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E.B.N. Enterprises, Inc., An Illinois Corporation v. C.L. Creative Images

March 28, 2011

E.B.N. ENTERPRISES, INC., AN ILLINOIS CORPORATION, PLAINTIFF,
v.
C.L. CREATIVE IMAGES, INC., AN ILLINOIS CORPORATION, AND
CORDA ANN LESTER, DEFENDANTS.



The opinion of the court was delivered by: Judge Sharon Johnson Coleman

MEMORANDUM OPINION AND ORDER

Defendants C.L. Creative Images and its sole owner, defendant Corda Lester, operated a hair salon under the "Fantastic Sams" name and trademark through a franchise agreement with plaintiff E.B.N. Enterprises. C.L. and Lester repudiated the agreement shortly before its term expired and Lester continued to operate a hair salon under a new name at the same location.

E.B.N. contends that this operation is a violation of the non-competition provisions of the franchise agreement and seeks a preliminary injunction to stop the operation of the salon in its current location and to stop the defendants from using Fantastic Sams trade secrets. To the extent that E.B.N. seeks return of the operations manual it provided to the defendants, its motion for preliminary injunction is granted. The remainder of its request for preliminary injunction is denied.

Undisputed Facts

In her discovery deposition, Corda Lester testified that she was hired by Len Hermer and Gene Herniak to work at their Fantastic Sams salon in Warrenville, Illinois in 1988. In 1991, she finished cosmetology school and became a hair stylist at the salon. She was promoted to assistant manager shortly thereafter and promoted to manager in 1994. Lester continued to work at the salon for the next six years, left the salon for six months to try office work in 2000, then bought the salon from Hermer and Herniak for $95,000 later that year. E.B.N. Enterprises, Inc., the entity that managed Fantastic Sams franchising in northeastern Illinois, charged a $5500 franchise transfer fee, and Lester paid half of that fee while Hermer and Herniak paid the remainder. On March 10, 2000, Lester and E.B.N. signed a "Standard Franchise Agreement" with an initial term of ten years. The agreement is governed by Illinois law. Lester assigned her rights under the agreement to C.L., the corporation she owned, effective May 22, 2000. Lester agreed to remain liable for the franchisee obligations under the agreement, and E.B.N. approved the assignment.

The franchise agreement allowed C.L. to use the Fantastic Sams name and trademarks, and entitled it to use the Fantastic Sams "Confidential Operating Manual." The agreement obliged C.L. to operate the salon in accordance with Fantastic Sams' standards and directives. C.L. was also required to pay to E.B.N. a minimum "royalty" fee for each week of the term of the contract, plus a share of the cost of any regional advertising or promotions.

C.L. promised that during the term of the franchise agreement, it would not use the premises of the franchise for any purpose other than the operation of a Fantastic Sam's salon, and that for the same period, it would not own, operate, or have any other connection with any hair care business that was not a Fantastic Sams location. C.L. also promised that for a period of two years after the termination of the agreement, it would not have any connection with a hair care business located within five miles of any Fantastic Sams salon. At the end of the agreement, C.L. was to stop using the Fantastic Sams trademarks, return the Confidential Operating Manual, and, on request, transfer its telephone numbers to a party of E.B.N.'s choosing. E.B.N. was also granted the option to buy any or all of C.L.'s tangible assets at book value.

In a letter dated May 29, 2009, Lester advised Fantastic Sams that she would "no longer be able to pay your fees for the use of the Fantastic Sams name" and that, effective June 1, 2009, she would "no longer identify my salon with Fantastic Sams." Lester continued to operate a salon, renamed Corda's Hair Design, at the same location. E.B.N. then filed this suit.

E.B.N.'s Requests For Injunctive Relief E.B.N. originally sought injunctive relief in three respects. It asked that the defendants be enjoined from using the Fantastic Sams marks in any manner, that they be prohibited from operating any hair salon within five miles of the former franchise location until March 2012, and that they be enjoined from using any Fantastic Sams trade secret.

E.B.N.'s trademark claims were based upon assertions that the defendants continued to sell Fantastic Sams products and that the Fantastic Sams logo was still clearly visible on a sign outside the salon after the repudiation of the franchise agreement. During the course of this action, Lester represented that the product sales had ceased and that the Fantastic Sams logo had been painted over and covered by a sign identifying the premises as "Corda's Hair Design." Although E.B.N. has reserved the right to pursue damages for the alleged misuse of its trademarks, it represented in open court that it was no longer seeking injunctive remedies for these claims.

A second element of E.B.N.'s request for injunctive relief is also essentially undisputed. The franchise agreement between the parties indicated that E.B.N.'s operating manual was confidential, that Lester and C.L. were entitled to use it only during the term of the agreement, and that they were obliged to return it upon termination of the agreement. E.B.N. seeks an injunction against the defendants' use of its trade secrets, and in Lester's deposition, she indicated that while she had not opened and did not use the operating manual, she still possessed it. (Deposition of Corda Ann Lester, Docket #33, Attachment #1, p. 18.) The defendants do not suggest that they are entitled to retain the manual, and this court concludes that it must be returned to E.B.N.

The remaining and contested issue is whether the defendants shall be enjoined from continued operation of their salon in violation of the franchise agreement's non-competition provisions. The propriety of a grant of this request for injunctive relief is determined by a two stage analysis. In the first stage, E.B.N. must show that it will suffer irreparable harm without a preliminary injunction; that traditional legal remedies would be inadequate to remedy the harm; and that its claim has some likelihood of succeeding on the merits. Girl Scouts of Manitou Council, Inc. v. Girl Scouts of the United States of America, 549 F.3d 1079, 1085-86 (7th Cir. 2008). If E.B.N. has failed to make any one of these showings, its request for injunctive relief must be denied. Girl Scouts, 549 F.3d at 1086. If all three showings are made, this court must then conduct the second-stage analysis: it must weigh each party's likelihood of success on the merits, the harm that would be suffered by each party in the event of an adverse ruling, and the impact of any ruling on the public interest, and must ultimately determine whether the balance of equities favors granting or denying the requested relief. Girl Scouts, 549 F.3d at 1086; Hoosier Energy Rural Electric Cooperative Inc. v. John Hancock Life Insurance Co., 582 F.3d 721, 725 (7th Cir. 2009). E.B.N.'s request for an injunction against continued operation of Lester's renamed salon fails to demonstrate that it will suffer irreparable harm in the absence of relief, and thus falls short of the showing required under the first-stage analysis.

District courts in this circuit are encouraged to conduct at least a cursory examination of the sufficiency of the plaintiff's showing under each of the required first stage elements. Girl Scouts, 549 F.3d at 1087. E.B.N. has made the necessary showing of a likelihood of success on the merits here. To make that showing, a plaintiff seeking injunctive relief must demonstrate only "a greater than negligible chance of winning." AM General Corp. v. DaimlerChrysler Corp., 311 F.3d 796, 804 (7th Cir. 2002). E.B.N. has made the uncontradicted showing that the current operation of Lester's salon is a breach of the franchise agreement's competition restrictions, and Illinois law permits enforcement of such restrictions if they are reasonable. Eichmann v. National Hospital and Health Care Services, 308 Ill. App. 3d 337, 343 (1999). Though it is less than clear from the present record that the restrictions in the franchise agreement here are reasonable, this court finds that E.B.N. has made the minimal showing of likely success required to support a grant of injunctive relief.

However, E.B.N. falls short of the necessary showing that it will be irreparably harmed without an injunction against the defendants' continued salon operations. E.B.N. contends that irreparable injury is presumed from a breach of a non-competition agreement, ...


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