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Foodworks USA, Inc. v. Foodworks of Arlington Heights, LLC

United States District Court, N.D. Illinois, Eastern Division

November 24, 2014

FOODWORKS USA, INC., Plaintiff/Counter-Defendant,
v.
FOODWORKS OF ARLINGTON HEIGHTS, LLC, Defendant/Counter-Plaintiff.

MEMORANDUM OPINION AND ORDER

MARY M. ROWLAND, Magistrate Judge.

Defendant/Counter-Plaintiff has filed a Motion for Judgment on Damages. For the reasons stated below, the motion is granted in part, denied in part, and reserved in part.

I. BACKGROUND

Defendant/Counter-Plaintiff Foodworks of Arlington Heights (FWAH) operates a Mexican-themed restaurant in Arlington Heights, Illinois, known as the Fuego Mex-ican Grill and Margarita Bar (Fuego). FWAH's Counterclaim asserts intellectual property violations against Plaintiff/Counter-Defendant Foodworks USA (FUSA) relative to the name of the restaurant and the trade dress used at the restaurant. The parties have consented to the jurisdiction of the United States Magistrate Judge, pursuant to 28 U.S.C. § 636(c). The tortured history of this case is well known to the parties, but because the background is relevant to the instant Motion, the Court will revisit it.[1]

A. Defendant's Counterclaim

Defendant FWAH's Counterclaim alleges federal trademark and trade dress in-fringement and dilution, false representation, and common law conversion. FWAH seeks declaratory and injunctive relief, disgorgement of all monies received by FUSA from licensing the trademarks and trade dress, money damages, and costs and fees. Specifically, the Counterclaim asserts that FWAH's shareholders, which included Ayad Nahlawi, FUSA's principal owner, were responsible for developing the service mark and trade dress for the Fuego restaurant. (Counterclaim ¶¶ 14, 18-22, 24). An August 2004 operating agreement indicated that Nahlawi would be the manager of both FWAH and the restaurant, but said nothing about the restau-rant operating under any form of an intellectual property license. ( Id. ¶ 16). In Oc-tober 2006, Nahlawi circulated various documents to FWAH's shareholders, includ-ing a Licensing Agreement and a Management Agreement. (Counterclaim ¶ 26). These documents indicated that a company primarily owned by Nahlawi, known as Foodworks Management, Inc., was Fuego's general manager. ( Id. ¶ 27). Although these documents indicated that they were approved by Defendant's shareholders on October 30, 2006 ( id. Exs. F, G), they were never approved by a majority of mem-bers ( id. ¶ 27). Instead, sometime after October 30, Nahlawi unilaterally executed the Licensing Agreement and Management Agreement as FWAH's manager, with-out the requisite approval of FWAH's shareholders. ( Id. ¶¶ 27-28). Thereafter, Nahlawi caused FWAH to make unauthorized, periodic payments to FUSA towards the Licensing Agreement. ( Id. Count IX ¶¶ 34-35).

FWAH asserts that it is and always has been the owner of the Fuego logo and its derivatives, as well as common law trademark rights in the name Fuego Mexican Grill & Margarita Bar (collectively, the Fuego Marks). (Counterclaim, Count I ¶ 34). The FWAH members collectively developed and implemented the Fuego Marks and the associated restaurant design elements (Fuego Trade Dress). ( Id. Count I ¶ 35, Count II ¶ 35). Nevertheless, FUSA licenses the Fuego Marks and Trade Dress to a third-party licensee in connection with the operation of another Mexican-themed restaurant. ( Id. Count III ¶ 36). FUSA accepted periodic payments from its third-party licensee for its use of the Fuego Marks and Trade Dress. ( Id. Count IX ¶ 36). The marks and trade dress currently being used by FUSA and its third-party licen-see to promote its restaurant is identical or substantially similar to the Fuego Marks and Trade Dress developed by FWAH. ( Id. Count III ¶ 38, Count IV ¶ 66). Thus, the Counterclaim alleges that FUSA has infringed, and continues to infringe, upon the Fuego Marks and Trade Dress despite FWAH's demand that such in-fringement cease. ( Id. Count III ¶ 39, Count IV ¶ 67).

On December 20, 2004, despite having no right to do so, FUSA filed a trademark application with the USPTO (Application), seeking registration of the Fuego Marks. (Counterclaim, Count VII ¶¶ 34 & 38, Count VIII ¶¶ 34 & 38). On February 10, 2006, FUSA filed a Statement of Use representing that FUSA was using the Fuego Logo in commerce as of November 14, 2005, the date the Fuego restaurant opened for business. ( Id. Count VII ¶ 36, Count VIII ¶ 36). FUSA knew that the representa-tions made in the Application and Statement of Use were materially and deliberate-ly false. ( Id. Count VII ¶¶ 38 & 40, Count VIII ¶¶ 38 & 40). On June 20, 2006, the USPTO registered the Fuego Marks. ( Id. Count VII ¶ 37, Count VIII ¶ 37).

The Counterclaim contains nine causes of action: declaratory judgment, pursu-ant to 28 U.S.C. § 2201, that FWAH is and always has been the owner of the Fuego Marks and Trade Dress (Counts I and II); trademark and trade dress infringement and unfair competition in violation of Lanham Act § 43 (Counts III and IV); dilution of trademark and trade dress in violation of Lanham Act § 43 (Counts V and VI); cancellation of trademark registration, pursuant to Lanham Act § 14 (Count VII); fraudulent/false representation in violation of Lanham Act § 38 (Count VIII); and common law conversion (Count IX).

B. Procedural History

On July 1, 2013, the Court granted FWAH's Motion for Default Judgment and set this cause over for an evidentiary hearing as to the issue of damages. (Dkt. 152). The Court found that FUSA's continuing discovery violations and flaunting of Court-ordered deadlines warranted granting default judgment on FWAH's Counter-claim.[2] Specifically, the Court found that FUSA's discovery responses remained grossly deficient, FUSA's failures to adequately respond to discovery and comply with Court orders demonstrated bad faith and fault, and default judgment was the appropriate Rule 37 sanction for FUSA's conduct.

On September 27, 2013, FWAH filed the current motion for judgment on damag-es. (Dkt. 166). FUSA filed a response on October 18, 2013. (Dkt. 173). The Court set an evidentiary hearing on the damages motion for November 6, 2013.[3] (Dkt. 176). FUSA's new counsel filed a supplemental response on December 2, 2013. (Dkt. 186). On December 13, 2013, after the parties advised that they were discussing global settlement of all pending federal and state cases, the Court entered and continued the motion for damages. (Dkt. 192). After the settlement discussions proved unsuc-cessful, the parties informed the Court that all damages evidence would be included in their papers and a hearing was not necessary. (Dkt. 215). FWAH filed a reply on October 20, 2014 (Dkt. 216), and FUSA filed a sur-reply on October 23, 2014 (Dkt. 220).

FWAH's Motion seeks: (1) a declaration that FWAH is the sole owner of the Fue-go Marks and Trade Dress, FUSA has no ownership rights in the Fuego Marks and Trade Dress, and all license agreements executed by FUSA regarding the Fuego Marks and Trade Dress are void; (2) a permanent injunction against FUSA and an-yone acting in concert with FUSA from using the Fuego Marks and Trade Dress in any manner; (3) actual damages for trademark infringement; (4) disgorged profits for trademark and trade ...


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