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ARTHUR TREACHER'S FISH & CHIPS, INC. v. A&B MGMT.

August 3, 1981

ARTHUR TREACHER'S FISH & CHIPS, INC.
v.
A&B MANAGEMENT CORPORATION v. MRS. PAUL'S KITCHENS, INC.



The opinion of the court was delivered by: HANNUM

FINDINGS OF FACT, CONCLUSIONS OF LAW, DISCUSSION AND ORDER

I. Introduction

 Arthur Treacher's Fish & Chips, Inc. ("ATFC") has brought suit against A&B Management Corporation ("A&B") under the Lanham Trade-Mark Act, 15 U.S.C. §§ 1051-1127 ("Lanham Act"). A&B answered and counterclaimed alleging, inter alia, breach of contract and antitrust violations on the part of plaintiff, ATFC, and third-party defendant, referred to as additional defendant by the parties in their pleadings, Mrs. Paul's Kitchens, Inc. ("MPK"). Thus commenced a battle between a franchisor (ATFC) and one of its franchisees (A& B). Figuratively, this "battle" was to be the first in what has evolved into, by analogy, "war". The last count revealed twelve ATFC cases which have been transferred to this Court by the Judicial Panel on Multidistrict Litigation.

 This opinion will focus upon and resolve cross motions for preliminary injunctive relief filed by ATFC and A&B. ATFC seeks a preliminary injunction ordering A&B to "remove all Arthur Treacher's signs and other identifying characteristics from its stores, and any goods, materials or products in its possession, custody or control" and further, enjoining A&B "from infringing upon Arthur Treacher's Fish & Chips, Inc."s trademarks in the future."

 A&B seeks a preliminary injunction enjoining ATFC and MPK from:

 
(1) continuing to violate the antitrust laws and continuing to breach their duties to A&B resulting from the unlawful tying arrangements and other unreasonable restrictions on franchisees' sources of supply for food products imposed by them; (2) terminating A&B's franchise; (3) preventing distributors and suppliers from supplying A&B with products necessary to the operation of its franchise, or otherwise interfering with such supply; and (4) attempting to collect franchise fees from A&B.

 An extensive hearing on these motions was conducted and extensive briefs have been filed resulting in a record consisting of several thousand pages. Oral argument was also heard at the request of the parties. The lines have thus been drawn in this preliminary skirmish. After thorough consideration of the record adduced, and in accordance with Fed.R.Civ.P. 52(a) and 65(d), the Court renders the following:

 II. Findings of Fact

 1. Plaintiff, Arthur Treacher's Fish & Chips, Inc. ("ATFC") is a Delaware corporation with its principal place of business in Pennsylvania.

 2. ATFC is a wholly owned subsidiary of Mrs. Paul's Kitchens, Inc. ("MPK"), having been acquired by MPK on November 21, 1979.

 3. ATFC is engaged in the business of owning and operating Arthur Treacher's Fish & Chips restaurants, and is also engaged in the business of licensing others, in return for a commission or royalty, to own and operate Arthur Treacher's restaurants. These restaurants are "fast food" outlets specializing in seafood. ATFC income is derived from the company owned stores, licensee fees and royalty income with a great portion of this income derived from the latter source.

 4. Beginning in 1969, ATFC has registered various trademarks with the United States Patent and Trademark Office pursuant to the Lanham Act, including the name "Arthur Treacher's Fish & Chips" and various other logos used in the business. These registered trademarks remain valid today.

 5. Defendant, A&B Management Corporation ("A&B") was formed in 1974 for the purpose of operating an ATFC franchise.

 6. On November 22, 1974, A&B entered into a Master License Contract with ATFC which granted A&B the exclusive right to operate Arthur Treacher's Restaurants in the city and county of Philadelphia. A&B purchased this franchise for $ 100,000.

 7. Pursuant to the Master License Contract, A&B opened and now operates seven Arthur Treacher's Restaurants in the Philadelphia area. The total investment made by A&B in opening these seven outlets is approximately $ 3,000,000. The most recent restaurant opened by A&B costs in excess of $ 600,000 and was completed in May, 1980. This last restaurant was opened with the approval and support of ATFC.

 8. For each of these outlets, A&B entered into a Standard Unit License Contract. These contracts granted to A&B the right to use the various registered trademarks of ATFC. In return for the permission to use the ATFC trademarks, A&B agreed to pay royalties equal to the greater of $ 500 or 5% of monthly gross receipts. Although the original contract between ATFC and A&B provided for a 5% payment of royalties, since approximately March, 1979, A&B was paying royalties on a 4% basis which is what they are being charged at the present time.

 9. In addition to the 5% of monthly gross receipts payable to ATFC, A&B agreed to pay a sum equal to not less than 3% of annual gross receipts to a cooperative advertising organization known as the "Philadelphia Metro" which was established by ATFC for the purpose of advertising in the Philadelphia Metropolitan area.

 10. To date, A&B has contributed approximately $ 300,000 to the Philadelphia Metro for advertising and is still contributing 3% of its annual gross receipts to the organization for advertising. This money is spent primarily to purchase "air time" on television.

 11. Although other franchisees in addition to A&B are present in the Philadelphia metropolitan area (which for purposes of the television advertising includes Bucks, Chester, Delaware and Montgomery counties and parts of Southern New Jersey and the state of Delaware) A&B has been primarily responsible in the past several years for the advertising done in these areas by the Philadelphia Metro. A&B has contributed 34%, 56% and 66% of the total contributions to the Philadelphia Metro for the years 1979, 1980 and 1981, respectively.

 12. In addition to the $ 300,000 of contributions by A&B to the Philadelphia Metro for advertising to date, A&B has paid ATFC approximately $ 400,000 in royalties.

 13. However, unlike the 3% advertising payment which A&B continues to make, since September, 1979, A&B has not paid any royalties to ATFC. The amount of royalties accruing to date since September, 1979, which A&B has withheld, is approximately $ 200,000.

 14. On July 11, 1980, ATFC gave A&B written notice of a then existing delinquency in the amount of $ 52,413.53 of unpaid royalties. The notification related an expectation on the part of ATFC that A&B would make prompt arrangement for payment of the outstanding amount.

 15. A&B did not pay the outstanding amount and on August 15, 1980, ATFC mailed to A&B a notice that A&B's license to use the Arthur Treacher's trademarks, service marks, processes, etc., was terminated. The notice further advised A&B that it should cease using the Arthur Treacher's signs and that it should remove all distinguishing characteristics identifying it as an ATFC restaurant from its premises.

 16. Despite this notice of termination, A&B continues to use the trademarks, service marks, processes, etc. of ATFC and is not paying for them. This suit was instituted on August 27, 1980 by ATFC seeking, inter alia, payment of the withheld royalties and injunctive relief preventing A&B from using the Arthur Treacher's trademarks and compelling A&B to remove all identifying characteristics of Arthur Treacher's from its seven restaurants.

 17. A&B is owned in part by Agostine Malerba. Mr. Malerba is also president of A&B and is in active charge of its daily operations.

 18. Mr. Malerba was considered to be an outstanding franchisee by the management of ATFC, both before and after the acquisition of ATFC by MPK. He can easily be characterized as a model franchisee. In 1978, Mr. Malerba received awards from ATFC for the best run store, the best multiunit operator, the ...


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