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QFA Royalties LLC v. ZT Investments LLC

United States District Court, D. Colorado

November 17, 2017



          William J. Martinez United States District Judge.

         This is a dispute between a franchisor and a former franchisee. Plaintiff QFA Royalties, LLC, “is the franchisor of the network of franchised Quiznos Sub restaurants.” (ECF No. 36 at 3, ¶ 1.) Plaintiff The Quiznos Master, LLC, “owns and licenses to QFA the intellectual property used in connection with QFA's franchising program.” (Id. ¶ 2.) The Court will refer to the two Plaintiffs collectively as “Quiznos.” The defendants are ZT Investments, LLC (“ZTI”), a Missouri limited liability company, and its owner, Thomas Kamau (“Kamau”). Quiznos accuses Defendants of continuing to operate a restaurant that is, in effect, an unauthorized Quiznos franchise.

         Kamau has appeared and defended pro se. (See ECF No. 18.) ZTI, which may only appear through counsel, has not appeared or defended. The Clerk entered default against ZTI on April 24, 2017. (ECF No. 24.) Quiznos moved for default judgment on May 15, 2017 (“Default Judgment Motion”). (ECF No. 31.) The Court found that full evaluation of that motion would take some time, but in the meantime, the Court partially granted Quiznos' request for a preliminary injunction. (See ECF No. 39.)

         The Court is now prepared to rule on Quiznos' Default Judgment Motion, and the Court will grant the motion in part and deny it in part, as explained below. Also before the Court is Kamau's recently filed “request for dismissing this case without prejudice against ZT Investment[s] and Thomas Kamau.” (ECF No. 53.) To the extent Kamau filed this document on behalf of ZTI, it will be stricken because ZTI is a business entity and can only appear through an attorney, which Kamau is not; and to the extent Kamau files on his own behalf, it will be denied.


         A. Legal Standard

         Default must enter against a party who fails to appear or otherwise defend a lawsuit. Fed.R.Civ.P. 55(a). Pursuant to Rule 55(b)(1), default judgment must be entered by the Clerk of Court if the claim is for “a sum certain”; in all other cases, “the party must apply to the court for a default judgment.” Fed.R.Civ.P. 55(b)(2). “[D]efault judgment must normally be viewed as available only when the adversary process has been halted because of an essentially unresponsive party. In that instance, the diligent party must be protected lest he be faced with interminable delay and continued uncertainty as to his rights. The default judgment remedy serves as such a protection.” In re Rains, 946 F.2d 731, 732-33 (10th Cir. 1991) (internal quotation marks and citation omitted).

         However, “a party is not entitled to a default judgment as of right; rather the entry of a default judgment is entrusted to the ‘sound judicial discretion' of the court.” Greenwich Ins. Co. v. Daniel Law Firm, 2008 WL 793606, at *2 (D. Colo. Mar. 22, 2008) (internal quotation marks omitted). Before granting a motion for default judgment, the Court must take several steps. First, the Court must ensure that it has personal jurisdiction over the defaulting defendant and subject matter jurisdiction over the action. See Williams v. Life Sav. & Loan, 802 F.2d 1200, 1202-03 (10th Cir. 1986). Next, the Court should consider whether the well-pleaded allegations of fact-which are admitted by the defendant upon default-support a judgment on the claims against the defaulting defendant. See Fed. Fruit & Produce Co. v. Red Tomato, Inc., 2009 WL 765872, at *3 (D. Colo. Mar. 20, 2009) (“Even after entry of default, however, it remains for the court to consider whether the unchallenged facts constitute a legitimate basis for the entry of a judgment.”).

         B. Allegations

         Quiznos licenses a number of registered trademarks to franchisees. (ECF No. 1 ¶¶ 13-18.) Quiznos has also licensed a distinct trade dress (i.e., restaurant design and décor) to franchisees. (Id. ¶¶ 19-21.)

         ZTI is a former Quiznos franchisee. (ECF No. 1 ¶ 5.) Kamau is a Missouri citizen and ZTI's 100% owner, and he “personally guaranteed [ZTI's] obligations under the franchise agreement.” (Id. ¶ 6.)

         Kamau became a Quiznos franchisee in June 2013 and thereby began operating a Quiznos in St. Louis, Missouri. (Id. ¶¶ 22-23.) Kamau later assigned his franchise agreement to ZTI. (Id. ¶ 24.) Under the Franchise Agreement between Quiznos and ZTI, ZTI undertook payment obligations to Quiznos (weekly royalties based on gross sales, marketing and promotion fees, regional advertising contributions, etc.) and also an obligation to protect Quiznos' confidential information, licensed methods, and so forth. (Id. ¶¶ 26-27.) The Franchise Agreement further imposed obligations on ZTI if the Agreement terminated, including paying all sums due; ceasing to use any Quiznos intellectual property; ceasing to hold itself out as a Quiznos; returning all proprietary and confidential information; and assigning to Quiznos all telephone and other directory listings used in connection with the restaurant. (Id. ¶ 29.)

         In October 2016, ZTI (presumably at Kamau's direction) abandoned its Quiznos franchise, leading Quiznos to terminate the Franchise Agreement. (Id. ¶¶ 33-34.) ZTI then began operating, in the same location, a restaurant named “Toasty Subs” (id. ¶ 35), or “Toasty Grill Subs, ” according to its marketing materials (see ECF No. 6-7). Toasty Subs, apart from the changed name, continued to operate effectively as a Quiznos, save for covering up or painting over signage or décor displaying Quiznos trademarks, and putting “Toasty Grill Subs” signage in its place. (ECF Nos. 6-8 & 6-9; ECF No. 1 ¶¶ 35-40.)

         Quiznos has accordingly sued for trademark infringement, trade dress infringement, unfair competition, specific performance (i.e., to comply with post-termination obligations under the Franchise Agreement), breach of contract, and breach of guaranty (against Kamau). (Id. at 10-15.)

         C. Jurisdiction

         The Court has subject matter jurisdiction under 28 U.S.C. § 1331 because Quiznos alleges various forms of trademark infringement under the Lanham Act. The Court has personal jurisdiction over ZTI because: (1) Kamau, when entering into the franchise agreement with Quiznos, expressly agreed that “the exclusive forum for disputes between [the parties] shall be a court of general jurisdiction located in Denver, Colorado, and each party waives any objection it might have to the personal jurisdiction of or venue in such courts” (ECF No. 6-2 § 21.1); and (2) ZTI assumed all of Kamau's obligations under the franchise agreement through an explicit agreement by which Quiznos permitted Kamau to transfer his interest to ZTI (ECF No. 6-3 § 1(c); see also id. § 7 (“Any disputes arising out of this Consent Agreement shall be settled in accordance with the dispute resolution terms of the Franchise Agreement.”)).

         D. Merits

         Quiznos' allegations establish that ZTI is liable to Quiznos for violation of 15 U.S.C. § 1114(1) (trademark infringement), 15 U.S.C. § 1125(a)(1) (trade dress infringement and unfair competition), and breach of contract.

         Quiznos has submitted two categories of damages to which it believes it is entitled. First, Quiznos claims past-due amounts (including accrued interest) of $11, 279.69. (ECF No. 52 at 2; ECF No. 31-1 ¶¶ 2-3.) This calculation encompasses royalties and advertising fund contributions that ZTI owed as of the Franchise Agreement's termination in October 2016. (I ...

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