Romper Room Inc. v. Winmark Corp.

Citations: 60 F. Supp. 3d 993; 2014 U.S. Dist. LEXIS 146360; 2014 WL 5106887Docket: Case No. 14-C-1217

Court: District Court, E.D. Wisconsin; October 11, 2014; Federal District Court

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An amended decision and order has been issued by Chief Judge William C. Griesbach, granting a motion for a preliminary injunction in a diversity case under the Wisconsin Fair Dealership Law (WFDL). The plaintiffs, Romper Room, Inc., Romper Room II, Inc., and Greg and Tammy Gering, are franchisees of the Once Upon a Child (OUAC) stores in Wisconsin, while the defendant, Winmark Corporation, is based in Minnesota. Jurisdiction is established under 28 U.S.C. 1332 due to the plaintiffs being Wisconsin citizens and the amount in controversy exceeding $75,000.

The case background reveals a Franchise Agreement clause allowing Winmark to terminate the agreement if any franchisee or key personnel is convicted of a crime that harms the business's reputation or engages in conduct that damages the associated goodwill. Greg Gering's conviction for misdemeanor theft by fraud in July 2014, highlighted in a newspaper article, prompted Winmark to notify the plaintiffs of its intent to terminate the Franchise Agreements for the Green Bay and Appleton stores, citing defaults and asserting that they were incurable.

Winmark issued a termination notice effective October 22, 2014, while acknowledging the legal requirement for a 90-day notice and a 60-day cure period. In response, the plaintiffs filed for an injunction, claiming Winmark's termination attempt violated WFDL due to lack of good cause and failure to provide the required cure period. They also allege breach of contract relating to underperforming software provided by Winmark. The court is currently considering the plaintiffs’ motion for a preliminary injunction.

In deciding on a motion for a preliminary injunction, the analysis involves two phases: a threshold phase and a balancing phase. In the threshold phase, the moving party must demonstrate three requirements: (1) that they will suffer irreparable harm without the injunction, (2) that there is no adequate legal remedy, and (3) that their claim has a likelihood of succeeding on its merits. Failure to meet any of these requirements results in denial of the injunction. If all three are met, the court moves to the balancing phase, weighing the plaintiff's potential injury against the defendant's potential injury and considering the public interest. The balance of harms uses a sliding scale approach, where a higher likelihood of success for the plaintiff reduces the need for a strong balance in their favor.

In this case, the court finds that the plaintiffs, Greg and Tammy Gering, are likely to suffer irreparable harm without the injunction, as their franchises would be terminated imminently, forcing them to close their business and potentially face insolvency. The court notes that the Gerings rely solely on income from their OUAC stores and cannot fund their lawsuit without this income. The assertion that they have other sources of income remains unsupported, and the ongoing lease obligations further complicate their financial situation. Therefore, the court concludes that the plaintiffs' motion for a preliminary injunction should be granted to prevent irreparable harm.

The plaintiffs face significant challenges in funding their lawsuit due to the high costs associated with WFDL litigation and the potential loss of goodwill and reputation if an injunction is not granted. The closure of their stores may lead to uncertain lost profits and difficulties in retaining customers and rehiring laid-off employees. These factors suggest that calculating damages would be difficult and potentially inadequate, reinforcing the need for a preliminary injunction as the only meaningful remedy. The WFDL creates a presumption of irreparable harm from violations, which the plaintiffs have not overcome. 

To obtain a preliminary injunction, plaintiffs must show a likelihood of success on the merits. They argue that Winmark's termination of their Franchise Agreements violates the WFDL by lacking good cause and failing to provide a 60-day right to cure deficiencies. Winmark acknowledges the WFDL governs their relationship but contends its termination letter complies with the law. The court finds that plaintiffs have demonstrated some likelihood of success on their claims.

Winmark asserts that Plaintiffs failed to cure their default, rendering any lack of a cure right inconsequential. Winmark claims that Greg Gering's misdemeanor theft by fraud provides sufficient cause to terminate the Franchise Agreements, which stipulate that a franchisee defaults if an owner is convicted of a law violation affecting the franchised business's reputation or goodwill. However, Winmark has not presented evidence demonstrating that the franchise name "Once Upon a Child" or its associated marks suffered material impairment. It references a few negative comments following a newspaper article on Gering’s conviction but provides no substantial evidence to support claims of damage to the franchise's reputation. Plaintiffs counter that sales at the affected stores have increased since the incident, with performance surpassing prior years during key sales events. The evidence suggests no material impairment to Winmark’s name or marks. Additionally, it remains uncertain whether Gering's conviction adversely affected the franchise's reputation as defined in the agreements. The term "reputation" refers to the general public's overall judgment, and the evidence does not convincingly show a lasting negative impact from a single news story. Furthermore, the question of whether Gering's conviction constitutes good cause under the Wisconsin Franchise Disclosure Law (WFDL) is raised, which defines good cause as a dealer's substantial noncompliance with essential requirements set by the grantor.

A requirement for franchisees to avoid criminal violations is deemed reasonable, but the necessity of treating any criminal conviction as grounds for termination is questioned. While strict necessity is not the standard, a connection to profitability or significant interest is required. The court finds that Gering's misdemeanor theft conviction does not constitute good cause for termination under the Franchise Agreements or the Wisconsin Franchise Investment Law (WFDL). The plaintiffs argue that Winmark's termination notice was deficient because it did not allow 60 days for Gering to cure the deficiency. Winmark claims no cure is possible, yet it remains uncertain whether Gering could have transferred his business interest to a family member, which might have remedied the default. Consequently, Gering's inaction is not considered dispositive. The court concludes that plaintiffs have a likelihood of success on the merits, justifying the move to the balancing phase. 

In balancing the plaintiffs' injury against potential harm to Winmark, the court determines that granting the injunction is appropriate. Termination would deprive the plaintiffs of their sole income source, jeopardize 32 employees' jobs, and potentially lead to insolvency. Winmark has already incurred any likely damages and will not face further harm while the case is resolved. The plaintiffs will continue to fulfill their obligations under the agreement, allowing Winmark the option to vacate the injunction if they fail. Therefore, the balance favors the plaintiffs, leading to the granting of their motion for a preliminary injunction. Winmark is enjoined from terminating the Franchise Agreements pending further court order, and a telephone conference will be scheduled to discuss the bond amount. This decision revises a prior order from October 10, 2014.