Mark Hamblett reports in the New York Law Journal and published at Law.com that the franchisor Krispy Kreme Doughnut Corp. has won an injunction blocking a delinquent franchisee from operating in New York’s Pennsylvania Station and another location.

A federal judge granted the preliminary injunction to the doughnut maker on the grounds that franchisee Satellite Donuts was behind on its obligations under its agreements with Krispy Kreme and is in violation of the Lanham Act.

Judge Lewis A. Kaplan made that ruling after considering allegations by Krispy Kreme that Satellite was infringing its marks by continuing to operate without authorization and diluting the marks by making substandard doughnuts in Krispy Kreme Doughnut Corp. v. Satellite Donuts, LLC, 10 Civ. 4272. Satellite Donuts filed for Chapter 11 bankruptcy and had an automatic stay under §362(a), but the bankruptcy court modified the stay to allow Krispy Kreme to pursue its injunction before Kaplan.

Satellite Donuts entered into a franchise agreement for Penn Station in 2008 and a second agreement for a commissary facility in Baldwin, N.Y., where the Penn Station doughnuts are made, in 2009.

But in a May 12, 2010 letter to Satellite, Krispy Kreme said Satellite had failed to make payments of $310,046. When Satellite principal Alexander McCourt, one of two people who had personally guaranteed the company’s performance, said he had a third party willing to invest in Satellite, he was told by a Krispy Kreme employee that it was “too late in the game.”

Krispy Kreme filed a letter on May 23 telling Satellite to cease and desist, and it terminated the franchise agreements.

Krispy Kreme then sued in the Southern District of New York, where, on May 28, Kaplan granted a temporary restraining order that allowed Krispy Kreme “to have a quality control manager on site” at the franchises at Penn Station and in Baldwin.

Kaplan also ordered the defendants to “comply with all quality control standards set forth in the franchise agreements.”

In his opinion Thursday, Kaplan rejected Satellite’s argument that Krispy Kreme denied it the opportunity to cure the defaults, overstated the amount of the debt and refused to allow it to bring in a new investor.

The judge also called “entirely conclusory and unavailing” Satellite’s claims that the doctrine of unclean hands bars Krispy Kreme from obtaining relief and that the agreements’ noncompetition covenant is void as a matter of “strong public policy against enjoining a person from engaging in one’s chosen profession.”

Kaplan found that Krispy Kreme had easily shown it would suffer irreparable harm if an injunction was not granted.

He noted that Krispy Kreme’s quality control manager had stated that the Penn Station and Baldwin operations were failing to meet “the most basic quality control standards” for Krispy Kreme franchises.

Read more at: Law.com