1 WO 2 3 4 5 6 IN THE UNITED STATES DISTRICT COURT 7 FOR THE DISTRICT OF ARIZONA
9 ReBath LLC, No. CV-21-00870-PHX-DWL
10 Plaintiff, ORDER
11 v.
12 Foothills Service Solutions Company, et al.,
13 Defendants. 14 15 In 2017, Plaintiff ReBath LLC (“ReBath”) executed a franchise agreement with 16 Defendant Foothills Service Solutions Company (“Foothills”) that allowed Foothills to 17 operate a ReBath franchise in North Carolina. In May 2021, the parties’ business 18 relationship broke down, prompting ReBath to announce that it was terminating the 19 franchise agreement and Foothills to dispute whether the termination was proper. The 20 parties then rushed to court and filed dueling lawsuits with dueling temporary restraining 21 order (“TRO”) requests. After the lawsuits were consolidated, the Court held a TRO 22 hearing on June 3, 2021. For the reasons that follow, ReBath’s motion is granted in part 23 and denied in part and Foothills’ motion is denied. 24 BACKGROUND 25 I. Factual Background 26 The following facts are derived from documentary evidence admitted during the 27 TRO hearing and from witness testimony during that hearing. 28 ReBath is the country’s largest bathroom remodeling company. It offers remodeling 1 services through 107 franchises in 45 states. ReBath also manufactures and sources some 2 remodeling products and sells those products to its franchisees. (Ex. 4 at RB49.)1 ReBath 3 trains and supports its franchisees using a variety of materials, methods, standards, 4 strategies, policies, procedures, techniques, training, specifications, and accumulated 5 experience that ReBath collectively calls the “System.” (Id.) The System is compiled in 6 ReBath’s confidential Systems Manual (the “Manual”). (Id.) ReBath also has various 7 “trade names, trademarks, service marks, tradestyles, logos, [and] designs” that are used in 8 connection with operating a ReBath franchise (the “Marks”). (Id.) Together, the Court 9 will refer to ReBath’s Marks and confidential and proprietary material, including the 10 System and the Manual, as ReBath’s intellectual property (“IP”). 11 By entering into franchise agreements, franchisees gain the benefit of ReBath’s IP, 12 brand, goodwill, products, and support. The flipside, as ReBath CEO Brad Hillier 13 (“Hillier”) testified, is that ReBath retains significant control over these benefits, merely 14 loaning the Manual to franchisees, designating all aspects of the System and Manual as 15 confidential, and requiring their immediate return—as well as the immediate disuse of all 16 IP—upon termination of a franchise agreement. (See also id. at RB63, RB71, RB89.) 17 On January 31, 2017, ReBath entered into a franchise agreement (the “Franchise 18 Agreement” or the “Agreement”) with Foothills for a ten-year term. (Ex. 4 at RB55, 19 RB101.) Under the Agreement, Foothills would operate in the Charlotte, North Carolina 20 area, gaining the benefit of ReBath’s IP, products, and support. (Id. at RB49-50, RB103.) 21 Foothills, in turn, promised among other things to pay monthly royalties on its sales (id. at 22 RB67) and to purchase a yearly quota of ReBath products (id. at RB52). Foothills also 23 promised that after the Agreement terminated or otherwise expired, it would not operate or 24 otherwise engage in any business offering similar products or services within a 20-mile 25 radius of the Charlotte-area territory. (Ex. 5 at RB91-92.) Defendant Norman Christopher 26 Woods (“Woods”), Foothills’ president, signed the Agreement on behalf of his company 27
28 1 The Court cites the parties’ stipulated exhibits. Specific page numbers are cited by Bates number. Leading zeros in the Bates numbers are omitted. 1 and also signed a payment and performance guarantee as personal guarantor of Foothills’ 2 performance under the Agreement. (Id. at RB101, RB105-06.)2 3 Foothills performed its contractual duties without major incident throughout 2017, 4 2018, and 2019. Hillier testified that Foothills had some financial trouble, which the parties 5 discussed over the phone around fall 2019, but his concerns were assuaged by the fact that 6 ReBath was negotiating a nationwide Installation Services Agreement with home 7 improvement retailer Lowe’s—if Foothills could participate in this program, its sales 8 would likely increase. 9 On December 5, 2019, ReBath entered into the Lowe’s agreement. (Ex. 7 at 10 RB131.) On January 13, 2020, Foothills signed an agreement with ReBath to participate 11 in the Lowe’s program. (Ex. 8 at RB164, RB171.) Sales derived from the Lowe’s program 12 ended up constituting around 40 percent of Foothills’ business in 2020 and during the first 13 four months of 2021. (Ex. 33 at RB228.) 14 Beginning in May 2020, Lowe’s and ReBath began to complain about issues with 15 Foothills’ performance, in particular its “spill rates”—that is, the number of customer 16 inquiries and referrals not converted into final sales—as well as its “lead times,” or the 17 number of weeks between when a customer would purchase the renovation and Foothills 18 would complete it. (Exs. 13-15, 18, 21 ¶¶ 5-6, 111, 116, 119.) Although ReBath and 19 Foothills attempted to implement various strategies to improve Foothills’ spill rates and 20 lead times (Exs. 12, 16-21, 31, 109-10), these efforts ultimately did not allay Lowe’s 21 concerns, as explained further below. 22 It should be noted that Foothills’ business in 2020 and 2021 was not without its 23 bright spots. In a 2020 customer survey of all ReBath franchises, Foothills had the highest 24 reputation score in the entire country. (Ex. 103.) Year-to-date sales figures for the 25 Foothills franchise show that, in 2021, Foothills was on track to meet or exceed its 2020 26 sales. (Ex. 33.) And in the Court’s view, Woods testified credibly and sincerely that 27
28 2 For convenience, the Court uses the term “Foothills” generally to refer to both Defendants, unless discussing Woods specifically. 1 although it had taken time for Foothills to establish itself, things were improving and the 2 business was overall doing well. Hillier’s testimony also acknowledged that Foothills had 3 been successful in certain aspects of its business. 4 Nevertheless, Lowe’s cancelled its arrangement with Foothills on April 14, 2021. 5 (Ex. 32.) Woods learned this news during an April 19, 2021 phone call (Ex. 21 ¶ 10) and 6 received formal notice in a May 4, 2021 letter. (Ex. 9.) 7 ReBath was distressed by Foothills’ exclusion from the Lowe’s program. Hillier 8 feared that, given Lowe’s significance to Foothills’ overall sales, this development would 9 render Foothills’ business unsustainable. Hillier was also concerned that not having a 10 ReBath franchise operating under the Lowe’s program in Charlotte, which Hillier stated is 11 a particularly important market for Lowe’s, could jeopardize ReBath’s national 12 relationship with the retailer. 13 Notwithstanding these concerns, the validity of the ReBath-Foothills Franchise 14 Agreement was not contingent on Foothills’ continued participation in the Lowe’s 15 program. This created a dilemma for ReBath, which hoped to replace Foothills as a 16 franchisee but could not invoke the Lowe’s situation as the basis for terminating the 17 Franchise Agreement. 18 ReBath thus explored two different paths for replacing Foothills as a franchisee. 19 The first was to locate a different ReBath franchisee who might be interested in buying out 20 Foothills and taking over the Charlotte territory. (During the TRO hearing, Hillier 21 characterized this as a “kind of brokered outcome [that] might ultimately produce the best 22 result.”) ReBath was able to identify such a franchisee and presented the idea to Woods 23 (Exh. 21 ¶ 12), but as discussed in more detail below, the idea ultimately fizzled. 24 The other path was to formally terminate Foothills as a franchisee based on 25 violations of the Franchise Agreement. To that end, on April 26, 2021, Hillier, on behalf 26 of ReBath, sent Woods a letter (the “Notice of Default”) stating that Foothills was in default 27 under the terms of the Franchise Agreement. (Ex. 104.) The Notice of Default invoked 28 two bases for default: (1) past-due royalty payments of $19,240.36 and (2) past-due product 1 purchase payments of $31,690.80. (Id.) The Notice of Default further stated that, under 2 § 24.A.8 of the Franchise Agreement, Foothills had 30 days to cure the defaults or be 3 terminated. (Id.; see also Ex. 4 at RB86 [§ 24.A.8].) The letter concluded with a note that 4 “[n]othing contained or omitted from this notice is intended to constitute an election of 5 remedies or a waiver, release for modification of ReBath’s rights under the Franchise 6 Agreement or otherwise. ReBath retains all rights and remedies available at law and in 7 equity.” (Ex. 104 at FSS255.) 8 On May 6, 2021, Foothills (via Woods) paid the $19,240.36 in royalties. (Ex. 105.) 9 That same day, only a few hours later, Woods received a new letter (the “Notice of 10 Termination”) from Hillier. (Ex. 5.) This letter formally gave notice that the Franchise 11 Agreement between ReBath and Foothills was terminated. (Id. at RB117.) The two 12 grounds for termination cited in this letter were distinct, in certain respects, from the 13 grounds identified in the Notice of Default. First, the Notice of Termination stated that 14 Foothills violated the Agreement by underreporting its sales by more than one percent 19 15 times in the prior 39 months and three times in the prior 12 months. (Id.; Ex. 4 at RB67- 16 68.) Under § 24.A.10 of the Agreement, a default occurs when a franchisee underreports 17 sales “by more than 1% on two or more separate occasions during the [ten-year] Term.” 18 (Ex. 4 at RB86.) Second, the Notice of Termination stated that Foothills was late in paying 19 its royalty fees and product purchases. (Ex. 5 at RB117-18.) The underlying late payments 20 were the same as those cited in the Notice of Default, but, unlike that letter, the Notice of 21 Termination stated that the untimeliness of the payments—regardless of Foothills’ attempts 22 to cure within a 30-day period—constituted an event of default under the terms of the 23 Agreement. To support this conclusion, the Notice of Termination cited § 24.A.20 of the 24 Agreement, which states in relevant part that a franchisee’s failure “on three or more 25 separate occasions within any 12 consecutive month period to . . . pay when due fees or 26 payments owed to [ReBath] or its affiliates” constitutes a default. (Id.; Ex. 4 at RB87.) 27 The Notice of Termination then stated that “ReBath expects” Foothills to comply with all 28 of its post-termination obligations, including, in relevant part, that Foothills “[c]ease . . . 1 use of ReBath’s marks and business system,” “[p]rovide to ReBath a complete customer 2 list,” and “[c]ancel or Transfer to ReBath all identifiers.” (Ex. 5 at RB118; see also Ex. 4 3 at RB89-90 [Agreement provisions setting out post-termination obligations].) ReBath 4 reserved all of its rights and noted that ReBath wished “to work with [Foothills] to effect 5 an orderly wind down of [the] franchise.” (Ex. 5 at RB118.) Attached to the letter were 6 documents purporting to support the proffered bases for termination. (Id. at RB119-25.) 7 On May 13, 2021 Foothills (via Woods) paid the overdue product purchase fees. 8 (Ex. 106.) That same day, Woods wrote Hillier a letter (“May 13 Letter”) disputing the 9 claims in the Notice of Termination. (Ex. 107.) Specifically, this letter stated that Foothills 10 had cured and intended to cure the payment violations within the 30-day cure period, 11 disputed the validity of the other grounds for termination, and intended to remain open for 12 business notwithstanding the purported immediate termination. (Id.) 13 Against this backdrop, ReBath and Foothills were trying to resolve what to do about 14 Foothills’ existing Lowe’s accounts. (See, e.g., Ex. 25 [May 5-6 emails discussing Lowe’s 15 account wind-down].) As noted, Hillier had previously tried to broker a deal between 16 Foothills and a replacement franchisee as a cooperative way to resolve the Lowe’s accounts 17 and manage the transition to the new franchisee. (Ex. 21 at RB202 ¶ 12.) Woods, however, 18 continued to contact Lowe’s personnel to discuss ways to improve the business, rather than 19 acknowledging that the program had terminated. (Ex. 115.) This convinced Hillier that 20 the parties would no longer be able to resolve the transition amicably. Thus, instead of 21 moving forward with a gradual wind-down of Foothills’ existing Lowe’s contracts, as had 22 been the original plan (Ex. 9), ReBath opted to terminate Foothills’ Franchise Agreement. 23 Even after the termination, however, Foothills and ReBath were in communication about 24 an orderly wind-down of Lowe’s jobs. (Ex. 108 [email dated May, 11, 2021].) But after 25 Woods’ May 13 Letter stating that Foothills was staying in business and did not agree that 26 the Franchise Agreement had terminated, ReBath decided it had to act immediately to 27 protect its IP, brand, and the integrity of its nationwide franchise system. (Ex. 24 at RB208- 28 09 ¶¶ 4-10.) According to Woods, among the actions ReBath has taken are removing 1 Foothills’ Facebook page, altering Foothills’ Google page to say that Foothills is 2 permanently closed, telling Foothills’ customers that ReBath’s Charlotte franchise would 3 be under new ownership, cutting off Foothills’ access to ReBath’s management software, 4 and contacting Foothills’ employees to offer them jobs with the new franchisee. 5 II. Procedural History 6 On May 17, 2021, ReBath filed its complaint. (Docs. 1, 6-7.) 7 On May 18, 2021, ReBath filed its TRO motion. (Doc. 13.) This motion later 8 became fully briefed. (Docs. 26, 32.) 9 Also on May 18, 2021, Foothills filed its complaint in the District of Arizona in a 10 separate action originally assigned to Judge Liburdi. Foothills Serv. Sols. Co. v. ReBath 11 LLC, 2:21-cv-00880 (May 18, 2021) (Doc. 1) [hereinafter cited as “Foothills Compl.”]. 12 The same day, Foothills filed its TRO motion. Id. (Doc. 2) [hereinafter cited as 13 “Foothills TRO Mot.”]. This motion later became fully briefed. (Docs. 28, 33.) 14 Sometime between May 18 and 20, 2021,3 ReBath’s counsel sent Foothills’ counsel 15 a cease-and-desist letter informing Foothills of the instant lawsuit and demanding that 16 Foothills stop operating its enterprise in the noncompete zone established in the Franchise 17 Agreement and using any ReBath Marks or other branding. (Ex. 22.) 18 On May 24, 2021, ReBath filed an unopposed motion to consolidate Foothills’ case 19 with the instant case. (Doc. 21.) That motion was granted. (Doc. 23.) 20 On June 3, 2021, the Court held a hearing on the TRO motions. (Doc. 35.) Hillier 21 and Woods testified in person. 22 THE PARTIES’ CLAIMS AND TRO MOTIONS 23 I. ReBath 24 ReBath’s complaint asserts six causes of action: (1) trademark infringement under 25 15 U.S.C. § 1114(1); (2) unfair competition and false designation of origin under 15 U.S.C. 26 § 1125(a); (3) common law trademark infringement and unfair competition; (4) trade 27 secrets violation under 18 U.S.C. § 1836; (5) misappropriation of trade secrets under 28 3 The letter is dated May 20, 2021, but Woods said he received it on the 18th or 19th. 1 A.R.S. § 44-401; and (6) breach of contract, including but not limited to breach of the 2 Franchise Agreement’s noncompete and post-termination provisions. (Doc. 1 at 15-21.) 3 ReBath seeks a TRO restraining Foothills and Woods (and any associates, agents, 4 employees, and so on) from using or associating with the ReBath brand or IP; 5 misrepresenting in any way an affiliation with ReBath or a right to use ReBath’s IP; 6 operating any business that gives the impression of an affiliation with ReBath; operating 7 any bathroom remodeling business within a 20-mile radius of the Charlotte-area territory; 8 and engaging in any unfair competition against ReBath. (Doc. 13-1.) 9 II. Foothills 10 Foothills’ complaint asserts four causes of action: (1) an equitable action seeking 11 injunctive relief against ReBath’s termination of the Franchise Agreement; (2) an action 12 seeking declaratory relief that Foothills is in compliance with the Agreement and that 13 ReBath’s termination constitutes breach; (3) breach of contract based on the termination; 14 and (4) breach of the implied covenant of good faith and fair dealing based on ReBath’s 15 terminating the Agreement, ignoring Foothills’ requests to mediate, and conspiring to 16 transfer Foothills’ franchise territory to a new franchisee. (Foothills Compl. at 7-10.) 17 Foothills seeks a TRO restraining ReBath (and its agents, employees, and so on) 18 from terminating the Franchise Agreement, moving forward with any plans to transfer 19 Foothills’ territory to a new franchisee, communicating with any of Foothills’ customers 20 regarding change in ownership, or deleting or taking off-line any of Foothills’ websites. 21 (Foothills TRO Mot. at 18-19.) 22 DISCUSSION 23 I. Legal Standard 24 A motion for TRO is analyzed under “substantially identical” standards as a motion 25 for preliminary injunction. Stuhlbarg Int’l Sales Co. v. John D. Brush & Co., Inc., 240 26 F.3d 832, 839 n.7 (9th Cir. 2001). “A preliminary injunction is an extraordinary and drastic 27 remedy, one that should not be granted unless the movant, by a clear showing, carries the 28 burden of persuasion.” Lopez v. Brewer, 680 F.3d 1068, 1072 (internal quotation marks 1 omitted). See also Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 24 (2008) (“A 2 preliminary injunction is an extraordinary remedy never awarded as of right.”). A plaintiff 3 seeking a preliminary injunction must show that (1) it is likely to succeed on the merits, 4 (2) it is likely to suffer irreparable harm without an injunction, (3) the balance of equities 5 tips in its favor, and (4) an injunction is in the public interest. Winter, 555 U.S. at 20. 6 However, “if a plaintiff can only show that there are ‘serious questions going to the 7 merits’—a lesser showing than likelihood of success on the merits—then a preliminary 8 injunction may still issue if the balance of hardships tips sharply in the plaintiff’s favor, 9 and the other two Winter factors are satisfied.” Shell Offshore, Inc. v. Greenpeace, Inc., 10 709 F.3d 1281, 1291 (9th Cir. 2013) (quotation and emphasis omitted). Under this serious- 11 questions variant of the Winter test, “[t]he elements . . . must be balanced, so that a stronger 12 showing of one element may offset a weaker showing of another.” Lopez, 680 F.3d at 13 1072. Regardless of which standard applies, the movant “carries the burden of proof on 14 each element of the test.” Envtl. Council of Sacramento v. Slater, 184 F. Supp. 2d 1016, 15 1027 (E.D. Cal. 2000). 16 II. Analysis 17 The key issue at the heart of this case is whether ReBath had the right to terminate 18 the Franchise Agreement. As explained below, the Court finds that ReBath likely had the 19 right to terminate. ReBath has further shown its entitlement to the remedies set out in the 20 Franchise Agreement with respect to its Marks and trade secrets, because it has 21 demonstrated a likelihood of success on the merits, irreparable harm, the balance of 22 equities, and that a TRO would be in the public interest with respect to those two categories 23 of claims. ReBath has also met its burden with respect to its breach of contract claim 24 insofar as the claim is for violating the Franchise Agreement’s post-termination 25 obligations. ReBath has failed to meet its burden, however, with respect to the noncompete 26 component of its breach of contract claim, because it has not shown a likelihood of success 27 on the merits or irreparable harm with respect to the covenant not to compete. 28 Foothills has not met its burden. Foothills has not shown a likelihood of success on 1 the merits with respect to the propriety of the termination. Even if it could show a serious 2 question going to the merits, moreover, Foothills has not demonstrated irreparable harm. 3 A. ReBath’s Motion 4 1. Likelihood Of Success On The Merits 5 a. Mediation/Arbitration 6 A threshold question underlying both parties’ motions is whether this dispute is 7 properly before the Court under the terms of the Franchise Agreement.4 The Agreement’s 8 choice-of-law and dispute resolution provisions are set out in § 32. (Ex. 4 at RB96-99.) 9 Among other things, § 32 mandates that, with one exception discussed further below, the 10 parties must attempt to mediate disputes before filing suit: 11 Except as provided in Section 32.F., the parties shall first attempt in good faith to resolve any Dispute by mediation. If a party commences any legal 12 action, other than as provided for in Section 32.F., without having first 13 complied with all of the provisions of this Article 32.C regarding mediation, the other party shall be entitled to a 30 day abatement of the legal action upon 14 filing the appropriate procedural motion in the legal proceeding . . . . 15 (Id. at RB96.) The exception, set forth in § 32.F, provides: 16 If a situation arises relating to Franchisee’s use of the Marks, the System, or 17 the Confidential Information and the Company believes it will suffer irreparable loss or damage unless the Company takes immediate action, 18 including . . . conduct alleged to be in violation of covenants set forth in this Agreement, the Company shall be free to seek restraining orders, preliminary 19 injunctive relief, or other interim relief from any court of competent 20 jurisdiction, and in this instance, a court may also decide claims for damages related to the Dispute. 21 (Id. at RB98.) 22 ReBath argues that, because it is seeking injunctive relief related to its IP, its claims 23 24 4 The Court notes that both parties allege that the Court has jurisdiction and that venue 25 is proper. (Doc. 1 ¶¶ 13-17; Foothills Compl. ¶¶ 9-11.) ReBath invokes federal question jurisdiction under the Lanham Act as well as diversity jurisdiction. (Doc. 1 ¶ 9.) Foothills 26 invokes diversity jurisdiction for its claims. (Foothills Comp. ¶ 13.) Based on the nature of the parties’ allegations and their states of citizenship, the Court concludes that it has 27 subject matter jurisdiction over both parties’ actions. Further, the Franchise Agreement provides for actions to be filed in the District of Arizona. (Ex. 4 at RB98.) The Agreement 28 is governed by Arizona law except to the extent that the Lanham Act or Federal Arbitration Act apply. (Id. at RB96.) 1 fall within § 32.F and it is thus exempt from § 32’s usual requirement to “first attempt in 2 good faith to resolve any Dispute by mediation.” For similar reasons, ReBath argues that 3 its claims fall outside the Agreement’s arbitration clause. (See Ex. 4 at RB98.)5 In contrast, 4 ReBath argues that Foothills’ claims are arguably subject to the mediation and arbitration 5 clauses but clarified during the TRO hearing that it has chosen, in the interest of judicial 6 economy, to allow both parties’ TRO arguments to be heard together. (Counsel further 7 clarified that ReBath has not waived its ability to enforce the arbitration clause during 8 future stages of this case.) Meanwhile, Foothills’ position seems to be that ReBath’s TRO 9 motion is not properly before the Court and instead is subject to mandatory mediation. 10 (Doc. 26 at 9 [“ReBath has failed and/or refused to withdraw the termination pending 11 contractually-mandated mediation . . . .”].) During oral argument, Foothills’ counsel 12 elaborated that ReBath’s interpretation of § 32 is nonsensical because in effect it means 13 that while the parties are forced to mediate or arbitrate the validity of termination, ReBath 14 can obtain a restraining order or injunction that could effectively put the franchisee out of 15 operation. As Foothills’ counsel put it: by that point, what’s left to mediate? 16 The Court understands Foothills’ point, but the plain language of the contract 17 supports ReBath’s interpretation. Section 32.F affords ReBath the right to seek injunctive 18 relief so long as “a situation arises relating to Franchisee’s use of the Marks, the System, 19 or the Confidential Information and the Company believes it will suffer irreparable loss or 20 damage unless the Company takes immediate action, including but not limited to a situation 21 involving threatened or actual conduct alleged to be in violation of the covenants set forth 22 in this Agreement.” (Ex. 4 at RB98.) This is precisely such a “situation.” It follows that 23
24 5 The relevant language of the arbitration clause is: “Except as provided in Section 32.E. and 32.F., all claims, controversies, and disputes arising out of or related to this 25 Agreement must be submitted to arbitration.” (Ex. 4 at RB98.) Section 32.E provides that the following categories of disputes “will not be resolved through arbitration unless the 26 Company consents to arbitration”: “(i) disputes that arise under or are related to the Lanham Act, as now or later amended; (ii) disputes that otherwise relate to the ownership 27 or validity of any of the Marks or any other elements of the System; (iii) disputes that involve enforcement of the Company’s intellectual property rights or protection of the 28 Confidential Information; or (iv) disputes related to the payment of sums Franchisee owes the Company or its affiliates.” (Id.) 1 when, as here, ReBath wishes to terminate a franchise, and the franchisee is uncooperative, 2 ReBath can seek an order to protect its IP even though the franchisee disputes whether the 3 stated grounds for termination were valid. Although this one-sided exception is favorable 4 to ReBath, that is how the contract is written, and the Court has a duty to give effect to the 5 terms of the contract. Grosvenor Holdings, L.C. v. Figueroa, 218 P.3d 1045, 1050 (Ariz. 6 Ct. App. 2009) (“A general principle of contract law is that when parties bind themselves 7 by a lawful contract, the terms of which are clear and unambiguous, a court must give effect 8 to the contract as written.”). 9 b. Termination 10 As noted, although ReBath gave notice to Foothills on April 26, 2021 that the 11 Franchise Agreement was “subject to termination” due to unpaid royalties and product 12 purchase payments and offered Foothills 30 days to cure these defaults (Ex. 104), ReBath 13 ended up terminating the Agreement on different grounds on May 6, 2021, well before the 14 30-day cure period expired (Ex. 5). In the Notice of Termination, ReBath asserted that 15 termination was proper for two reasons: (1) Foothills underreported its sales figures by 16 more than one percent on two or more separate occasions; and (2) Foothills failed to pay 17 fees or payments when due on three or more separate occasions within any 12 consecutive 18 month period. (Ex. 5; Doc. 32 at 2-3.) 19 i. Underreporting Of Sales Figures 20 On this record, the Court concludes that ReBath has not met its burden of showing 21 a likelihood of success on the merits of the underreporting-of-sales issue. 22 The sole documentary evidence of Foothills’ underreporting is a single-page 23 printout of what appears to be an Excel spreadsheet showing Foothills’ sales reports from 24 January 2018 to March 2021. (Ex. 5 at RB120.) This document was attached to the 25 termination letter. It is notable to the Court that no declarations or other materials were 26 submitted alongside it to attest to its accuracy or the validity of its methodology. As noted 27 during the TRO hearing, Foothills disputes that it ever misreported its sales, arguing that 28 the discrepancies in the spreadsheet must be the product of a lack of clarity around how to 1 report sales or errors in ReBath’s calculations. 2 The Court acknowledges that ReBath did submit some additional evidence, on top 3 of the spreadsheet, in an effort to prove its underreporting-of-sales claim. ReBath CFO 4 David Japhet’s declaration includes, among other things, an attestation that Foothills “has 5 been a systemic under reporter of sales” and “underreported sales to ReBath 19 times by 6 more than 1% since January 31, 2018,” which is consistent with the spreadsheet. (Id.; Ex. 7 10 at RB181 ¶ 4.) Japhet also declares “[t]here is no possible way Foothills is confused or 8 misunderstands the methodology for reporting sales to ReBath, nor is there an error in 9 ReBath’s calculations, nor could Foothills reasonably dispute that it has ever underreported 10 its sales.” (Ex. 10 at RB 182 ¶ 9.) The problem with these assertions, however, is that they 11 are ipse dixits devoid of any explanation of where the numbers in the spreadsheet actually 12 came from (and why they are accurate). 13 The Court also appreciates that Hillier testified at length during the TRO hearing in 14 an attempt to explain the spreadsheet, including how it was generated and updated and how 15 a ReBath franchisee “reports” sales. Hillier’s testimony was credible. Nevertheless, this 16 testimony ultimately did not persuade the Court that ReBath is likely to prevail on the claim 17 that Foothills underreported sales in violation of the Franchise Agreement. Hillier testified 18 that the spreadsheet showed the exact numbers from ReBath’s system. So far, so good. 19 But Hillier’s explanation of how these numbers are generated did not sufficiently establish 20 that Foothills in fact underreported. Hillier explained that on the seventh or eighth day of 21 each month, franchisees sync their QuickBooks records with ReBath’s financial system, at 22 which point the system takes a timestamp of the figures and calculates the royalties to be 23 billed to the franchisees based on this timestamp. The system, however, continues to take 24 live data from the franchisees’ QuickBooks records, and then sometime near the end of the 25 month the system syncs with the franchisees’ QuickBooks records a second time, and if 26 the revenue number is different on this second sync, the system creates a report noting the 27 existence of a difference. 28 This explanation, although clear enough, raises some questions which, at this point 1 in the case, ReBath has not sufficiently answered. For one thing, the process Hillier 2 described seems to differ from the process spelled out in the Franchise Agreement. Section 3 13.E of the Agreement states that on or before the seventh day of each month, a franchisee 4 must “submit . . . a correct statement, [that is] signed.” (Ex. 4 at RB67.) However, Hillier 5 testified that franchisees do not affirm or sign any reporting statement, or indeed that there 6 is any kind of standalone statement that a franchisee could review and then submit. Rather, 7 Hillier’s testimony indicated that Foothills was merely on notice to “sync” its QuickBooks 8 records with ReBath’s system by the seventh day of each month, which franchisees may 9 set up to occur automatically or with the push of a button.6 Then, in an opaque process, 10 the system automatically determines whether there have been any changes after the seventh 11 day of each month and flags any such differences. Even if there is some autogenerated 12 mismatch at this point, that does not seem, in the Court’s view, to be sufficient evidence 13 that Foothills thereby underreported its sales in violation of the relevant provisions of the 14 Franchise Agreement. It seems just as plausible that some error in the franchisee’s 15 QuickBooks, in ReBath’s system, or in how the numbers are interpreted might be to blame. 16 True, § 13.E says that the sales report “shall be submitted electronically as prescribed by 17 [ReBath],” but the electronic report described by Hillier sounds more like one 18 autogenerated by an internal ReBath system than one signed and submitted by a franchisee. 19 ReBath seems to argue that because its autogenerated report says there was a difference 20 between the amounts captured at the seventh versus the end of the month, ipso facto 21 Foothills has misreported. That is not enough, at least on this record and in light of the 22 burdens of proof applicable at the TRO stage. 23 Finally, the Court acknowledges that the accuracy of the spreadsheet is arguably 24 bolstered by Woods’ October 2020 communications with ReBath agents regarding 25 Foothills’ sales reporting issues. (Exs. 112, 120-21.) This evidence suggests that a ReBath 26 agent told Woods in October 2020 that Foothills had been misreporting its sales on many 27 28 6 Woods said that he believed Foothills’ QuickBooks syncing occurred automatically. 1 occasions.7 In his live testimony, Woods stated that he first learned of this issue in the fall 2 of 2020 and Foothills subsequently tightened up its reporting. This account is in turn 3 supported by the spreadsheet itself, which states that from November 2020 to March 2021, 4 Foothills’ sales reports, as captured by ReBath’s system, were more accurate. Although 5 these developments lend some support to the spreadsheet, they do not adequately resolve 6 underlying uncertainties about how reports are in fact submitted, how ReBath’s system 7 captures the difference, and why the presence of the difference as captured by the system 8 is, standing alone, sufficient evidence that a franchisee has misreported. The Court 9 ultimately concludes that ReBath has not met its burden on this issue.8 10 ii. Late Payments 11 In contrast, the Court concludes that ReBath has shown a likelihood of success on 12 the merits on its other proffered basis for termination: Foothills’ late royalty and product 13 purchase payments. 14 The statements showing past-due royalty and product purchase payments, unlike the 15 sales reporting spreadsheet, have indicia of being official ReBath business records, 16 including the ReBath logo, ReBath’s contact information, and date stamps. (Ex. 5 at 17 RB121-25.) Most important, Woods admitted during the TRO hearing that these records 18 are accurate and that Foothills had been late in paying both the listed royalties and the listed 19 product purchases.9
20 7 This is also consistent with the Japhet declaration, which notes that “ReBath’s controller regularly contacted Foothills and informed it of its underreporting.” (Ex. 10 at 21 RB181 ¶ 5.) 22 8 The Court notes that it is not persuaded by Foothills’ argument that only a knowing underreport of its sales would constitute an event of default. Even accepting that this was 23 Woods’ subjective understanding of the Franchise Agreement, the default and termination provision is quite clear that although such a knowing misrepresentation is one ground for 24 default, § 24.A.7, underreporting sales, regardless of knowledge, is another type of default, § 24.A.10. (Ex. 4 at RB86.) 25 9 The Court notes that Woods testified that he negotiated an arrangement with ReBath’s past CFO to remit product purchase payments on a modified schedule, based in 26 essence on when funds were available. Ultimately, however, Woods did not contest that he was late in making the product purchase payments. Additionally, although § 24.B.2 of 27 the Franchise Agreement states that ReBath may make temporary or permanent fee reductions in an effort to work with a franchisee, § 24.B.3 makes clear that “[t]he 28 Company’s exercise of its rights under Section 24.B.2 will not . . . be the Company’s sole or exclusive remedy for Franchisee’s default” and “[i]f the Company exercises any of its 1 iii. Termination On Basis Of Default 2 The Court can understand why, from Foothills’ perspective, the tactics employed 3 by ReBath may seem harsh. ReBath informed Foothills on April 26, 2021 that the 4 Franchise Agreement was “subject to termination” unless Foothills made certain overdue 5 payments within 30 days. Foothills proceeded to make a payment 10 days later, yet ReBath 6 terminated the Franchise Agreement anyway. 7 Harsh as this approach may be, it was specifically permitted by the Franchise 8 Agreement. In § 24.A of the Agreement, various categories of conduct are identified as an 9 “event of default.” (Ex. 4 at RB85-88.) One of those categories, set forth in § 24.A.8, is 10 when a franchisee fails to make a single payment. (Id. at RB86.) In that scenario, the 11 missed payment only becomes a default if the franchisee “fails to cure the default within 12 30 days after receiving written notice of such default.” (Id.) In contrast, § 24.A.20 states 13 that a default occurs when a franchisee fails to make timely payments on three or more 14 occasions in a 12-month period “whether or not the breaches are cured after notice and 15 whether such failures involve the same or different requires or this Agreement.” (Id. at 16 RB87.) Thus, nothing precluded ReBath from invoking § 24.A.8 in the Notice of Default 17 sent on April 26, 2021 and then invoking § 24.A.20 in the Notice of Termination sent on 18 May 6, 2021. To the contrary, under § 24.B.1, “[i]f an Event of Default occurs, the 19 Company may, in its sole election and upon notice to the Franchisee, declare this 20 Agreement . . . . to be immediately terminated.” (Id. at RB88.) Additionally, ReBath made 21 clear in the Notice of Default that it wasn’t waiving its right to invoke other remedies under 22 the Franchise Agreement. (Ex. 104 at FSS255.) 23 c. Intellectual Property 24 As noted, ReBath’s IP falls into two broad categories: (1) the Marks and (2) the 25 System and Manual. 26 ReBath has submitted substantial evidence of its Marks. (Ex. 2.) Hillier testified to 27
28 rights under Section 24.B.2, the Company may thereafter terminate this Agreement without providing Franchisee any additional corrective or cure period . . . .” (Ex. 4 at RB89.) 1 the veracity of this evidence, which includes the Marks’ federal registrations, and Foothills 2 nowhere disputes the registrations or ReBath’s ownership of the Marks. Zobmondo Ent., 3 LLC v. Falls Media, LLC, 602 F.3d 1108, 1113 (9th Cir. 2010) (registration is “prima facie 4 evidence of the mark’s validity and entitles the plaintiff to a strong presumption that the 5 mark is a protectable mark”) (quotation marks omitted). ReBath also submitted evidence 6 showing how these materials appear on ReBath franchisees’ stationary and marketing 7 materials (Ex. 3) and on Foothills’ office and vehicle trailers. (Exs. 27-29.) Woods 8 admitted that the Marks still appear on Foothills’ office signs and trailers. Accordingly, 9 the Court finds that ReBath (1) has a valid, protectable mark and (2) Foothills’ use of the 10 mark is likely to cause consumer confusion. OTR Wheel Engineering, Inc. v. W. Worldwide 11 Servs., Inc., 897 F.3d 1008, 1022 (9th Cir. 2018) (describing elements requirement to 12 prevail on an infringement claim in a trademark case). See also Wetzel’s Pretzels, LLC v. 13 Johnson, 797 F. Supp. 2d 1020, 1028 (C.D. Cal. 2011) (“Because the Court finds Wetzel’s 14 properly terminated the Franchise Agreement on June 3, 2010, the Court finds that any use 15 of the mark by Defendants after that date was an unauthorized use.”). 16 ReBath has also shown that the Manual and related, propriety confidential 17 information regarding its System constitute trade secrets and are therefore entitled to 18 protection under 18 U.S.C. § 1836 and A.R.S. § 44-401–402. Hillier testified that ReBath 19 has invested considerable time, effort, and money developing its System and Manual and 20 keeping these materials confidential. Further, the Agreement establishes that these 21 materials, including the Manual, remain ReBath’s property, are confidential, and must be 22 returned to ReBath upon termination. (Ex. 4 at RB63, RB71, RB89.) Foothills also agreed 23 to stop using these materials upon termination. (Id. at RB89.) Foothills ultimately does 24 not dispute that these materials constitute trade secrets, and the Court finds that they do. 25 InteliClear, LLC v. ETC Glob. Holdings, Inc., 978 F.3d 653, 657 (9th Cir. 2020) (“[T]he 26 definition of trade secret consists of three elements: (1) information, (2) that is valuable 27 because it is unknown to others, and (3) that the owner has attempted to keep secret.”). See 28 also A.R.S. § 44-401(4) (definition of trade secret with same basic elements). 1 Foothills’ only argument with respect to the likelihood-of-success prong of 2 ReBath’s trade secret claims is that because Foothills is “currently effectively out of 3 business,” there is and can be no misappropriation. (Doc. 26 at 13.) ReBath replies that 4 this does not defeat its claims because Foothills still possesses the Manual and related 5 System information. 6 The Court concludes that, on this record and for purposes of the TRO motions, 7 ReBath has met its burden with respect to misappropriation. The federal and the Arizona 8 trade-secrets statutes each define misappropriation to include “breach or inducement of a 9 breach of a duty to maintain secrecy,” and each statute authorizes the issuance of a 10 preliminary injunction in cases of “actual or threatened misappropriation.” 18 U.S.C. 11 §§ 1836(b)(3)(A), 1839(5)-(6); A.R.S. §§ 44-401(1)-(2), 44-402(A). Additionally, § 25.A 12 of the Franchise Agreement obligates Foothills to return the trade secrets and stop using 13 them upon termination. (Ex. 4 at RB89.) Foothills’ noncompliance with this provision 14 means that it possesses the trade secrets when it no longer has permission to do so, in breach 15 of the Agreement. For purposes of ReBath’s TRO motion, this is sufficient to show “actual 16 or threatened misappropriation.” See also FTC v. Affordable Media, 179 F.3d 1228, 1237 17 (9th Cir. 1999) (“[I]t is actually well-settled that an action for an injunction does not 18 become moot merely because the conduct complained of was terminated, if there is a 19 possibility of recurrence, since otherwise the defendants would be free to return to their 20 old ways.”) (cleaned up). 21 d. Breach Of Contract 22 ReBath’s breach of contract claim has two components: (1) breach of Foothills’ 23 post-termination obligations under § 25.A (Ex. 4 at RB89-91); and (2) breach of the 24 covenant not to compete under § 26.B (id. at RB91-92.) 25 Although ReBath submitted much less evidence regarding these claims, the Court 26 finds that, for reasons already discussed, ReBath has carried its burden with respect to 27 breach of the post-termination obligations. It is undisputed that Foothills has not stopped 28 using the Marks and still possesses the trade secrets, in violation of § 25.A. (Ex. 4 at 1 RB89.) 2 In contrast, ReBath has not demonstrated a likelihood of success on the merits of its 3 noncompete claim. Arizona courts do not favor covenants not to compete. Valley Med. 4 Specialists v. Farber, 982 P.2d 1277, 1281 (Ariz. 1999) (“Despite the freedom to contract, 5 the law does not favor restrictive covenants.”). A noncompete covenant is therefore only 6 “enforceable as long as it is no broader than necessary to protect [the party’s] legitimate 7 business interest.” Zep, Inc. v. Brody Chem. Co., Inc., 2010 WL 1381896, *4 (D. Ariz. 8 2016). Under Arizona law, it is ReBath’s burden “to prove the extent of its protectable 9 interests, and if it cannot, the entire [noncompete] covenant will be deemed unenforceable.” 10 Compass Bank v. Hartley, 430 F. Supp. 2d 973, 979 (D. Ariz. 2006). A court may rule that 11 a noncompete covenant is unenforceable if, for example, the duration is longer than 12 necessary, Zep, 2010 WL 1381896 at *5, or if the geographic scope is unreasonably broad, 13 Valley Med., 982 P.2d at 1285. 14 ReBath has not met its burden on these issues. ReBath made little effort and 15 submitted no evidence to show that the noncompete covenant’s two-year duration and 20- 16 mile geographic limitation are no broader than necessary to protect its legitimate business 17 interests. 18 2. Irreparable Harm 19 “A plaintiff seeking a preliminary injunction must demonstrate that irreparable 20 injury is likely in the absence of preliminary relief. Mere possibility of harm is not 21 enough.” Enyart v. Nat’l Conference of Bar Exam’rs, 630 F.3d 1153, 1165 (9th Cir. 22 2011) (citation omitted). “Irreparable harm is traditionally defined as harm for which there 23 is no adequate legal remedy, such as an award of damages.” Ariz. Dream Act Coal. v. 24 Brewer, 757 F.3d 1053, 1068 (9th Cir. 2014). 25 a. Intellectual Property 26 The Court finds that Foothills’ infringement of the Marks and misappropriation of 27 the trade secrets will likely result in irreparable harm to ReBath. 28 As for the Marks, the recently enacted Trademark Modernization Act of 2020 1 (“TMA”) amended 15 U.S.C. § 1116(a) to provide a plaintiff seeking an injunction “a 2 rebuttable presumption of irreparable harm upon a finding of a violation.” Consolidated 3 Appropriations Act, 2021, Pub. L. No. 116-260, § 226, 134 Stat. 1182 (2020). Foothills’ 4 only rebuttal to this presumption is that Foothills is effectively out of business at present. 5 But this argument fails because, as noted, termination of the conduct does not moot the 6 need for an injunction where recurrence is possible. In any event, the Court finds that 7 Foothills’ continued possession and use of the Marks prevents ReBath from controlling its 8 reputation and goodwill and threatens the loss of goodwill, which constitutes irreparable 9 harm. Stuhlbarg, 240 F.3d at 841; Athleta, Inc. v. Pitbull Clothing Co., Inc., 2013 WL 10 142877, *10 (C.D. Cal. 2013). See also Wetzel’s Pretzels, 797 F. Supp. 2d at 1028 11 (“[G]iven that Defendants are engaging in the unauthorized use of Wetzel’s marks, the 12 Court finds that unless Plaintiff is allowed to protect its marks, its ability to control its 13 reputation and goodwill associated with the marks will be significantly reduced.”).10 14 The same basic analysis applies to the trade secrets. As Hillier testified, ReBath’s 15 System and Manual are the product of decades of development and effort and ReBath goes 16 to considerable lengths to ensure that the trade secrets remain confidential and valuable. 17 Foothills’ continued possession and use of these trade secrets, which is no longer 18 authorized by any agreement with ReBath, risks harming ReBath’s reputation and 19 goodwill. Also, Foothills has said that it still considers itself entitled to these materials as 20 a ReBath franchisee because the termination was invalid. (Ex. 107.) This is sufficient to 21 show irreparable harm. Cf. Cutera, Inc. v. Lutronic Aesthetics, Inc., 444 F. Supp. 3d 1198, 22 1209 (E.D. Cal. 2020) (irreparable harm where evidence suggests that defendants would 23 continue to use trade secrets absent an injunction); WeRide Corp. v. Kun Huang, 379 F. 24 Supp. 3d 834, 853 (N.D. Cal. 2019) (“In trade secret cases, injunctions are appropriate to 25 prevent this sort of unfair advantage.”). 26 10 Hillier acknowledged that, because Foothills is essentially out of operation, this 27 lessens the harm caused by Foothills’ continued use of ReBath’s brand and Marks. Although the harm may be reduced, the loss of control and potential loss of customer 28 goodwill are still sufficient to establish irreparable harm, especially in light of the presumption created by the TMA. Further, there remains the possibility of recurrence. 1 b. Breach Of Contract 2 As noted, the only component of ReBath’s breach-of-contract claim as to which it 3 has established a likelihood of success (or even serious questions) is its claim related to the 4 Agreement’s post-termination provisions. That claim is factually entangled with its 5 trademark and trade secrets claims—the core issue is that Foothills has not discontinued its 6 use of the Marks or trade secrets or returned the Manual or other confidential information. 7 Accordingly, for the reasons outlined above with respect to the Marks and trade secrets, 8 the Court finds that ReBath has shown a likelihood of irreparable harm with respect to this 9 aspect of its breach of contract claim. 10 3. Balance of Equities 11 “[D]istrict courts must give serious consideration to the balance of equities.” Earth 12 Island Inst. v. Carlton, 626 F.3d 462, 475 (9th Cir. 2010) (citation omitted). In doing so, 13 courts must consider “all of the competing interests at stake.” Id. 14 ReBath has strong interests in protecting the value of its brand, goodwill, and 15 reputation and, for reasons explained above, protecting its Marks and trade secrets are 16 necessary to achieving this goal. Accordingly, ReBath has a strong interest in the issuance 17 of a TRO. 18 On the other hand, issuing a TRO against Foothills’ use of the IP could subject 19 Foothills to hardship, especially in light of Woods’ testimony that Foothills is already 20 effectively out of business. But these concerns are alleviated somewhat by the Court’s 21 denial of the TRO with respect to the covenant not to compete—Foothills can still operate, 22 but it may not infringe ReBath’s IP in the process. Viewed in this light, the balance of 23 equities tips in ReBath’s favor. 24 Further, the weight of the case law supports the conclusion that in cases of trademark 25 infringement, the balance of equities generally tips against the infringer even where 26 issuance of an injunction may cause substantial harm. See, e.g., 2Die4Kourt v. Hillair Cap. 27 Mgmt., LLC, 692 F. App’x 366, 369 (9th Cir. 2017) (“[W]hen the harm complained of 28 results from a defendant’s allegedly infringing conduct, we have . . . approved the entry of 1 a preliminary injunction.”); S & R Corp. v. Jiffy Lube Int’l, Inc., 968 F.2d 371, 379 (3d Cir. 2 1992) (“Durst is certainly harmed by the threat of loss of his franchise, but his self-inflicted 3 harm is far outweighed by the immeasurable damage done Jiffy Lube by the infringement 4 of its trademark.”). See also Metso Minerals Indus. Inc. v. Oakes, 2014 WL 1632927, *3 5 (D. Ariz. 2014) (“The hardship that would be placed on Oakes if the preliminary injunction 6 were granted is mild . . . he would be required to return the 2005 thumb drive and submit 7 his computers to inspection . . . . Metso would suffer considerable harm if the Court refused 8 to grant a preliminary injunction—Metso would lose exclusive control over confidential 9 information in which it has invested millions of dollars.”). 10 4. Public Policy 11 The Court likewise concludes that public policy favors the granting of ReBath’s 12 TRO motion. Courts have generally concluded that public policy favors protecting 13 registered trademarks and trade secrets. Metso, 2014 WL 1632927 at *3 (“[G]ranting the 14 injunction is consistent with the public policy of protecting a company’s interest in its trade 15 secrets and confidential information.”); Fitness Together Franchise Corp. v. C.P. Body 16 Design, Inc., 2010 WL 11628010, *10 (D. Ariz. 2010) (“The public interest in preventing 17 confusion and deception in the marketplace weighs strongly in favor of protecting 18 registered trademarks.”). 19 Foothills’ arguments to the contrary are unpersuasive. Foothills essentially suggests 20 that because it has high customer reputation scores, it would serve the public to allow it to 21 continue operating. (Doc. 26 at 15-17.) But this argument presupposes that the Franchise 22 Agreement has not been validly terminated, and thus that it would not constitute 23 infringement or misappropriation for Foothills to continue operations using ReBath’s IP. 24 Because ReBath has established a likelihood of success on the merits of its termination, 25 trademark infringement, and misappropriation of trade secrets claims, the public policy 26 favoring trademarks and trade secrets takes hold and suggests that this factor weighs in 27 ReBath’s favor as well. 28 1 B. Foothills’ Motion 2 Given the Court’s findings with respect to ReBath’s TRO motion, extended 3 discussion of Foothills’ motion is unnecessary. The Court nonetheless addresses the key 4 reasons why it does not grant a TRO in Foothills’ favor. 5 1. Likelihood Of Success On The Merits 6 a. Breach of Contract 7 As noted, ReBath has shown a likelihood of success on the merits with respect to 8 its interpretation of the Franchise Agreement. Because ReBath’s claims fall under § 32.F 9 of the Agreement, Foothills is not entitled to seek a 30-day abatement to pursue mediation. 10 As for termination, the Court has explained at length above that, because Foothills 11 likely defaulted under § 24.A.20, ReBath likely had the right to terminate immediately 12 under § 24.B. This termination in turn triggers ReBath’s rights under § 25. The Court 13 finds that Foothills has not shown a likelihood of success on the merits of this claim. 14 b. Breach Of The Implied Covenant Of Good Faith And Fair Dealing 15 At first blush, Foothills’ implied covenant claim would seem more likely to succeed 16 than its breach of contract claim. There is something off-putting about sending a notice of 17 default to a long-term contractual partner that offers a 30-day cure period, only to terminate 18 the relationship on separate grounds roughly 10 days later (and hours after payment was 19 remitted pursuant to the earlier notice). Nevertheless, the Court finds that Foothills has not 20 carried its burden on this claim. 21 First, Hillier’s testimony, which the Court found forthright and credible, dealt with 22 these issues extensively. Hillier essentially testified that the purpose of the April 26 letter 23 was to ensure ReBath received the money it was owed from a franchisee whom it had 24 reason to worry would be unable to pay. The evidence also shows that, until Woods sent 25 the May 13 letter, ReBath was still cooperating with Foothills on the transition to a new 26 franchisee and encouraging Foothills to enter a brokered agreement with the new 27 franchisee. This is not bad faith or unfair dealing. 28 Second, in the Notice of Default, ReBath expressly reserved all of its rights under 1 the Franchise Agreement. Thus, although it was not unreasonable for Foothills to proceed 2 as though it had 30 days to cure, it was on notice that ReBath might pursue other remedies 3 as well. 4 Third, in Arizona, it is possible for a party to breach the implied covenant without 5 breaching an express contract term. Wells Fargo Bank v. Ariz. Laborers, Teamsters & 6 Cement Masons Local No. 395 Pension Tr. Fund, 38 P.3d 12, 29-30 (Ariz. 2002). But 7 such a breach generally occurs when “one party exercises discretion retained or 8 unforeclosed under a contract in such a way as to deny the other a reasonably expected 9 benefit of the bargain.” Beaudry v. Ins. Co. of the W., 50 P.3d 836, 841 (Ariz. Ct. App. 10 2002). The unambiguous terms of the Franchise Agreement make clear that there are at 11 least 20 different grounds for default, and that upon any event of default, ReBath has the 12 right to terminate the Agreement immediately. (Ex. 4 at RB85-89.) Given this backdrop, 13 Foothills has not established a likelihood that it was denied a reasonably expected benefit 14 of the bargain. 15 2. Irreparable Harm 16 In addition to failing to establish a likelihood of success on (or serious question 17 going to) the merits, Foothills has failed to establish irreparable harm. 18 The main issue is that Foothills’ alleged harm is largely, if not wholly, monetary in 19 nature. Woods testified that he could calculate the lost profits from the contracts that were 20 lost as a result of ReBath’s termination. Damages are the traditional remedy for breach of 21 contract and a “court will not order specific performance if damages would adequately 22 protect the nonbreaching party’s expectation interest.” County of La Paz v. Yakima 23 Compost Co., Inc., 233 P.3d 1169, 1189 (Ariz. Ct. App. 2010). “Irreparable harm is 24 traditionally defined as harm for which there is no adequate legal remedy, such as an award 25 of damages.” Ariz. Dream Act Coal., 757 F.3d at 1068. 26 C. Bond 27 Section § 32.F of the Franchise Agreement provides that ReBath “will not be 28 required to post a bond or other security in seeking or obtaining injunction relief.” (Ex. 4 || at RB98.) Foothills does not contend that a bond is necessary. Therefore, the TRO may 2|| issue without ReBath’s posting of a bond. 3 Accordingly, IT IS ORDERED that: 4 (1) | ReBath’s TRO motion (Doc. 13) is granted in part and denied in part. || The TRO itself will issue by separate order. 6 (2) Foothills’ TRO motion (Case No. 20-cv-880, Doc. 2) is denied. 7 Dated this 9th day of June, 2021. 8 9 fam oe” 10 f t _o——— Dominic W. Lanza 11 United States District Judge 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28
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