves imparted, it is certainly outweighed by Defendants’ concrete 2 harm. Defendants have, in fact, spent time and money to develop their business under 3 The Eye Man Marks—which they likely own pursuant to the Amendment drafted by 4 Plaintiffs—on the Upper West Side of Manhattan. To issue the requested injunction 5 would force them to close that business and redo the process and expenses elsewhere 6 under a different name. Plaintiffs’ counterargument that this harm was self-inflicted is 7 unavailing given that Defendants are the likely owners of The Eye Man and thus were 8 likely well within their rights to open the business. Further, Plaintiffs rely on Sierra Club 9 v. Trump in support of their argument that self-inflicted losses should not be given weight 10 when balancing harms. 929 F.3d 670, 706 (9th Cir. 2019). But there, the Ninth Circuit 11 was referring to costs undertaken after a motion for preliminary injunction was filed. Id. 12 Here, Defendants did open their Eye Man store two days after Plaintiffs filed the instant 13 Motion, but by that time, they had already incurred the bulk of the costs to develop the 14 store. While Defendants face significant losses if an injunction were to issue, Plaintiffs 15 have no concrete business plans, and, as discussed, have provided minimal evidence of 16 harm. The balance of equities favors Defendants. 17 d. Public Interest 18 The Court finds that this factor is of little importance in this case, but it 19 nonetheless weighs against an injunction. As to the injunction against use of the Marks, 20 in trademark cases, the public interest favors the protection of trademarks and the 21 prevention of consumer confusion. See Brookfield Commc’ns, Inc. v. W. Coast Ent. 22 Corp., 174 F.3d 1036, 1066 (9th Cir. 1999); Internet Specialties W., Inc. v. Milon- 23 DiGiorgio Enters., Inc., 559 F.3d 985, 993 (9th Cir. 2009). Thus, the public interest 24 favors whichever party is the true owner of the Marks—which here, is likely Defendants. 25 As to the non-compete provision, Plaintiffs argue that the public interest favors an 26 injunction because there is no public interest in unfair competition and the economy 27 depends on the enforcement of contracts. (Doc. 13 at 14). But this argument carries 28 weight only if Plaintiffs are likely to succeed on the merits, which they are not. On the 1 other hand, Defendants argue that public policy favors a patient’s right to see the doctor 2 of their choosing, citing Valley Medical Specialists. (Doc. 22 at 15). Again, then, the 3 public interest favors Defendants. 4 IV. CONCLUSION 5 The resolution of this Motion largely turns on the central question of who owns 6 The Eye Man, a question addressed under the first and most important Winter factor. The 7 question is likely to be answered using the simple principle “that when parties bind 8 themselves by a lawful contract the terms of which are clear and unambiguous, a court 9 must give effect to the contract as written.” Roe v. Austin, 433 P.3d 569, 574 (Ariz. Ct. 10 App. 2018) (internal quotation marks omitted). Here, under the unambiguous terms of the 11 APA and Amendment, it is very likely that Defendants own The Eye Man, including its 12 Marks. Accordingly, Plaintiffs have not demonstrated a likelihood of success nor serious 13 questions going to the merits of the trademark infringement claim. Moreover, it is likely 14 that Defendants are entitled to rescission of the Franchise Agreement such that there is no 15 enforceable non-compete covenant, meaning Plaintiffs have not shown a likelihood of 16 success on the breach of covenant claim, either. Plaintiffs have also failed to offer 17 evidence showing a likelihood of irreparable harm, and the balance of equities and the 18 public interest weigh against restraining Defendants from operating an optical business 19 that they likely own pursuant to a contract drafted and executed by Plaintiffs themselves. 20 Having considered all of the evidence and the arguments of the parties, and having 21 individually considered the Winter factors with respect to both claims for injunctive 22 relief, the Court finds that Plaintiffs are not entitled to a preliminary injunction. 23 /// 24 /// 25 /// 26 /// 27 /// 28 /// 1 IT IS THEREFORE ORDERED that Plaintiffs’ Motion for Preliminary Injunction, which the Court construes within the Motion for Temporary Restraining 3) Order (Doc. 13) is denied. 4 Dated this 17th day of June, 2022. 5
7 United States District Judge 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28