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H Guys, LLC v. The Halal Guys Franchise, Inc.

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

July 25, 2019

H GUYS LLC, an Illinois limited liability company, Plaintiff,
THE HALLAL GUYS FRANCHISE, INC., a New Jersey Corporation Defendants.


          Robert M. Dow, Jr. United States District Judge.

         This matter is before the Court on the motion for a temporary restraining order (“TRO”) and preliminary injunction [3] filed by Plaintiff H Guys LLC (“Plaintiff”). For the reasons stated below, Plaintiff's motion for a temporary restraining order [3] is denied. Counsel are directed to confer and file by 7/31/2019 a joint status report advising the Court as to the following: (1) whether Plaintiff wishes to pursue a preliminary injunction; (2) if so, what expedited discovery will be necessary in advance of a hearing on a motion for preliminary injunction and when that discovery will be completed; (3) a proposed briefing schedule on the motion for preliminary injunction; and (4) whether the parties anticipate that the motion can be resolved on the paper or will require live testimony and/or oral argument and, if either live testimony or oral argument are requested, how many hours of in-court time are anticipated. In the event that in-court time is requested, the Courtroom Deputy will contact counsel to schedule a date and time.

         I. Background[1]

         Plaintiff H Guys is an Illinois limited liability company with its principal place of business at 950 Lunt Avenue, in Elk Grove Village, Illinois. Plaintiff has operated two Halal Guys franchise restaurants located at 172 North Wabash Avenue, Chicago, Illinois 60601 (the “Loop Restaurant”) and at 49 West Division Street, Chicago, Illinois 60610 (the “Gold Coast Restaurant”). Steven Chong (“Chong”) is Plaintiff's Chief Executive Officer (CEO) and Vincent Tan (“Tan”) is its Chief Operating Officer (COO). Megan Chong is also a Member of Plaintiff. Defendant THG is a New Jersey corporation with its principal place of business at 131 Main Street, Suite 240, Hackensack, New Jersey. Mohamed Abouelenein (“Mohamed”) is Defendant's President, Ahmed Abouelenein (“Ahmed”) is its CEO, and Margaret Carrera (“Carrera”) is its Chief Development Officer. Until the end of January 2019, Defendant's Director of Franchise Operations was Terry Lee Wilson (“Wilson”). After leaving THG, Wilson worked as a consultant for Plaintiff from February to early July 2019.[2]

         Defendant THG sells franchises serving their specialty of chicken and gyro over rice. There are over 60 Halal Guys restaurants, of which Plaintiff became the first franchisee outside the New York area. Plaintiff and Defendant entered into a certain Franchise Agreement dated November 25, 2014 (the “Franchise Agreement”) and also multi-unit operator agreement(s) under which Plaintiff currently owns and operates the Loop Restaurant and Gold Coast Restaurant which are the subject of this lawsuit. Pursuant to a Second Addendum to the Multi-Unit Operator Agreement dated March 3, 2015 (the “Addendum”), Plaintiff obtained exclusive territory located in some of the most valuable and desirable areas in Chicago, within which only Plaintiff could open and operate Halal Guys restaurants. Within that territory Defendant cannot establish nor authorize any other person or entity to establish a Halal Guys restaurant during the term or any extensions of the subject Franchise Agreement. The exclusive territory granted to Plaintiff pursuant to the parties' written agreements included mapped out 0.5 mile radius areas in the Chicago neighborhoods best described as Wrigleyville/Lakeview, the Loop/Jewelers Row, Wicker Park, Gold Coast/Streeterville, and Lincoln Park/Park West. Plaintiff opened its Gold Coast Restaurant in 2016 and its Loop Restaurant in 2017.

         Defendant faced allegations of improperly handled food and problems with sanitation at least as far back as April 2018. On April 29, 2018, Wilson sent an email to Ahmed and Carrera detailing problems with Plaintiff's restaurants, including food handling, cleanliness, food safety, and temperature of food storage devices. [8-8] at 9. Also in 2018, Plaintiff's restaurants failed two inspections by the City of Chicago's Department of Public Health. See [8] at 3; [8-9] at 1-2.

         On March 22, 2019, Defendant's new Director of Franchise Operations, Melissa Curtin, emailed Plaintiff expressing concerns about unsafe and improper operation of Plaintiff's restaurants, including unlabeled and undated food, incomplete temperature logs, cleanliness issues, refrigerators operating at excessively high temperatures, and cleanliness issues. [8-5] at 3-4. Attached was a detailed inspection report of the restaurants. Id. at 6-38.

         On May 22, 2019, Defendant conducted audits of the Loop Restaurant and the Gold Coast Restaurant. The audits identified several deficiencies at the two restaurants, including cooler temperatures that were too high, food-warmer temperatures that were too low, inadequate and undated labels on food containers, expired food products, and concerns about the cleanliness of the stores. The written statements in the audit are supported by photographs of the conditions inside the restaurant. The audit report also expressed concern about a “Tea Ninja” stand operating within the Loop Restaurant. Defendant attached these reports to a May 28, 2019 letter to Plaintiff, notifying Chong and Tay of Plaintiff's default under the Franchise Agreement. [8-2]. The letter described the problems identified in the inspection reports and the contract provisions Defendant claimed had been violated. The letter also directed Plaintiff to cure the problems or Defendant would terminate the Franchise Agreement.

         On July 9, 2019, Defendant again audited the Loop Restaurant and the Gold Coast Restaurant. The problems identified in the first audits remained or had worsened. The July 9 audit identified, among other things, food storage temperatures even further out of range than they had been in May, more inadequate and undated labels on food containers, expired food items, raw food sitting in a container on the floor for long periods, and ongoing concerns about the cleanliness of the stores, which Plaintiff did not seem to have addressed after the May 22 audit. [8-3]. Again, the claims were supported by photographs of the restaurant.

         On Friday, July 19, 2019, Defendant conducted a follow up audit. The report from the follow up briefly states that both restaurants still had the problems identified in the previous audits and provided photographs in support of those assertions. [8-4]. Also on July 19, Defendant sent Plaintiff a Notice of Termination notifying Plaintiff that Defendant was terminating the Franchise Agreement because of Plaintiff's repeated material defaults under the agreement [3-5].[3] The letter asserted that the conditions of Plaintiff's restaurants violated the health and safety standards of Article 7 of the Franchise Agreement and that operation of the Tea Ninja stand in the Loop Restaurant violated several provisions of the Agreement.

         On July 20, 2019, Chong and Wilson had a conversation by text message in which Wilson asserted that Ahmed and Carrera disliked Chong and Tan, that Ahmed instructed auditors to “go hard” on Plaintiff, that Carrera tried to document problems in order to push Plaintiff out of the franchise system, and that Ahmed and Carrera treated Plaintiff worse than other franchisees because Chong and Tan once spoke disrespectfully to Carrera.

         On Monday, July 22, 2019, Defendant halted shipments of food and supplies from its supplier, U.S. Foods, to Plaintiff. See [3-6]. Plaintiff filed the instant suit on July 24, 2019.

         In this lawsuit, Plaintiff asserts claims for breach of contract and breach of implied covenant of good faith and fair dealing. More specifically, Plaintiff claims that Defendant violated the Illinois Franchise Disclosure Act, 815 ILCS 705/1 et seq., by terminating the Franchise Agreement without good cause. Plaintiff also contends that Defendant violated the implied covenant of good faith and fair dealing in four specific ways. See [1] at 11.

         In the motion before the court, Plaintiff seeks a TRO to restore its business operations, including its food supply contract, to status quo prior to the July 19 Notice of Termination. Plaintiff asserts that the termination decision rested on pretextual allegations and was driven by Defendant's desire to sell Plaintiff's exclusive territory without sharing the proceeds with Plaintiff, as well as personal animus. Support for the allegations of animus derives mainly from the text messages Wilson sent Chong sent on July 20. Defendant, in contrast, asserts that the termination decision rested on repeated violations of Franchise Agreements, stressing principally food safety issues but also referencing other issues, such as operation of the Tea Ninja stand in the Loop Restaurant.

         II. Legal Standard

         The Seventh Circuit uses a two-step analysis to assess whether preliminary injunctive relief is warranted. See Girl Scouts of Manitou Council, Inc. v. Girl Scouts of USA, Inc.,549 F.3d 1079, 1085-86 (7th Cir. 2008). This analysis is the same one that is used to determine if a TRO is warranted. Gray v. Orr, 4 F.Supp.3d 984, 989 n.2 (N.D. Ill. 2013). “In the first phase, the party seeking a preliminary injunction must make a threshold showing that: (1) absent preliminary injunctive relief, he will suffer irreparable harm in the interim prior to a final resolution; (2) there is no adequate remedy at law; and (3) he has a reasonable likelihood of success on the merits.” Turnell v. CentiMark Corp., 796 F.3d 656, 661-62 (7th Cir. 2015). If the movant makes the required threshold showing, then the court moves on to the second stage and considers: “(4) the irreparable harm the moving party will endure if the preliminary injunction is wrongfully denied versus the irreparable harm to the nonmoving party if it is wrongfully granted; and (5) the effects, if any, that the grant or denial of the preliminary injunction would have on nonparties, ” i.e. the public interest. Id. at 662. The Court balances ...

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