Opinion
Civil Action No. 18-1125
12-11-2018
GENERAL NUTRITION CORPORATION, Plaintiff, v. K & R NUTRITION, INC., RICHARD R. COLON, and AMADOR J. COLON, Defendants.
REPORT AND RECOMMENDATION
I. RECOMMENDATION
Presently before the Court is a Motion for Default Judgment (ECF No. 7) filed by Plaintiff General Nutrition Corporation (GNC). For the following reasons, it is respectfully recommended that the motion be granted.
II. REPORT
Factual and Procedural History
GNC is a Pittsburgh-based retailer of nutrition products (ECF No. 1, ¶ 11). GNC operates both corporate-owned and franchised stores (Id. at ¶ 11). Defendants K&R Nutrition, Inc., Richard R, Colon, and Amador J. Colon (collectively, Defendants) have operated at least one GNC franchise for the past decade (Id. at ¶ 19). On July 29, 2016, Defendants signed an agreement to renew the franchise term for a period of five years with respect to a GNC store they operated in Kernersville, North Carolina (Id. at ¶ 20). A few months later, on February 24, 2017, Defendants signed an agreement to renew the franchise term of a second store, located in Raleigh, NC (Id. at ¶ 21).
Defendant Richard R. Colon has filed for bankruptcy in the Eastern District of North Carolina, case number 18-04952-5.
The terms of the franchise agreements provide that the stores operated by Defendants conform to the "GNC System" for selling goods and services, and explicitly prohibit the sale of competitor products (Id. at ¶¶ 15-18, 23). Additionally, the agreements set forth a schedule for payment of fees and inventory costs (Id. at ¶¶ 24-25). An attachment to the franchise agreement permits franchisees to enter into leases directly with the location landlord; however, this Direct Lease Program is conditioned on the franchisee operating the location as a GNC store (Id. at 34-36).
In the event of a breach of the agreement, GNC is required to provide notice and the franchisee has a 30-day grace period in which to correct any default, after which the agreement may be terminated by GNC (Id. at ¶ 26). Section 29D of the franchise agreements provides that the franchisee "accepts generally and unconditionally the in personam jurisdiction and venue of [any state or federal court located within the Commonwealth of Pennsylvania] and waives any defense of forum non conveniens" with respect to litigation relating to the agreement (Id. at ¶ 32; ECF No. 1-1, pgs. 37-38; ECF No. 1-2, pgs. 37-38).
In its complaint, GNC alleges that Defendants breached sections 12H and 22 A-I of the franchise agreement by selling unapproved products from Nutrition Zone, USA, a direct competitor of GNC, in their Kernersville store (Id. at ¶ 23, 25, 37; ECF No. 1-1, pgs. 14, 31-33; ECF No. 1-2, pgs. 14, 31-33). Additionally, one of the store managers informed representatives from GNC that the Kernersville store "would soon be a Nutrition Zone location," in violation of the franchise agreements' non-compete clause, found at Section 22(b) of the franchise agreements (Id.; ECF No. 1-1, pgs. 31-32; ECF No. 1-2, pgs. 31-32). According to GNC, Nutrition Zone, USA "currently does not have any stores east of Kansas, yet its website states that there are stores 'coming soon' to Raleigh and Kernersville" (Id. at ¶ 38). GNC learned of the material breaches in March or April of 2018 (Id. at ¶ 37).
On April 5, 2018, GNC sent Defendants notices of termination, which included an opportunity to cure the $442,000 in fees and liquidated damages owed to GNC under the terms of the franchise agreements for both stores (Id. at ¶ 1, 40). The fees and damages included monthly royalties owed to GNC on the stores and accounts receivable in the form of payment for product shipped to Defendants (Id. at ¶¶ 45-47). On April 9, 2018, Defendant Richard R. Colon admitted to selling a competitor's products during a conference call (Id. at ¶ 41). In response, GNC sent him a cease and desist letter (Id.) Defendants failed to respond or cure the defaults and, as a result, the franchise agreements were terminated on May 5, 2018 (Id. at 42). However, Defendants refused to turn over the stores, deciding instead to shutter the businesses (Id. at ¶¶ 43-44). Moreover, in its complaint, GNC avers that, rather than pay GNC for or return the unsold GNC-brand product, Defendants sold it at a profit to themselves (Id. ¶ 47). Finally, GNC states that, in August of 2018, Defendant Richard Colon contacted the landlord for the Kernersville store to ask about buying out the lease and converting the store into another nutrition business (Id. at ¶ 48).
On August 24, 2018, GNC filed a complaint against Defendants seeking monetary damages and injunctive relief (ECF No. 1). Although the docket evidences that the summons have been returned, none of the named Defendants have responded to the complaint. On October 3, 2018, Plaintiff filed a motion for default judgment (ECF No. 7). On November 13, 2018, a default judgment hearing was held. Per this Court's order, GNC served notice of the hearing upon all Defendants; however, none appeared for the hearing.
At the hearing, the Court confirmed that Defendants had been served with notice and failed to appear (Notes of Testimony (N.T.), 11/13/2018, pg. 2). Counsel for GNC explained that it was her understanding that Defendants had recently reopened the previously shuttered stores as Nutrition Zone locations; thus, her client was no longer "seeking assignment of the leases at issue" (Id. at 3). However, GNC was still seeking $442,000 in damages and fees, as well as approximately $20,000 in attorney's fees, and other injunctive relief, including extension of the terms of the non-compete clause contained in the franchise agreements (Id.) At the conclusion of the hearing, the Court took GNC's motion under advisement and requested a detailed accounting of the requested attorney's fees, which was subsequently provided by counsel (ECF No. 15).
Discussion
A. Entry of Default Judgment
The Federal Rule of Civil Procedure provide that a district court may enter default judgment against a party when default has been entered by the Clerk of Court. Fed.R.Civ.P. 55(b)(2). In these circumstances, the entry of default judgment is a matter within the sound discretion of the district court. Hritz v. Woma Corp., 732 F.2d 1178, 1180 (3d Cir. 1984). As the Third Circuit has explained, "[t]here factors control whether a default judgment should be granted: (1) prejudice to the plaintiff if default is denied, (2) whether the defendant appears to have a litigable defense, and (3) whether defendant's delay is due to culpable conduct." Chamberlain v. Giampapa, 210 F.3d 154, 164 (3d Cir. 2000) (citing United States v. $55,518.05 in U.S. Currency, 728 F.2d 192, 195 (3d Cir. 1984)). "However, when a defendant has failed to appear or respond in any fashion to the complaint, this analysis is necessarily one-sided; entry of default judgment is typically appropriate in such circumstances at least until the defendant comes forward with a motion to set aside the default judgment pursuant to Rule 55(c)." Sec. & Exch. Comm'n v. Fortitude Grp., Inc., 2017 WL 818604, at *1 (W.D. Pa. Feb. 10, 2017) (citing Anchorage Assocs. v. Virgin Is. Bd. of Tax Rev., 922 F.2d 168, 177 n.9 (3d Cir. 1990)).
In the instant case, the averments in the complaint clearly establish that Defendants have been in breach of the franchise agreements for over seven months (ECF No. 1, ¶ 37). At the November 13, 2018 hearing, GNC indicated that the breach is ongoing, and is expected to continue for the foreseeable future (N.T., 11/13/2018, pg. 2-12). Even though it conceded that it is no longer seeking return of the franchised properties at issue, GNC established that its business, and the goodwill generated therefrom, will be substantially prejudiced if default is not entered. (Id.; ECF No. 1 ¶¶ 37-49, 51-72). Thus, the first factor outlined above weighs in favor of entering default judgment. With respect to the remaining two factors, because Defendants have failed to participate in this litigation in any way, this Court cannot determine whether they have a viable defense or whether the default is due to their culpable conduct. Chamberlain, 210 F.3d at 164. As noted above, the Third Circuit has determined that, under such circumstances, default is proper See Anchorage Assocs., 922 F.2d at 177 n.9. Accordingly, it is respectfully recommended that default judgment be entered against Defendants.
B. Recommended Relief
With respect to the specific relief to be afforded GNC, this Court is mindful of Defendant Richard R. Colon's pending bankruptcy proceedings. Accordingly, it is recommended that the money judgment imposed herein be enforced jointly and severally against the remaining defendants, Amador Colon and K&R Nutrition, Inc. in the amount of $442,000, which is the outstanding balance of costs and fees associated with Defendants' breach of the franchise agreements. This Court also recommends that the District Court award appropriate attorney's fees in the amount of $22,324.82, based on 65.4 hours of work by plaintiff's counsel (ECF No. 15).
Finally, GNC requests injunctive relief to prevent further harm to its brand. Specifically, it asks this Court to extend the enforcement the business restrictive covenants found at Section 22(a) of the franchise agreements against Defendants for a period of one year from the date of the judgment herein (N.T., 11/13/2018, at 8-9). Such extension is not explicitly provided for under the terms of the franchise agreement, although Section 22(H) permits equitable relief, "including injunction and specific performance" (ECF No. 1-1, pg. 36).
In determining whether to grant a permanent injunction, the Court must determine whether: "(1) the moving party has shown actual success on the merits; (2) the moving party will be irreparably injured by the denial of injunctive relief; (3) the granting of the permanent injunction will result in even greater harm to the defendant; and (4) the injunction would be in the public interest." Gucci Am., Inc. v. Daffy's, Inc., 354 F.3d 228, 236-37 (3d Cir.2003). In situations involving a contract, such as that presently before the Court, the United States Court of Appeals for the Third Circuit has held that a party may demonstrate irreparable harm in two ways: (1) by establishing that the special value or peculiar qualities of the subject matter of the contract render money damages inadequate; or (2) by establishing that the features of the contract render ascertainment of the legal measure of damages impracticable. ECRI v. McGraw-Hill, Inc., 809 F.2d 223, 226 (3d Cir.1987).Serv. Elec. Cablevision, Inc. v. City of Hazleton, 462 F. Supp. 2d 616, 620 (M.D. Pa. 2005).
Although Defendants' failure to appear has made it impossible for this Court to reach the merits of GNC's claims, this Court accepts as true the averments of record and finds that GNC has set forth a claim for breach of the franchise agreements. Moreover, the record establishes irreparable harm to GNC and the balance of the equities falls in their favor. At the default judgment hearing, counsel for GNC stated that, after being closed for seven months, Defendants have reopened the storefronts as competitors of GNC, in clear violation of the franchise agreement, which "prohibited them from operating in a competitive capacity for one year within five miles of their prior GNC location" (N.T., 11/13/2018, pg. 9). This has occurred despite the issuance of cease and desist letters to Defendants and GNC's competitor (Id.) Moreover, the monetary damages requested do not contemplate harm to GNC's brand, reputation or standing in the community, nor does the accounting of monetary damages consider losses currently incurred now that the stores have been reopened under a competitor's name. For those reasons, this Court believes that GNC is entitled to a permanent injunction and would recommend enjoining Defendants from operating any franchise that is inconsistent with the exclusivity of the franchise agreement between Defendants and GNC for a period of one year from the date Judgment is entered.
GNC also requested that this Court similarly enjoin Nutrition Zone, USA (N.T., 11/13/2018, at 9-10). However, because it is not a party to this action, such extreme remedy is inappropriate here. --------
In accordance with Magistrate Judge's Act, 28 U.S.C. § 636(b)(1)(B) and (C), and Rule 72(D)(2) of the Local Rules pertaining to Magistrate Judges, the parties are permitted until December 26, 2018 to file written objections to this Report and Recommendation. Failure to do so may waive the right to appeal. Any party opposing written objections shall have fourteen days after the service of such objections to respond thereto. GNC is further directed to serve a copy of this Report and Recommendation on each defendant, and file proof of service.
DATED this 11th day of December, 2018.
BY THE COURT:
s/Robert C. Mitchell
ROBERT C. MITCHELL
United States Magistrate Judge