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Rocky Mountain Chocolate Factory v. Arellano

United States District Court, D. Colorado

October 19, 2017

ROCKY MOUNTAIN CHOCOLATE FACTORY, a Colorado Corporation, Plaintiff,
v.
TIMOTHY ARELLANO, and AGS ENTERTAINMENT LLC, Defendants.

          ORDER GRANTING MOTION TO DISMISS FOR LACK OF PERSONAL JURISDICTION

          WILLIAM J. MARTINEZ, UNITED STATES DISTRICT JUDGE.

         In this trademark infringement action, Plaintiff Rocky Mountain Chocolate Factory (“RMCF”) brings claims against Defendants, Timothy Arellano and AGS Entertainment LLC (together, “Arellano, ” except as addressed separately below) for violation of the Lanham Act, 15 U.S.C. § 1114(1), for trade dress infringement, for false advertising in violation of 15 U.S.C. § 1125(a)(1)(B), a tort claim for unfair competition, and a claim for violation of the Colorado Trade Secrets Act, Colorado Revised Statutes, §§ 7-74-101 et seq. (See generally ECF No. 25.) Now before the Court is Defendants' Motion to Dismiss for Lack of Personal Jurisdiction, or in the Alternative, Motion to Transfer Venue. (ECF No. 22 (the “Motion”).) For the reasons explained below, the Motion is granted to dismiss this action for lack of personal jurisdiction.

         I. LEGAL STANDARD

         The purpose of a motion to dismiss pursuant to Rule 12(b)(2) is to test whether the Court has personal jurisdiction over the named parties. The plaintiff bears the burden of establishing personal jurisdiction over a defendant. Behagen v. Amateur Basketball Ass'n, 744 F.2d 731, 733 (10th Cir. 1984). As is true here, when the court does not hold an evidentiary hearing before ruling on jurisdiction, “the plaintiff need only make a prima facie showing” of personal jurisdiction to defeat a motion to dismiss. Id. (citing Am. Land Program, Inc. v. Bonaventura Uitgevers Maatschappij, N.V., 710 F.2d 1449, 1454 n.2 (10th Cir. 1983)). A plaintiff “may make this prima facie showing by demonstrating, via affidavit or other written materials, facts that if true would support jurisdiction over the defendant.” OMI Holdings, Inc. v. Royal Ins. Co. of Can., 149 F.3d 1086, 1091 (10th Cir. 1998). To defeat the plaintiff's prima facie case, a defendant “must present a compelling case demonstrating ‘that the presence of some other considerations would render jurisdiction unreasonable.'” Id. (quoting Burger King Corp. v. Rudzewicz, 471 U.S. 462, 477 (1985)).

         To obtain personal jurisdiction over a nonresident defendant, the plaintiff “must show that jurisdiction is legitimate under the laws of the forum state and that the exercise of jurisdiction does not offend the due process clause of the Fourteenth Amendment.” Benton v. Cameco Corp., 375 F.3d 1070, 1075 (10th Cir. 2004) (quoting Soma Med. Int'l v. Standard Chartered Bank, 196 F.3d 1292, 1295 (10th Cir. 1999)). In Colorado, the state's long arm statute “confers the maximum jurisdiction permissible consistent with the Due Process Clause.” Archangel Diamond Corp. v. Lukoil, 123 P.3d 1187, 1193 (Colo. 2005) (referring to Colo. Rev. Stat. § 13-1-124). Thus, the Court need only address the constitutional question of whether the exercise of personal jurisdiction over the defendants comports with due process. Dudnikov v. Chalk & Vermillion Fine Arts, Inc., 514 F.3d 1063, 1070 (10th Cir. 2008) (the state jurisdictional analysis in Colorado “effectively collapses into the second, constitutional, analysis”).

         The Court will accept the well-pled factual allegations of the complaint as true to determine whether Plaintiffs have made a prima facie showing that personal jurisdiction exists. Id. Any factual conflicts arising from affidavits or other submitted materials are resolved in the plaintiff's favor. Wenz v. Memery Crystal, 55 F.3d 1503, 1505 (10th Cir. 1995).

         II. FACTUAL BACKGROUND[1]

         Plaintiff, RMCF, is a Colorado corporation with its principal place of business in Durango, Colorado. (ECF No. 26-1 ¶ 2.) RMCF operates as a franchisor, confectionery manufacturer, and retail operator. (Id. ¶ 3.) RMCF franchises to others the rights to operate RMCF stores. (Id.) A total of approximately 400 RMCF retail stores are operated either by RMCF or its franchisees in numerous states, as well as in Canada and the United Arab Emirates. (Id.)

         RMCF owns and controls the service mark “Rocky Mountain Chocolate Factory” and related trade names and trade marks. (Id.) According to an affidavit submitted by an RMCF officer, “[i]n addition to receiving a license to use the RMCF Marks, RMCF franchisees are provided . . . a variety of confidential information proprietary to RMCF, including methods, strategies and techniques developed by RMCF such as gourmet chocolate specialty recipes and cooking methods, confectionary manufacturing, processing, ordering, stocking and inventory control, technical equipment standards, order fulfillment methods and customer relations, marketing techniques, written promotional materials, advertising, and accounting systems.” (ECF No. 26-1 ¶ 7.)

         On or about March 31, 2015, RMCF entered into a franchise agreement with non-parties Luke Joseph and Vegas Restaurants LLC (collectively, “Joseph”) to operate a RMCF store in Summerlin, Nevada (the “Summerlin Store”). (Id. ¶ 12; ECF No. 35-2.) The franchise agreement with Joseph permitted him to transfer his franchise, with RMCF's approval, provided certain conditions were met, including that Joseph “obtains [RMCF's] written consent, ” that “[a]ll amounts due and owing . . . are paid in full, ” and that the transferee agreed to operate the Summerlin Store as an RMCF store and “to execute the . . . Franchise Agreement.” (ECF No. 35-2 ¶ 16.2; see also ECF No. 26-1 ¶ 13.)

         In September 2015, Joseph communicated to RMCF that he wanted to sell the Summerlin Store to Arellano. (See ECF No. 35-3; ECF No. 25 ¶ 20.) Individual Defendant Timothy Arellano is a resident of Clark County, Nevada, and he is the sole manager of Defendant AGS Entertainment, LLC (“AGS”), a Nevada LLC with a principal place of business in Nevada. (ECF No. 22-1 ¶¶ 2-5.) There is no claim or evidence that either Defendant is a Colorado resident. Other than the specific contacts detailed in this Order, neither Defendant owns property in, does business in, advertises or holds itself out in, or maintains any presence in Colorado. (See generally ECF No. 22-1 ¶¶ 9-28, 33-54.)

         Between November 2015 and February 2016, Arellano and RMCF pursued negotiations to transfer Joseph's RMCF franchise to Arellano. On November 19, 2015, Arellano submitted an application to RMCF and disclosed certain financial information. (ECF Nos. 35-1 ¶ 9; ECF No. 35-4; ECF No. 35-5.) On or about the same date, RMCF sent Arellano a lengthy “Franchise Disclosure Document” (ECF No. 35-6), and Arellano sent RMCF an acknowledgment of receipt (ECF No. 35-7). This receipt stated “[t]he franchisor is [RMCF], ” and listed RMCF's address in Colorado. (ECF No. 35-7.) The Franchise Disclosure Document sent to Arellano also included the form of the proposed franchise agreement, which included a choice of law and forum selection clause providing that the franchise agreement would be interpreted under Colorado law, and that the state courts in La Plata County, Colorado, and federal courts in Colorado, would be the exclusive venue for any claims asserted between the franchisee (i.e., Arellano) and the franchisor (i.e., RMCF). (ECF No. 35-6 at 93, ¶ 22.1.)

         Subsequent communications reflect that around that time, Arellano substantially took over operational control of the Summerlin Store from Joseph, and that the parties continued negotiations to finalize a franchise agreement, until approximately February 2016. In particular, on November 19, 2015, Joseph e-mailed both Arellano and RMCF, stating that he gave “100% permission to Mr. Timothy Arellano to place orders, to pay for orders and [to] operate” the Summerlin Store. (ECF No. 35-8.) RMCF internal e-mails reflect that on November 20, 2015, Arellano had a phone conversation with Kraig Carlson, a Franchise Sales Specialist at RMCF, who reported that Arellano was “in the process of trying to purchase” the Summerlin Store, and summarized items requiring follow-up: “In case things come to fruition[, ] [t]he following . . . need to be addressed in order to have a chance to keep the [Summerlin S]tore open . . . .” (ECF No. 35-9.) Carlson reported that Arellano “ha[d] been approved to order product, ” but that, among other issues, “[Joseph's] debt [approximately $24, 000] for product will have to be taken care of.” (ECF No. 35-9.)

         On December 7, 2015, Mr. Carlson sent Arellano a list of “items that we need to get resolved ASAP in order to do a transfer of the store, ” and in response Arellano later sent RMCF an unexecuted copy of the purchase agreement for his acquisition of the Summerlin Store from Joseph. (ECF No. 35-10.) (Id.) On January 19, 2016, Arellano confirmed that he had “assumed the day to day operations in hopes to have a clean purchase, ” but communicated that “unfortunately [Joseph's] debt will have to be his own prior to such purchase.” (ECF No. 35-11.)[2]

         Nevertheless, on January 28, 2016, RMCF sent Arellano a preliminary franchise approval letter, which still identified prerequisites for final execution, in particular reiterating that “all outstanding balances will need to be paid . . . along with attending training in Durango, CO.” (ECF No. 35-12.) On February 1, 2016, RMCF again communicated that “we are able to approve you as a [RMCF] Franchisee, ” but reiterated that the then-current amount of approximately $25, 000 claimed due from Joseph's franchise must be paid before finalizing the franchise agreements, and that Arellano must attend training in Durango, Colorado. (ECF No. 25-15 at 3.)[3]

         By the end of February 2016, however, the parties reached an impasse over payment of the amounts claimed due from Joseph's RMCF franchise. As a result, RMCF and Arellano never executed a franchise agreement. On February 26, 2016, Arellano communicated to RMCF that if the debt issue could not be resolved, Arellano might abandon the RMCF franchise and instead “operate the store as an independent.” (ECF No. 35-15 at 1-2.) Arellano communicated, in part, to Carlson as follows:

Since we are months into operation of [the] store the financial toll in delaying transfer has impacted our business operation and capitol [sic] tremendously and therefore we may need to possibly look at dropping the Rocky [M]ountain franchise name and operate the store as an independent non-franchise store if this becomes the decision and reality what concerns will your company have in the way of the store's conversion?

(Id.) On February 29, 2016, Carlson responded, again stating that “[a]ll amounts due must be satisfied before [RMCF] can facilitate a transfer of the existing [franchise] agreement.” (Id. at 1.) Arellano responded the same day, stating “I understand what you require, ” but, “I'm not in a position to wait for you and [Joseph] to resolve your outstanding issues, so please let me know what issues I will have to remove [the RMCF] name from the store and operate as an independent.” (Id. at 1.) Following these communications, the franchise agreement between the parties was never finalized or executed. (ECF No. 25 ¶ 22.)

         On July 13, 2016, RMCF terminated Joseph's franchise agreement, largely because of the failure to pay the past-due amounts. (ECF No. 26-1 ¶ 18.) RMCF's termination letter to Joseph advised that he could no longer use any RMCF trade secrets, signs, symbols, devices, trade names, trademarks, or other materials. (Id.) Arellano, however, continued to operate the Summerlin Store. (Id. ¶ 26.) On August 11, 2016, RMCF sent Arellano a letter notifying him of the termination of Joseph's franchise and that RMCF viewed Arellano's operation of the Summerlin Store as trademark infringement. (Id., ¶ 19; id. at 10-11.)

         As alleged by RMCF, Arellano continued to operate the Summerlin Store after that date, and RMCF alleges his operation has continued to infringe on its trademarks, trade dress, and trade secrets through the present day. (See ECF No. 25 ¶¶ 27-40; ECF No. 26-1 ¶¶ 21-31.) RMCF has sent several additional demand letters to Arellano. (See Id. ¶¶ 19, 23, 24, 26, 30, 31.) Arellano, for his part, has made certain efforts to “de-identify” the Summerlin Store from RMCF's marks, including changing the name from “Rocky Mountain Chocolate Factory” to “Red Rock Chocolate Factory.” (See, e.g. ECF No. 26-1 at 14-15; id. at 22.)

         However, the parties have been unable to resolve their disputes, despite repeated communications over many months. RMCF maintains that Arellano's “de-identification” of the Summerlin Store has been perfunctory and insufficient, that he continues to infringe on RMCF's trademarks and trade secrets, and that this infringement harms RMCF, including by impairing its ability to grow, operate, and/or franchise competing RMCF stores in Nevada. (See ECF No. 25 ¶¶ 36-40; ECF No. 26-1 ¶¶ 29-36.) Arellano, on the other hand, has communicated that he has “no intention of infringing on any rights or inflicting any harm on [RMCF], ” but he believes he has sufficiently removed all trademarked materials from the store and will not take further steps to comply with RMCF's demands. (See ECF No. 26-1 ¶ 31; id. at 39-41.)

         The more specific details of how Arellano is allegedly infringing on RMCF's trademarks and trade secrets are not material to resolving the present Motion. Treating RMCF's allegations as true, however, this alleged infringement is occurring exclusively at the Summerlin Store, in Nevada, but is harming RMCF both in Colorado, where it claims it is entitled to receive royalty and other payments from Defendants, and also in Nevada, where RMCF claims Arellano is allegedly ...


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