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Stockade Co., LLC v. Kelly Restaurant Group, LLC

United States District Court, W.D. Texas, Austin Division

June 15, 2018

STOCKADE COMPANIES, LLC AND STOCKADE FRANCHISING, LP
v.
KELLY RESTAURANT GROUP, LLC MICHAEL KELLY

          ORDER

          ANDREW W. AUSTIN UNITED STATES MAGISTRATE JUDGE

         Before the Court are Defendants' Opposed Motion for Attorneys' Fees and Costs (Dkt. No. 96); Plaintiffs' Objection (Dkt. No. 98); Defendants' Reply (Dkt. No. 101); and Plaintiff's Sur-Reply (Dkt. No. 104). The District Court referred the motion to the undersigned for resolution pursuant to 28 U.S.C. § 636(b)(1)(A), Fed.R.Civ.P. 72 and Rule 1(c) of Appendix C of the Local Rules.

         I. GENERAL BACKGROUND

         Plaintiffs Stockade Companies, LLC and Stockade Franchising, LP (together “Stockade”) own and license the proprietary trademarks for Sirloin Stockade, Coyote Canyon, and Montana Mike's restaurants. On June 4, 2014, Stockade entered into fifteen separate franchise agreements with Kelly Restaurant Group, LLC (“KRG”). After KRG defaulted on the royalty payments due under the franchise agreements, Stockade sent KRG a Notice of Default, Demand for Payment, and Opportunity to Cure. The Default Notice stated that KRG was in default and gave KRG until February 10, 2017 to pay all amounts due. KRG failed to cure the default by that date. Stockade then sent KRG a Notice of Termination, which advised that the franchise agreements had terminated and that KRG “was to immediately cease use” of any proprietary marks. KRG has continued to use Stockade's proprietary marks and to operate multiple Sirloin Stockade, Coyote Canyon, and Montana Mike's restaurants.

         On February 24, 2017, Stockade sued KRG and Michael Kelly (together “Kelly”) alleging trademark infringement and false designation of origin, breach of non-competition covenant, and misappropriation of trade secrets, and sought to immediately and permanently enjoin Kelly from using or otherwise infringing on any of its proprietary information and from violating the Franchise Agreements. On May 11, 2017, the Court denied Kelly's Motion to Compel Arbitration after concluding that the Franchise Agreements contained a carve-out provision explicitly permitting Stockade to seek temporary or injunctive relief in court to protect its trademarks and other rights. See Dkt. No. 20.

         On May 31, 2017, the District Court granted in part and denied in part Stockade's Motion for Preliminary Injunction. See Dkt. No. 26. The Court granted Stockade's request to enjoin Kelly from infringing or otherwise using any of Stockade's proprietary marks, but denied its request to enjoin Kelly from violating the non-competition provisions in Section 7.04 of the franchise agreements or to enjoin Kelly from using or transferring Stockade's confidential information. Id. In that order, the Court directed Kelly to de-brand its Sirloin Stockade, Coyote Canyon and Montana Mikes' franchise restaurants within 21 days. Kelly then re-branded the restaurants as “Kansas Buffets.” On July 28, 2017, Stockade filed another Motion for Preliminary Injunction, this time seeking an order enjoining Kelly from operating “family-style buffets” at former Stockade restaurants. Specifically, Stockade asked the Court to enjoin Kelly from “using Stockade's confidential information in violation of the parties' [f]ranchise [a]greements, ” “misappropriating Stockade's trade secrets in violation of the Texas Uniform Trade Secrets Act, ” and “infringing on Stockade's trade dress in violation of the Lanham Act.” Because the District Court determined that Stockade had “not demonstrated a high likelihood of success on any of its three claims, ” the Court denied the Motion for Preliminary Injunction. See Dkt. No. 86.

         On October 30, 2017, Kelly filed a Motion to Dismiss seeking to dismiss all of Stockade's claims under Federal Rule of Civil Procedure 12(b)(6). See Dkt. No. 88. On December 6, 2017, Stockade filed “Plaintiffs' Notice of Voluntary Dismissal of Claims Without Prejudice” seeking to “dismiss all claims against all Defendants without prejudice.” See Dkt. No. 92. On December 7, 2017, pursuant to Federal Rule of Civil Procedure 41, the District Court ordered that “Plaintiffs' claims against all defendants in this action be dismissed without prejudice” and ordered that “all costs shall be taxed to the party incurring the same.” See Dkt. No. 94.

         Kelly has now filed the instant Motion for Attorneys' Fees and Costs requesting the Court to award it $369, 221.00 in attorneys' fees and $5, 838.21 in costs.

         II. STANDARD OF REVIEW

         Traditionally, under the American rule, “each litigant pays his own attorney's fees, win or lose, unless a statute or contract provides otherwise.” Baker Botts LLP. v. ASARCO LLC, - U.S.-, 135 S.Ct. 2158, 2160 (2015). Accordingly, “[a] district court may not award attorneys' fees ‘unless a statute or contract provides' the basis for such an award.” Spear Mktg., Inc. v. BancorpSouth Bank, 844 F.3d 464, 470 (5th Cir. 2016) (quoting Baker Botts, 135 S.Ct. at 2164). Federal Rule of Civil Procedure 54(d)(2) provides the procedure for the prevailing party, by motion, to specify the statute, rule, or other grounds entitling them to the award. Fed.R.Civ.P. 54(d)(2). See White v. Regional Adjustment Bureau, Inc., 2013 WL 12175083, * 4 (N. D. Tex. June 16, 2013) (noting that party must identify a statute or rule to recover fees under Rule 54). However, Rule 54(d)(2) does not supply the substantive prerequisites for obtaining attorneys' fees and expenses; rather, those requirements are “governed by the same law [e.g., federal or state] that serves as the rule of decision for the substantive issues in the case.” Mathis v. Exxon Corp., 302 F.3d 448, 461 (5th Cir. 2002). “One basic substantive requirement is that the requested fees and expenses be recoverable in the first place.” Rodriguez v. Quicken Loans, Inc., 257 F.Supp.3d 840, 844 (S.D. Tex. 2017). “Even when a party has satisfied Rule 54(d)(2)'s procedural requirements and the governing substantive law permits recovery, the decision whether to award attorney's fees and expenses remains subject to the district court's equitable discretion.” Id.

         Although Kelly argues that Texas state law applies to the award of attorneys' fees in this case, Stockade's lawsuit alleged both state and federal claims. In addition, the District Court applied both federal and state law in granting and denying Stockade's Motions for Preliminary Injunction. See Dkt. Nos. 26 and 86. Accordingly, Texas state law and federal law govern the issue of attorneys' fees in this case. See Rodriguez, 257 F.Supp.3d at 844 (applying federal substantive law to federal claims and state law to state claims in determining fees). Regardless, however, “[f]ederal and Texas law both recognize that although ‘the prevailing litigant is ordinarily not entitled to collect a reasonable attorneys' fee from the loser, ' such recovery is permissible if explicitly provided for by statute or an enforceable contract.” Id. at 845 (quoting Travelers Cas. & Sur. Co. v. Pac. Gas & Elec. Co., 549 U.S. 443, 448 (2007) and Intercont'l Grp. P'ship v. KB Home Lone Star L.P., 295 S.W.3d 650, 653 & n.7 (Tex. 2009)).

         II. ANALYSIS

         Kelly argues that it is the prevailing party in the case because Stockade voluntarily dismissed this lawsuit to avoid an unfavorable judgment on the merits. Kelly argues that it is entitled to $369, 221.00 in attorneys' fees and $5, 838.21 in costs pursuant to Federal Rule of Civil Procedure 54(d), Section 19.11 of the Franchise Agreements, Section 134A.005 of the Texas Civil Practices & Remedies Code, and Federal Rule of Civil Procedure 41(d).

         In response, Stockade argues that the Court should deny the Motion because the arbitration clause contained in the Franchise Agreements requires Kelly to arbitrate its claim for attorneys' fees.[1] Stockade also contends that an arbitrator, not the Court, should determine whether Kelly's claim for attorney's fees is subject to arbitration. Alternatively, Stockade argues that “[t]he Franchise Agreements only allow fees to the prevailing plaintiff, not a prevailing defendant, and in any event [Stockade] did not prevail.” Dkt. No. 98 at 6. Because the question of arbitrability determines whether this Court has jurisdiction to even address the issue of attorneys' fees, the Court must address this issue first.

         A. Arbitration Issues

         The parties' Franchise Agreements contain the following arbitration clause:

21.01 Duty to Arbitrate. . . .[T]he parties agree that any and all controversies, claims and disputes between them arising out of or related to this Agreement that cannot be amicably settled shall be finally resolved by submitting such matter to the American Arbitration Association (“AAA”) in either Denver, Colorado or Austin, Texas, in Franchisor's sole ...

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