US-DIST-CT, FRANCHISE-GUIDE ¶9883, Meineke Discount Muffler Shops, Inc. v. Wayne Smith and Stanley Smith., (Apr. 08, 1991)

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U. S. District Court, Northern District of Illinois, Eastern Division. No. 91 C 1117. Order and Preliminary Injunction dated July 18, 1991; Magistrate’s Report and Recommendation dated April 8, 1991.

Preliminary Relief--Temporary Restraining Order--Magistrate’s Ruling--Lack of Authority--Expiration of Order.--A temporary restraining order, entered by a federal magistrate, prohibiting terminated muffler shop franchisees from continuing to display a franchisor’s trademarks and enforcing a noncompetition provision in the franchise agreements was rendered moot by the magistrate’s lack of authority to issue such an order and the expiration of the order by its own terms. Due to clerical errors, the court’s referral order incorrectly instructed the magistrate to conduct a hearing and to rule on the franchisor’s motion for a temporary restraining order. As a consequence, the magistrate entered an order, rather than a report and recommendation, and the franchisor never requested that the court adopt and enter the order. Although the temporary restraining order was moot, the franchisor was not without relief, since the court adopted the magistrate’s recommendation for a preliminary injunction.

Preliminary Relief--Violation of Temporary Restraining Order--Contempt of Court--Award of Attorneys’ Fees--Magistrate’s Lack of Authority to Enter Order.--Terminated muffler shop franchisees were not guilty of contempt of court or liable for a franchisor’s attorneys’ fees for violating a temporary restraining order entered by a federal magistrate because the magistrate did not have the authority to enter the order. This was a regrettable conclusion in view of the court’s conclusion that the franchisees engaged in "contumacious behavior."

Preliminary Relief--Prohibition of Post-Termination Trademark Use--Enforcement of Noncompetition Agreement--Notice of Termination--Jurisdiction.--Terminated muffler shop franchisees were preliminarily enjoined from continuing to use the franchisor’s trademarks and from engaging in any business similar to the franchisor’s for one year following termination within 20 miles of the franchise. The franchisees’ claim that the termination was not effective because they did not receive a notice of termination until after the termination date was rejected. Even a cursory reading of the franchise agreement revealed that notices became effective upon dispatch in the mail, whether or not the other party accepts such notice. A contention that the franchise agreement was not effectively terminated because a subsequent agreement between the parties and a bank amended its notice requirement was without merit. A claim that the federal district court lacked personal jurisdiction because the franchisees did not receive notice of the temporary restraining order and were not served with a summons in a timely fashion confused the distinction between service of process and personal jurisdiction and was specious. The franchisees’ filing of bankruptcy did not divest the court of jurisdiction, making the preliminary injunction hearing "a nullity." The automatic stay of proceedings in bankruptcy was inapplicable, since the previously-terminated franchise agreement was not part of the bankruptcy estate and the bankruptcy court dismissed the franchisees’ petition.

Common Law--Notice of Termination--Failure to Notify Lender--Lender’s Material Breach of Contract--Excuse from Notice Obligation.--A muffler shop franchisor’s failure to notify franchisees’ lender that it was terminating the franchise agreement did not render the termination ineffective and therefore did not legitimize the franchisee’s post-termination trademark use. An agreement between the franchisor, the franchisees, and the lender did require the franchisor to notify the lender of its termination of the franchise agreement. However, the agreement also required the lender to notify the franchisor if the franchisees defaulted on their loan. The lender’s previous failure to give the franchisor notice of the franchisee’s defaults and the lender’s foreclosure suit against the franchisees constituted a material breach of the agreement, excusing the franchisor from its obligation to give notice of termination to the lender.

Bankruptcy Law--Automatic Stay of Proceedings--Magistrate’s Jurisdiction--Petition for Preliminary Injunction--Termination Prior to Bankruptcy.--In a report to the federal district court, a magistrate judge held that a terminated muffler shop franchisee’s filing for bankruptcy did not trigger the automatic stay of proceedings with regard to a temporary restraining order and a franchisor’s petition for a preliminary injunction because the franchise was terminated and the restraining order was issued prior to the bankruptcy filing. Since the franchise agreement was terminated prior to bankruptcy, the agreement was not part of the bankruptcy estate and therefore was not subject to the automatic stay of proceedings.

ALESIA, D.J.: Before the Court are various motions referred to Magistrate Judge Rosemond for a Report and Recommendation. We briefly address each motion below.

I. Temporary Restraining Order

On March 7, 1991, plaintiff, Meineke Discount Muffler Shops, Inc. ("Meineke"), moved for a temporary restraining order ("TRO") and preliminary injunction against defendants, Wayne Smith and Stanley Smith (collectively "defendants"), seeking, among other relief, to enjoin defendants’ further and future display and use of the Meineke trademark and name after they had been terminated as franchisees and to enforce the License Agreement’s covenant not to compete provisions. This Court referred Meineke’s motions for a TRO and preliminary injunction to Magistrate Judge Rosemond. The Court intended to refer the motions to the Magistrate Judge to prepare a Report and Recommendation, to conduct a hearing, and to prepare written findings of fact and conclusions of law, as well as credibility findings as to any witnesses who might testify at the hearing(s). However, due to clerical errors, the Referral Order incorrectly stated that the Magistrate Judge was to conduct a hearing and to ruleon Meineke’s motion for a TRO. Further, the Referral Order incorrectly characterized this motion for a TRO as a nondispositive pretrial matter.

As a consequence of this unfortunate oversight, the Magistrate Judge entered an "Order" granting the TRO, rather than issuing a Report and Recommendation. Presumably, Meineke believed that the TRO entered by the Magistrate Judge was a final order and never moved this Court to adopt and enter the TRO. Of course, Meineke’s failure to move to adopt the Magistrate Judge’s ruling created a problem, as the Magistrate Judge does not have the requisite authority to enter a TRO pursuant to statute and local rule. 28 U.S.C. §636(b)(1)(A); Rule 1.70C.1(a) of the United States District Court Rules for the Northern District of Illinois ("Local Rule 1.70C.1(a)"). This proscription on the authority of the Magistrate Judge, coupled with the fact that the TRO has expired by its own terms, renders moot the entry of the TRO. Therefore, we reject the Magistrate Judge’s order of March 7, 1991, and deny Meineke’s motion for a TRO as moot. ¹

II. Contempt of Court and Meineke’s Attorneys’ Fees

On April 9, 1991, the Magistrate Judge issued his report recommending that defendants be held in contempt of court for violating the TRO and for their failure to appear at the Rule to Show Cause hearing. Further, the Magistrate Judge recommended that as an appropriate sanction for their deliberate conduct, defendants be required to pay Meineke’s reasonable attorneys’ fees incurred in obtaining and enforcing the TRO and in bringing the Rule to Show Cause. Defendants filed timely objections to the Magistrate Judge’s report. Although we reject defendants’ objections as wholly meritless, unfortunately, we must also reject the Magistrate Judge’s April 9, 1991 report.

While we appreciate the time and effort expended by Magistrate Judge Rosemond in issuing his Report and Recommendation finding defendants in contempt of court, because he did not have the authority to enter a TRO, we cannot accept his recommendation. As the Magistrate Judge lacked the authority to enter a TRO, it logically follows that defendants cannot be held in contempt of court for disobeying this non-final order. In this Court’s opinion, this is a regrettable conclusion, as we are convinced that defendants did indeed engage in contumacious behavior.

By the same token, as the Magistrate Judge lacked the power to enter a TRO, we must reject his recommendation that Meineke be allowed its reasonable attorneys’ fees as an appropriate sanction for defendants’ willful disobedience of the Magistrate Judge’s order. In light of the foregoing, defendants’ objections to Meineke’s petition for attorneys’ fees require no discussion as they are rendered moot by the procedural posture of this case.

III. Preliminary Injunction

After reviewing Magistrate Judge Rosemond’s Report and Recommendation of April 8, 1991, defendants’ objections to the report, and Meineke’s consolidated response and underlying brief, this Court adopts Magistrate Judge Rosemond’s Report and Recommendation in its entirety and overrules defendants’ objections. ^{2 We agree with the Magistrate Judge, who had an opportunity to observe the testimony of the witnesses and assess their credibility, that Meineke has established the requisite elements for obtaining preliminary injunctive relief. See Brunswick Corp. v. Jones, 784 F.2d 271, 273-74 (7th Cir. 1986); Roland Machinery Co. v. Dresser Indus., Inc., 749 F.2d 380, 386-87 (7th Cir. 1984). Where the necessary criteria are met, as here, this Court will issue the requested injunctive relief. Nevertheless, we briefly address each of defendants’ objections in turn.}

First, defendants argue that Meineke’s December 6, 1990 notice of termination letter was not effective because it was not received by them until after the allegedly effective termination date of January 6, 1991. We categorically reject this argument. In fact, even a cursory reading of the License Agreement reveals that this contention is unfounded. Paragraph 22 of the License Agreement provides, in pertinent part, that "[a]ll notices shall be effective when deposited, postage prepaid, in the mail whether or not the other party accepts such notice. The return receipt shall be conclusive evidence thereof." This unequivocal language demonstrates the frivolousness of this argument. ³

Second, defendants contend that the License Agreement was not effectively terminated on January 6, 1991 because a subsequent agreement entered into by and among Meineke, defendants, and Hyde Park Bank & Trust Company (the "Bank") amended its notice provisions. Incredibly, defendants simply attached this agreement as an exhibit to their objections without the benefit of any legal analysis or citation to the relevant contractual provisions. This Court is not required to make legal arguments for litigants and declines to do so. ⁴

Third, defendants raise procedural objections. For their first line of attack, defendants contend that this Court lacks personal jurisdiction over them because they did not receive notice of the TRO and were not served with the summons until at least March 18, 1991. This argument, which confuses the distinction between service of process and personal jurisdiction, is specious and rejected by the Court. ⁵

As their second line of attack, defendants contend that this Court lacks subject matter jurisdiction as a result of their filing for a voluntary petition for bankruptcy on March 21, 1991. According to defendants, the filing of the bankruptcy petition invokes the automatic stay provisions of Section 362 of the United States Bankruptcy Code and renders the March 21, 1991, preliminary injunction hearing a "nullity". See 11 U.S.C. §362(a). This "argument" merits no extended discussion. As an initial matter, this Court is not divested of jurisdiction simply because defendants filed for bankruptcy. Moreover, we agree with the Magistrate Judge and the Bankruptcy Judge ^{6 that the automatic stay provisions of Section 362 are inapplicable. Equally important, on June 27, 1991, Judge Schwartz dismissed defendants’ petition for bankruptcy without prejudice. Defendants’ argument fails for all of these reasons.}

Finally, we summarily reject defendants’ argument that the Bankruptcy Judge’s finding in his March 29, 1991 order that the License Agreement was terminated on January 6, 1991, "is mere surplusage." Clearly, defendants are grasping at straws. They have utterly failed to advance any credible objections to the Magistrate Judge’s report. As a result, we overrule this objection, as well as defendants’ other objections.

IV. Motion to Dismiss or Alternatively to Stay the Proceedings

After reviewing Magistrate Judge Rosemond’s Report and Recommendation of April 11, 1991, defendants’ underlying brief and objections to the report, and Meineke’s consolidated response, we adopt the result reached by the Magistrate Judge without addressing the underlying reasons. Defendants’ objections require no extended discussion by this Court and we summarily reject them as unpersuasive.

First, defendants argue that the verified complaint must be dismissed as "not ripe for judicial review." This argument is specious and requires a quantum leap in logic which this Court declines to make. According to defendants, because Meineke failed to notify the Bank (i.e., the franchisees’ lender under a subsequent agreement entered into by and among Meineke, defendants and the Bank) that it was terminating the License Agreement, the License Agreement remained in effect at all times with the defendants as "legitimate" franchisees who have committed no trademark or Lanham Act violations. This contention proves too much.

In fact, the subsequent agreement of April 9, 1987, required the Bank to notify Meineke if defendants defaulted on their loan. Notwithstanding this contractual provision and without notifying Meineke, the Bank in or about January, 1990, filed a foreclosure suit against defendants. ^{7 Meineke contends that the Bank’s failure to comply with its contractual obligations constituted a material breach which excuses their performance under the subsequent agreement. In support, Meineke cites Burger King Corp. v. Austin, et al., ¶9788, BUSINESS FRANCHISE GUIDE (CCH) (S.D. Fla. February 22, 1991). While Burger King is factually distinguishable, the legal analysis is applicable. Accordingly, we agree with Meineke that the Bank’s failure to comply with its obligations under this agreement constitutes a material breach which excused Meineke from notifying the Bank of its intent to terminate the defendants’ franchise.}

Finally, we reject defendants’ argument that this Court lacks personal jurisdiction over them as unintelligible and defying explanation. More importantly, defendants’ "argument" illustrates such a fundamental misunderstanding of the principles of personal jurisdiction that this Court declines to dignify it with a response. We therefore reject this, and all objections raised by defendants. ⁸

V. Conclusion

For the reasons stated, the Court denies Meineke’s motion for a TRO as moot; rejects Magistrate Judge Rosemond’s Report and Recommendation of April 9, 1991 finding defendants in contempt of court and denies Meineke’s petition for attorneys’ fees; adopts Magistrate Judge Rosemond’s Report and Recommendation of April 11, 1991, and denies defendants’ motion to dismiss or, alternatively, to stay the proceedings; and, finally, adopts the Magistrate Judge’s Report and Recommendation of April 8, 1991, and consistent with that report, enters the draft preliminary injunction order submitted by Meineke.

ALESIA, D.J.: It Is Hereby Ordered:

1. Defendants Wayne Smith and Stanley Smith, their affiliates, employees, agents, attorneys, and assigns, together with all persons in active concert or participation with them, be and the same hereby are restrained and enjoined from:

(a) Displaying the Meineke trademark, service mark and name in any manner;

(b) Using the Meineke registered trademark and holding themselves out as a Meineke franchisee or as a former franchisee of Meineke;

(c) Using the Meineke name on service orders, invoices and/or in any other manner;

(d) Advertising themselves as a Meineke Discount Muffler Shop utilizing the Meineke trade name, trademarks or service marks, including but not limited to, a withdrawal from the Yellow Pages Directory in the Chicago, Illinois metropolitan market and any other local market;

(e) Using the Meineke telephone listing which appears in certain yellow page directories for the Chicago, Illinois area; and

(f) Using the Meineke registered trademark in any telephone directory listing for their business.

It Is Further Ordered:

2. Defendants Wayne Smith and Stanley Smith, as well as their agents, servants and employees, are to immediately remove all signs identifying the business located at 9644 S. Halsted, Chicago, Illinois 60628, as a Meineke Discount Muffler Shop.

3. Defendants, as well as their agents, servants and employees, must immediately release and deliver to Meineke, the Meineke telephone listing which appears in certain yellow page directories for the Chicago, Illinois area.

4. Defendants, as well as their agents, servants and employees, are ordered to immediately deliver to Meineke and/or destroy all blank Meineke invoices and blank receipts in their possession.

5. Defendants are enjoined for a period of one year from the effective date of termination of the license agreement, that is, the date of de-identifying, from engaging in any business which is the same as, similar to or competitive with any Meineke Discount Muffler Shop which, during that one year period following termination, is located within a radius of twenty miles of the shop operated by the defendants at the time of termination.

6. Defendants are ordered to deliver to Meineke the Confidential Operating Manuals and all revisions or modifications and all other development, policies and procedures, training or other manuals which were given to defendants by Meineke.

So Ordered.

ROSEMOND, Magis.: To the Honorable James H. Alesia, a District Judge of the United States District Court for the Northern District of Illinois.

Plaintiff Meineke Discount Muffler Shops, Inc. seeks entry of a preliminary injunction against defendants Wayne Smith and Stanley Smith, and we so recommend.

On March 7, 1991 Meineke sought and obtained a Temporary Restraining Order essentially enjoining the defendants from displaying the sign Meineke Discount Mufflers, from holding themselves out in any manner whatsoever as being affiliated with the chain of Meineke Discount Muffler Shops, and to cease and desist from offering any services at their business establishment that are services authorized by Meineke Discount Muffler Shops, Inc., namely exhaust products, brakes and shocks. The TRO expired on March 18, 1991.

On March 18, 1991, Meineke filed a Petition For Rule To Show Cause And To Extend Temporary Restraining Order from March 18, 1991 through to the date of the preliminary injunction hearing. By minute order dated March 18, 1991, the petition and request to extend the TRO were granted.

The preliminary injunction hearing was held on March 21, 1991. Defendants failed to appear. Their attorney entered a special appearance for the sole purpose of contesting the Court’s jurisdiction.

Counsel for the defendants informed the Court that on the morning of March 21, 1991, Wayne Smith and Stanley Smith, a partnership, doing business as Meineke Discount Muffler Shop #255, filed a Chapter 11 Voluntary Petition in bankruptcy, Case No. 91 B 6134. In light of the filing of the Chapter 11 bankruptcy petition, defense counsel argued that a §362 automatic stay existed and that, therefore, the Court could not proceed on either the contempt hearing or the preliminary injunction hearing. ^{1 The magistrate judge took the automatic stay issue under advisement, and proceeded to hold the contempt hearing and the preliminary injunction hearing.}

By filing a Chapter 11 bankruptcy petition, Messrs. Wayne Smith and Stanley Smith sought to avoid the legal restraints and obligations imposed upon them by the outstanding Temporary Restraining Order. The TRO forbid the defendants from, among other things, continuing to operate as a Meineke Discount Muffler Shop and otherwise utilizing the Meineke trade name, trademarks or service marks. Defendants sought the shelter of the bankruptcy court for the sole purpose of continuing to operate a franchise which had been terminated by Meineke on January 6, 1991. Given the obvious manipulative conduct of the defendants to avoid the dictates of an outstanding TRO, the magistrate judge refused to countenance such conduct without first reviewing the applicable law. Accordingly, as noted above, he proceeded with the preliminary injunction hearing and the contempt of court hearing.

Having reviewed the pleadings, heard the oral argument of Meineke counsel, observed and studied the demeanor of the witnesses, determined the credibility of the witnesses, and otherwise weighed and considered their testimony, and considered all of the evidence and law presented, including the affidavits on file and the exhibits received in evidence, the magistrate judge hereby makes the following Findings of Fact and Conclusions of Law:

1. On or about May 7, 1991, Messrs. Stanley Smith and Wayne Smith (collectively the "Smiths"), and Meineke entered into a License Agreement (the "Agreement"), which granted the Smiths a franchise to operate a Meineke Discount Muffler Shop in Chicago, Illinois (the "Shop"). Under the Agreement, the Smiths were required to (i) submit weekly written reports to Meineke of the receipts generated by the shop; (ii) pay to Meineke weekly royalties equal to seven (7%) percent of the gross receipts of the shop; and (iii) pay Meineke an advertising contribution equal to ten (10%) percent of the shop’s gross receipts.

2. The Smiths have not paid to Meineke the royalty fees and advertising contributions due under the Agreement.

3. On December 6, 1991, a Notice of Termination was sent to the Smiths advising them that the franchise license granted to them in the Agreement would be terminated effective January 6, 1991, unless and until they cured the defaults enumerated in that Notice of Termination.

4. The Smiths did not cure the defaults enumerated in the Notice of Termination. Consequently, the Meineke License granted to them was terminated on January 6, 1991.

5. On January 22, 1991, Meineke’s Operations Representative, Peter Koerber, went to the location of the Smiths’ shop at 9644 S. Halsted, Chicago, Illinois 60628 to determine whether the Smiths had complied with Meineke’s post termination covenants in the Agreement, which required them to de-identify their business location as a Meineke Discount Muffler Shop. Koerber observed that the Smiths still displayed the Meineke sign and still used the Meineke telephone listing contained in the local Chicago Yellow Pages Directory. The Smiths still represented to the public that they were associated with the nationally known chain of Meineke Discount Muffler Shops.

6. On February 7, 1991, Ted P. Pearce, Vice President and General Counsel for Meineke sent a letter to the Smiths, advising them that they had not removed all Meineke signs from their business location and were still operating an automotive repair business under the name Meineke. The letter also advised the Smiths to cease and desist from infringing upon Meineke’s proprietary marks, and ordered them to remove their signs from the shop premises.

7. On February 11, 1991, Peter Koerber again went to the automotive repair shop located at 9644 S. Halsted, Chicago, Illinois and observed that the Meineke signs were still not taken down. Upon calling the telephone number of the Smiths’ business establishment, he learned that the Smiths were still identifying their business as being affiliated with Meineke.

8. The Smiths’ refusal to cease utilizing the Meineke trademark, service mark or name in connection with their automobile repair business causes customer confusion in that customers are led to believe that the Smiths’ automobile repair shop is associated with the nationally known chain of Meineke Discount Muffler Shops. In addition, consumers believe that by patronizing the Smiths’ shop, they are entitled to participate in Meineke’s national warranty program when in fact they are not.

9. By utilizing Meineke’s proprietary marks without Meineke’s authorization, the Smiths receive the benefit of these marks for free when all other members of the Meineke chain are required to pay for the right to use Meineke’s proprietary marks by paying to Meineke a weekly royalty in the amount of seven (7%) percent of the gross sales generated at their shops.

10. The Smiths’ continued use of Meineke proprietary marks causes Meineke irreparable injury because Meineke no longer has the ability to control the quality of services being performed at the Smiths’ business. Furthermore, consumers are no longer guaranteed to receive the quality of service that they have come to expect from Meineke Discount Muffler and Brake Shops.

11. Meineke suffers further irreparable harm because the Smiths no longer carry the appropriate liability insurance required under Meineke franchises. Consequently, customers will erroneously look to Meineke Discount Muffler Shops for reimbursement for injuries to their automobile or themselves in the event that they are involved in an accident on the Smiths’ shop premises as a result of their patronage of the Smiths’ automobile repair shop.

12. Meineke will suffer further irreparable harm if the Smiths are allowed to continue to sell and service exhaust proponents, brakes and shocks at their shop because the Smiths are then unfairly competing with Meineke franchisees in the Chicago area in that they are utilizing for free all of the valuable and proprietary information received from Meineke in order to operate their repair facility. Consequently, the Smiths are in a position to offer services at their repair facility for a lower price than Meineke franchisees because they are not paying to Meineke any royalty payments or making any advertising contributions.

1. Any of the foregoing Findings of Fact which may be deemed a Conclusion of Law is hereby adopted as a Conclusion of Law. Any of the following Conclusions of Law which may be deemed a Finding of Fact is hereby adopted as a Finding of Fact.

2. The magistrate judge has jurisdiction over the parties and the cause.

3. On March 7, 1991, Meineke filed a Motion For Temporary Restraining Order And Preliminary Injunction, essentially seeking to enjoin the Smiths from displaying the sign Meineke Discount Mufflers, from holding themselves out in any manner whatsoever as being affiliated with the chain of Meineke Discount Muffler Shops, and to cease and desist from offering any services at their business establishment that are services authorized by Meineke Discount Muffler Shops, Inc., namely exhaust products, brakes and shocks. The motion was granted, and the requested Temporary Restraining Order ("TRO") issued on March 7, 1991. The TRO expired on March 18, 1991.

4. On March 18, 1991, Meineke filed a Petition For Rule To Show Cause And To Extend Temporary Restraining Order from March 18, 1991 through to the date of the preliminary injunction hearing. By minute order of the same date, the petition to extend was granted. Accordingly, at the time of the preliminary injunction hearing, a TRO was outstanding and in full force and effect.

5. At the time of the preliminary injunction hearing, Meineke had terminated its franchise agreement with the Smiths. Consequently, as the magistrate judge ruled in his March 22d Order, "[b]ecause the franchise agreement was terminated prior to the filing of the Smith partnership bankruptcy petition, neither the Smiths or the[ir] partnership has any property interest in the Meineke logo or other Meineke-franchise property. They only have a possessor’s interest in such property which does not warrant bankruptcy court protection." Only out of a prophylactic excess of caution did the magistrate judge deem it the better course of action to have this established law enunciated by the Bankruptcy Court. Accordingly, on March 22, 1991, after the preliminary injunction hearing, the magistrate judge issued an order staying the proceedings "until Meineke obtain[ed] a §362(d) or (f) lifting of the stay."

6. On March 29, 1991, the Bankruptcy Court affirmed the magistrate judge’s analysis of the situation, finding and ruling as follows:

1. That the [Meineke-Smith] Franchise Agreement at issue was terminated on January 6, 1991, prior to the filing of this bankruptcy petition. Hence the Franchise Agreement was not part of the bankruptcy estate, and therefore, it is not subject to the automatic stay provisions of Section 362.

2. That a Temporary Restraining Order was issued against Debtors on March 7, 1991, restricting them from utilizing the Meineke Service marks, name and logos. And further, restricting them from competing within a twenty (20) mile radius with Meineke.

3. That due to the Debtors’ violation of the Temporary Restraining Order the Court issued a Rule to Show Cause on March 7 and 18, 1991, prior to the filing of the bankruptcy petition.

4. That even if the Franchise Agreement in question was a part of the bankruptcy estate, Section 362(b) exempts operation of the stay against the commencement or continuation of a criminal action or proceeding against the Debtors.

5. The continuation of Rule to Show Cause for issuance of a criminal contempt citation is not stayed by the bankruptcy petition and further, Debtors’ violation of a Temporary Restraining Order by continuing to use the Meineke service marks, name and logos and continued competition with Meineke constitutes contempt of court which is a criminal proceeding not stayed by the bankruptcy petition. ²

Accordingly, as observed by the magistrate judge in his March 22d Order and as reaffirmed by the Bankruptcy Court’s Order of March 29, 1991, at all relevant times throughout the injunctive and contempt proceedings, the magistrate judge had jurisdiction over the parties and the case.

7. Four factors must be considered in deciding whether a preliminary injunction should issue. These factors are:

(a) whether the plaintiff has a reasonable likelihood of success on the merits,

(b) whether the plaintiff will have an adequate remedy at law or will be irreparably harmed if the injunction does not issue.

(c) whether the threatened injury to the plaintiff outweighs the threatened harm an injunction may inflict on defendant, and

(d) whether the granting of a preliminary injunction will disserve the public interest.

8. A strong likelihood of success by Meineke on the merits of its Verified Complaint exists because the Smiths’ franchise was terminated by Meineke on January 6, 1991. Consequently, the Smiths’ continued use of Meineke service marks and their continued operation of their auto repair facility as a Meineke Discount Muffler Shop is unlawful.

9. In a trademark case, having shown a reasonable likelihood of success on the merits, lack of an adequate remedy at law and irreparable harm are presumed.

10. Injunctive relief is further appropriate due to the likelihood of confusion amongst the consuming public who will be deluded into thinking that the Smiths are in fact authorized licensees. Meineke will lose goodwill from its loss of control over its reputation and the resulting confusion to the consuming public. The unauthorized use of Meineke’s service marks and name harms Meineke’s goodwill by depriving it of the ability to control the quality of the products and services sold under its mark by an unauthorized licensee.

11. Injunctive relief is necessary to prevent Meineke from sustaining further irreparable harm through the Smiths’ lack of insurance coverage, and to protect Meineke and its franchisees from the Smiths’ continued unlawful issuance of warranties which must be honored by Meineke franchisees despite the fact that these warranties are issued by an unlicensed business.

12. Injunctive relief is specifically provided for under §1116 of the Lanham Act as the appropriate remedy for a licensor whose trademark is being used without its consent or authorization.

13. The balance of harms favors Meineke. The Smiths’ continued unlawful use of the Meineke logo and mark puts at risk Meineke’s goodwill and reputation, dilutes the value of a Meineke franchise for present franchisees, encourages similar unlawful conduct by present franchisees, and endangers the confidence of potential licensees in the Meineke licensing program.

14. The Smiths’ continued use of Meineke trademarks and trade secrets is unfair to Meineke franchisees and the public.

15. The Smiths’ continued use of Meineke trademarks and trade secrets after their franchise relationship with Meineke was terminated is unlawful. The balance of equities always weighs against those who engage in unlawful conduct.

16. The harm to the Smiths from issuance of a preliminary injunction is limited to their inability to use the Meineke service marks and name in conducting their business--a right they are not entitled to in any event.

17. Having shown a likelihood of confusion, the public interest favors issuance of an injunction. The public interest is served by protecting consumers from the confusion created by an unauthorized licensee/franchisee operating under the Meineke service mark and name.

18. The public interest further favors issuance of a preliminary injunction because it is within the public’s interest to require parties to honor their obligations under contracts which they freely enter into.

Recommendation: A preliminary injunction should issue against defendants Wayne Smith and Stanley Smith. The District Judge should enter the Preliminary Injunction attached hereto as Exhibit A. ³

¹Even though we have denied the TRO as moot, Meineke is not without relief as we have adopted the Magistrate Judge’s recommendation that a preliminary injunction should issue.

²Although it has no bearing on the analysis, the Court notes for the record some inaccuracies in the report regarding the dates on which the License Agreement was executed and the notice of termination letter was sent.

³In fact, Meineke attached as Exhibit C to its verified complaint a copy of the December 6, 1990 termination letter with a photocopy of the return receipt.

⁴Furthermore, as discussed more fully at pages 6 and 7 of this Order, we have considered and rejected this argument in connection with defendants’ objections to the Magistrate Judge’s report denying their motion to dismiss or stay.

⁵Defendants have not moved to dismiss the complaint for insufficient service of process. After a review of the relevant documents, it is this Court’s opinion that such a motion, in addition to being untimely, would be ill-conceived.

⁶In his March 29, 1991 order, Judge Schwartz found that the License Agreement was not part of the bankruptcy estate and that the automatic stay provisions of Section 362 were inapplicable. Moreover, even if this section was applicable, Judge Schwartz ordered that the automatic stay be lifted.

⁷Attached as Exhibit H to Meineke’s "Consolidated Response to Defendants’ Objections to Magistrate’s Reports and Recommendations" is a copy of the complaint for foreclosure and other relief filed in the Chancery Division of the Circuit Court of Cook County styled, Hyde Park Bank & Trust Company v. Stanley Smith, et al., No. 90 CH 01154.

⁸Defendants failed to raise, and thereby waived, their earlier argument that this action should be stayed pending a determination of their motion to vacate the order lifting the automatic stay before the bankruptcy court. Even if this argument were raised, it would be unavailing as Judge Schwartz on June 27, 1991, dismissed the defendants’ petition for bankruptcy without prejudice.

¹Section 362 of Title 11, United States Code reads in pertinent part as follows:

"§362. Automatic stay.

"(a) [A] petition filed under section 301, 302, or 303 of this title operates as a stay, applicable to all entities, of--

"(1) the commencement or continuation ... of a judicial ... proceeding against the debtor that was ... commenced before the commencement of the case under this title...."

²In re: Wayne Smith and Stanley Smith, a Partnership d/b/a Meineke Discount Muffler Shop #255, Case No. 91 B 6134, Order, at 1 and 2 (Chief Judge Schwartz, March 29, 1991).

³Pursuant to Rule 72(b) of the Federal Rules of Civil Procedure, the parties must file their objections to the Report and Recommendation with The Honorable James H. Alesia within 10 days after being served with a copy of the report. Failure to file objections within the specified time period waives the right to appeal the magistrate judge’s report. Video Views, Inc. v. Studio 21, Ltd., 797 F.2d 538 (7th Cir. 1986). See also, The Provident Bank v. Manor Steel Corporation, 882 F.2d 258, 261 (7th Cir. 1989) (when a matter has been referred to a magistrate judge, acting as a special master or §636(b)(2) jurist, a party waives his right to appeal if he has not preserved the issues for appeal by first presenting them to the District Judge as objections to the magistrate judge’s report).