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COTTMAN TRANSMISSION SYS. v. MELODY

April 21, 1994

COTTMAN TRANSMISSION SYSTEMS, INC.
v.
DONNA MELODY and LEE MELODY



The opinion of the court was delivered by: J. CURTIS JOYNER

 JOYNER, J.

 This civil action comes before this Court following removal from the Court of Common Pleas of Montgomery County, Pennsylvania and upon motion of the plaintiff, Cottman Transmission Systems, Inc. for the issuance of a preliminary injunction enjoining the defendants, Lee and Donna Melody from, inter alia, infringing upon Cottman's trademarks, manuals, proprietary information and to enjoin Mr. and Mrs. Melody from operating a competing transmission business in La Habra, California. Plaintiff also moves to hold the said defendants in contempt of the temporary restraining order issued by the Montgomery County Court prior to removal. Hearings in this matter were held on April 6, 7 and 11, 1994 and the respective motions were orally argued on April 12, 1994. Pursuant to Fed.R.Civ.P.Nos. 52 and 65, we now make the following:

 1. Plaintiff, Cottman Transmission Systems, Inc. is a corporation organized and existing under the laws of the Commonwealth of Pennsylvania, with its principal place of business located at 240 New York Drive, Fort Washington, Pennsylvania.

 2. Defendants Lee W. Melody and Donna Melody are adult individuals, husband and wife, who owned and operated the Cottman Transmission Center located at 441 E. Imperial Highway in La Habra, California. Defendants reside at 311 16th Street in Seal Beach, California.

 3. Cottman Transmission Systems, Inc. (hereinafter "Cottman") was organized in 1962 and since that time and to the present has, as its principal business purpose, the licensing and operation of automobile transmission repair centers throughout the United States. Cottman achieves its business purpose through the sale of franchises and/or licenses to operate Cottman Transmission Centers to individual franchisee/licensees. At present, Cottman has 140 franchises/transmission centers throughout the United States, five of which are located in California.

 4. Cottman owns, as federally registered trademarks, the Cottman logo, the phrase "Cottman Man," and the actual Cottman Man Figure. Pursuant to its Licensing Agreements, Cottman permits its licensee/franchisees to, among other things, utilize the Cottman name and its trademarks, trade names, service marks and logos. These marks, names and logos appear on the stationary, business cards, signs, repair orders and promotional items and on the advertising which Cottman supplies to and procures for its licensees in accordance with the terms and conditions of its license agreements.

 5. The sales of franchises to franchisees is regulated by the Federal Trade Commission. The Federal Trade Commission requires all franchisors to send to potential franchisees an informational document known as a Uniform Franchise Offering Circular for their review prior to entering into negotiations for the sale of a franchise. Cottman must renew and update its offering circulars every year and, in addition, must comply with the particular requirements of the laws of each state in which it is authorized to sell franchises. Presently, Cottman is authorized to sell franchises in ten states, including California.

 6. A Cottman franchise essentially consists of what is referred to in its licensing agreements as the "Cottman System" for conducting operations in the automotive transmission business. The system consists, in part, of the use of the Cottman name, Cottman's methods, procedures and techniques, and a network of Centers devoted exclusively to the repair of automotive transmissions using the Cottman name, methods, procedures and techniques.

 7. The initial License Fee to purchase a license to operate a Cottman franchise is, and at all times relevant to this case, was $ 22,500.00. A prospective licensee could purchase either a new license directly from Cottman or an existing license from a Cottman licensee subject, of course, to Cottman's approval of the sale.

 8. Under the Franchise Investment Law of the State of California, franchises must be registered with the California state Department of Corporations. It is in compliance with this law that Cottman submitted its application for renewal of its offering circular to the Department of Corporations on or about February 3, 1993 and that the application for registration was approved, effective as of March 9, 1993. Notwithstanding the state's acceptance of the updated circular and the registration renewal, page two of Cottman's Uniform Franchise Offering Circular specifically states that "such registration does not constitute approval, recommendation or endorsement by the Commissioner of Corporations nor a finding by the Commissioner that the information provided herein is true, complete and not misleading."

 9. In or about February, 1993, Lee Melody left his position as President and CEO of the Mc Guire Nicholas Corporation with one year's severance pay and, together with his wife Donna began exploring various franchise opportunities with an eye toward opening and running his own business. Although Lee Melody had more than twenty years' experience in the corporate business world primarily in the areas of sales, marketing and management, he had no experience in retail, in owning or operating a small business or in the automotive or automotive/transmission repair industry.

 10. In early March, 1993, Mr. Melody answered an advertisement from a franchise broker in California with the result that he received a letter on Cottman stationary dated March 15, 1993 from one Joseph Sanfellipo, the sole owner of FranchiseWorks, Inc. of Del Mar, California. In that letter, Mr. Sanfellipo described himself as someone with over twenty years of experience in starting and growing businesses and went on to tout the benefits of owning a Cottman franchise. Mr. Melody and Mr. Sanfellipo subsequently met on March 18, 1993 at the Cottman in Escondito, California to further discuss franchise opportunities with Cottman. 11. On March 22, 1993, Mr. Sanfellipo gave Mr. Melody a copy of Cottman's Uniform Franchise Offering Circular to review and it was at or about this same time that Mr. Melody executed a receipt acknowledging that he had received a copy of the offering circular and that he completed a Cottman Franchise Questionnaire for submission to the Cottman home office along with a copy of his then-current resume.

 12. Joseph Sanfellipo and Franchiseworks, Inc. are described at page 6 of the Offering Circular as "a Franchise Sales Agent for Cottman Transmissions Systems, Inc. Mr. Sanfellipo is the President of that company [Franchiseworks] and the sole owner." At the time of their meeting, Mr. Sanfellipo told Mr. Melody that he had spent a considerable amount of time working with Cottman and that he had become the sole agent for Cottman in Southern California.

 13. The Uniform Franchise Offering Circular also included a copy of the Cottman License Agreement together with, inter alia, the Cottman License Schedule, Telephone Waiver, Sign Lease Agreement, Lease Rider and Manual Receipt and a listing of the names, addresses and telephone numbers of existing Cottman franchisees nationwide.

 14. In the course of his review of the offering circular, Mr. Melody called and spoke with Michael Ambrose, the President of Cottman as well as several of the franchisees listed in the circular.

 15. In late March or early April, 1993, Mr. Melody decided that he would like to proceed with the purchase of a Cottman franchise and in accordance with that decision, he met with and gave Mr. Sanfellipo a check in the amount of $ 22,500 representing payment in full for a Cottman License. Receipt of this payment was acknowledged by Mr. Sanfellipo in a letter dated that same day to Mr. Melody wherein Mr. Sanfellipo further explained that the "final paperwork" on the matter would "be prepared upon determination of the location, and successful negotiation of acceptable terms."

 16. At the conclusion of their April 2, 1993 meeting, Messrs. Melody and Sanfellipo agreed that Mr. Sanfellipo would assist Mr. Melody in locating a site for his Cottman Center. They thereafter again met on April 7, 1993 and, together with one of Cottman's Operations Managers, Mark DiMuzio, travelled to a number of different locations in southern Orange County, California for purposes of finding a suitable location for the opening of Mr. Melody's Cottman Center.

 17. It was Cottman's understanding that California law required that ten business days elapse between the time that a prospective franchisee receives a franchise offering circular and the time that funds are tendered toward the purchase of a franchise. For this reason and because Cottman had some concern that Mr. Sanfellipo may have accepted payment for the license from Mr. Melody before the expiration of that ten-day period, Mr. Sanfellipo returned the monies to Mr. Melody via correspondence dated April 5, 1993 with the proviso that if Mr. Melody should again decide to proceed with the purchase of his Cottman license, he would accept payment from Mr. Melody after April 5th.

 18. In or about March-April, 1993, Joseph Sanfellipo himself owned several Cottman licenses/franchises in Southern California and it was one of these licenses which he sold to Lee Melody. At or about that same time, Mr. Sanfellipo also held certain rights to and interest in, a new autoplex center located in Alisa Viejo, California.

 19. One of the locations visited by Messrs. Melody, Sanfellipo and DiMuzio on April 7, 1993 was the Alisa Viejo auto complex in which Mr. Sanfellipo had an interest and it was the consensus of all three that the Alisa Viejo site would be a good location for Melody's franchise. On April 9, 1993, Mr. Melody met with one Rich Julian, the individual from whom he would be subleasing the Alisa Viejo site and gave him a deposit on the sublease.

 20. On April 13, 1993, Eileen Burke, a Legal Assistant with Cottman Transmission Systems sent, via overnight mail, a copy of the License Agreement which it was expected that Lee Melody would sign when he purchased the Alisa Viejo franchise. Mr. Melody received and executed a receipt indicating that he had received the said license agreement on April 14, 1993.

 21. Lee Melody had the uniform franchise offering circular and the license agreement reviewed by his attorney, William Tucker.

 22. As a general rule, because of the confidential nature of the information provided at its three-week training school, Cottman permits only those individuals who have entered into a Cottman license agreement to attend its training school.

 23. On April 18, 1993, Lee Melody travelled to Fort Washington, Pennsylvania to attend the Cottman training school which began the following day. As of that date, however, Mr. Melody had not yet signed a license agreement and it was therefore understood that he would be permitted to attend the training sessions as an "employee" of Joseph Sanfellipo. Accordingly, on April 19, 1993, Lee Melody executed an agreement whereby he agreed to, among other things, protect and preserve the confidential information communicated to or acquired by him in the course of the training sessions.

 24. On April 27, 1993, Lee Melody once again tendered a check for $ 22,500 to Joseph Sanfellipo representing payment in full for the Cottman license for the Alisa Viejo site.

 25. Donna Melody attended the final week of the Cottman training school session that had commenced on April 19, 1993.

 26. On May 6, 1993, Lee Melody entered into a license agreement with Cottman. Immediately prior to his execution of the said document, he was interviewed by Eileen Burke and Todd Leff, Esquire, Cottman's Corporate Counsel, and questioned concerning the circumstances surrounding his purchase of the Cottman license and the representations which had been made to him, if any, by Cottman's representatives. This interview was tape recorded with Mr. Melody's permission and was ostensibly undertaken to ensure that Cottman had complied with all applicable state and federal regulations.

 27. Since Mr. Melody had been having some difficulty in obtaining what were in his opinion adequate answers and assurances from Rich Julian with respect to the sublease on the Alisa Viejo site, Mr. Melody requested, and Cottman agreed, to change the location designated in the license agreement from Alisa Viejo, California to Orange County, California.

 28. Like all of Cottman's license agreements, the license agreement which Mr. Melody entered into with Cottman on May 6, 1993 contained, inter alia, a clause dictating that any legal proceedings arising thereunder would be governed by the law of Pennsylvania and would be adjudicated in either the Courts of Common Pleas of Philadelphia or Montgomery County or the U.S. District Court for the Eastern District of Pennsylvania. The said license agreement also included a covenant not to compete and an acknowledgment that the telephone numbers and telephone directory listings for the Cottman center were the property of Cottman. Appendix "C" to the license agreement reaffirmed and reiterated the telephone acknowledgement and provided several blank spaces where the actual telephone numbers for the individual Cottman centers were to be specifically designated.

 29. Since Lee Melody did not yet know the actual location or have the telephone numbers for his Cottman center at the time he executed the license agreement and Appendix "C" thereto, the address and telephone number portion of the appendix was left blank. Mr. Melody agreed that those ...


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