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Posts in Noncompetes.
Posted in Noncompetes

The United States Court of Appeals for the Fourth Circuit recently affirmed an arbitration award entered in favor of Wild Bird Centers of America, Inc. enforcing a covenant not to compete against a former franchisee. Frye v. Wild Bird Centers of Am., Inc., Case No. 17-1346 (4th Cir. Nov. 27, 2017). Gray Plant Mooty represented Wild Bird Centers in this case. Upon expiration of the parties’ franchise agreement, the franchisee, Frye, continued to operate the franchise without renewing the agreement. Wild Bird Centers filed an arbitration action for violation of the agreement’s ...

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Posted in Noncompetes

A federal court in Michigan recently applied the “rule of reason” doctrine in enforcing a covenant not to compete contained in a Little Caesar franchise agreement. Little Caesar Enters., Inc. v. Creative Rests., Inc., 2017 WL 4778721 (E.D. Mich. Oct. 23, 2017). The noncompete provision restricted the former franchisee from engaging in certain competitive conduct for a one-year period within any “Designated Market Area“ and for a two-year period within the Designated Market Area where the franchise at issue was located. The former franchisee moved for partial summary ...

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Meanwhile, a federal court in Ohio denied a franchisor’s motion for a preliminary injunction after finding that the franchisor did not show that it faced irreparable harm from a former franchisee who operated a competing business where the franchisor intended to open a new restaurant. D.P. Dough Franchising, LLC v. Southworth, 2017 WL 4315013 (S.D. Ohio Sept. 26, 2017). Franchisor D.P. Dough alleged a series of claims against Edward Southworth, a former franchisee, including breach of contract, misappropriation of trade secrets, copyright infringement, and trademark ...

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In another case involving a post-term covenant against competition, the United States District Court for the District of Colorado declined to dismiss a franchisor’s complaint seeking to enforce a noncompete provision contained in the parties’ franchise agreement, despite the “strong public policy” against enforcement of such restrictions under Colorado law. Homewatch Int’l, Inc. v. Navin, 2017 WL 4163358 (D. Colo. Sept. 20, 2017). After expiration of the parties’ franchise agreement, the franchisee’s owner immediately commenced operating a competing ...

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In another case litigated by Gray Plant Mooty, the Chief Judge for the United States District Court for the District of Nebraska granted a preliminary injunction prohibiting former The Maids franchisees and their two daughters from operating a competing residential cleaning business in violation of the noncompete and nonsolicitation provisions contained in the applicable franchise agreements. The Maids Int’l, Inc. v. Maids On Call, LLC, 2017 WL 4277146 (D. Neb. Sept. 25, 2017). The Maids International (“TMI”) terminated the franchise agreements because the ...

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A United States District Court for the Southern District of Texas recently granted a motion by Fantastic Sams to enforce a post-termination noncompetition obligation against a nonrenewing franchisee. Fantastic Sams Franchise Corp. v. Mosley, 2016 WL 7426403 (Dec. 23, 2016). The franchise agreement contained a noncompetition provision prohibiting the franchisee, Mosley, from operating a hair salon business within five miles of the location of his former Fantastic Sams salon for two years after the expiration of the agreement. Soon after the expiration of the franchise ...

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The United States District Court for the Middle District of Florida granted U.S. Lawns, Inc.’s request to enjoin its former franchisee, Landscape Concepts of CT, LLC, from competing after termination. U.S. Lawns sought the preliminary injunction enforcing the covenant not to compete pending arbitration of other claims. U.S. Lawns, Inc. v. Landscape Concepts of CT, LLC, No. 6:16-cv-929-Orl-41DAB (M.D. Fla. Oct. 31, 2016). In granting the motion the court found U.S. Lawns had established legitimate business interests in protecting its goodwill, franchise system ...

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In Pirtek USA, LLC v. Twillman, 2016 WL 5846978 (M.D. Fla. Oct. 6, 2016), a federal court granted, in part, Pirtek’s motion for a preliminary injunction seeking to enjoin the use of confidential information and the operation of a competing business by former franchisees, Michael Twillman, Dolores Twillman, and Donald Twillman, in Missouri. In February 2016, Michael Twillman executed a franchise agreement for the operation of a Pirtek franchise in Missouri. Each of the Twillmans also executed a personal guaranty. Both the franchise agreement and the personal guaranty ...

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An Arizona federal court enjoined a former ReBath franchisee from violating a covenant not to compete in ReBath LLC v. New England Bath Inc., Bus. Franchise Guide (CCH) ¶ 15,801 (D. Ariz. July 15, 2016). ReBath, a bathroom remodeling franchisor, discovered that franchisee New England Bath, Inc. (“NEBI”) conducted business outside of its exclusive territory in breach of its franchise agreement, and demanded payment of liquidated damages. NEBI refused to pay the damages and, after the agreements expired, also failed to comply with its post-expiration obligations, including a ...

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A federal court in Georgia granted a plaintiff franchisor's motion for a preliminary injunction enforcing a franchise agreement's restrictive covenants in Cellairis Franchise, Inc. v. Duarte, 2015 WL 6517487 (N.D. Ga. Oct. 21, 2015). The defendant, Duarte, was a former employee, independent contractor, and officer of the franchisor who had been involved in finding and negotiating mall leases for the franchisor to open franchised cell phone kiosks. He was also a part-owner of four franchises, although he claimed he was not involved in their day-to-day operations or management ...

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In Singas Famous Pizza Brands Corp. v. New York Advertising LLC, 2011 U.S. Dist. LEXIS 14524 (S.D.N.Y. Feb. 14, 2011), the court granted franchisor Singas a preliminary injunction to prevent its franchisee from running two competing businesses in violation of an in-term and post-term covenant not to compete. This case arose when the franchisee’s husband started a business called Queens New York Famous Pizza, in which the franchisee participated. In holding that the standards for an injunction were met, the court cited the fact that the Queens restaurant provided nearly ...

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In Rita’s Water Ice Franchise Co., LLC v. S.A. Smith Enterp., LLC, 2011 U.S. Dist. LEXIS 2595 (E.D. Pa. Jan. 11, 2011), a Pennsylvania federal court recently granted the franchisor’s motion for preliminary injunction against a former franchisee, finding the post-termination covenant not to compete to be reasonable, and that success on the merits was likely. The franchisee operated a Rita’s Water Ice franchise before starting its own competing dessert business at the same location. The Rita’s franchise agreement contained a covenant restricting the former franchisee ...

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In American Dairy Queen Corp. v. Fortune Street Research and Writing, Inc., 2010 U.S. LEXIS 119782 (W.D. Ky. Nov. 10, 2010), franchisor ADQ, represented by Gray Plant Mooty, moved for summary judgment that it was entitled to liquidated damages under its franchise operating agreements with the franchisee, which had been operating three Dairy Queen restaurants. When ADQ learned that the franchisee was operating a chain of competing Rally’s restaurants in Kentucky, it issued notices of default and gave the franchisee an option to cure by selling either the Dairy Queen or the ...

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In Sylvan Learning, Inc. v. Gulf Coast Educ., Inc., 2010 U.S. Dist. LEXIS 107160 (M.D. Ala. Oct. 6, 2010), the franchisor of Sylvan Learning Centers brought a preliminary injunction motion against a recently terminated franchisee for continuing to operate a learning center in violation of the license agreement’s noncompete provision. At issue was whether Sylvan had a substantial likelihood of success in enforcing its two-year, 20-mile noncompete provision, and whether the court should apply Alabama or Maryland law. As an initial matter, the Alabama federal court applied ...

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In Big O Tires, LLC v. Felix Bros. Inc., 2010 U.S. Dist. LEXIS 81559 (D. Colo. Jul. 12, 2010), a franchisee group owned and operated three Big O Tires franchises in California. The franchisee elected not to renew the franchise agreement for one of the units, and requested early termination of the remaining two units. That request was declined, and the franchisee continued to operate its remaining two franchises. The franchisee also continued to operate its first tire store, changing the name to “Budget Tires and Automotive.” 

The franchisor sought a preliminary injunction to ...

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A Texas-based franchisor of building cleaning and maintenance services and supplies  won a temporary restraining order to prevent its Minnesota master franchisee—and related persons and entities—from operating a competing business. Bonus of America, Inc. v. Angel Falls Services, L.L.C., et al., No. 0:10-cv-02111-DSD-FLN (D. Minn. May 28, 2010). The defendants had also formed and been conducting business in Minnesota through another entity, which led the franchisor to file suit in federal court in Minnesota. (Gray Plant Mooty represents the franchisor in this action.)

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In Doyle v. Nutrilawn U.S., Inc., 2010 U.S. Dist. LEXIS 48613 (W.D. Wash. May 17, 2010), a Washington federal court concluded that language in a noncompete clause making it applicable “following the termination of this Agreement for any reason whatsoever” applied upon the agreement’s expiration. The franchisee argued that the covenant only applied if the agreement was terminated, and that termination and expiration should be treated differently. After reviewing “the franchise agreement as a whole” and “giving its terms their ordinary meaning,” the court ...

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A Montana federal court has granted H&R Block’s motion for a preliminary injunction to enforce a covenant not to compete. The case is H&R Block Tax Services LLC v. Kutzman, 2010 U.S. Dist. LEXIS 12837 (D. Mont. Jan. 26, 2010). At issue was whether the covenant’s geographic 45-mile restriction and one-year prohibition were reasonable under Montana law. The franchisee, who continued to provide tax preparation services after the expiration of the franchise agreement, claimed that the covenant violated a Montana statute. The court disagreed, finding that while noncompete ...

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Two judges in the same Michigan federal district court issued different rulings in non-compete cases recently. In the first case, Domino’s Pizza Franchising, LLC v. Yeager, 2:09-cv-14704 (E.D. Mich. Jan. 25, 2010), the court handed Domino’s a victory in its efforts to enforce its post-term rights. Domino’s had sued after the defendants breached their obligations by continuing to operate pizza restaurants using the franchisor’s marks and failing to return proprietary information. The defendants denied liability. After Domino’s provided photographic evidence ...

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In Rescuecom Corp. v. Mohamed E. Khafaga, 2009 WL 4269441 (Bankr. E.D.N.Y. Nov. 30, 2009), a franchisor brought a bankruptcy nondischargeability lawsuit against its former franchisee for

violation of the noncompete provision in the franchise agreement and diversion of business away from the franchisor.  Khafaga was a franchisee in the Rescuecom system, which provides computer repair services. Khafaga was obligated to report his sales, submit annual financial records, and pay royalties for computer repair services rendered to his customers. Khafaga’s wife secretly opened a ...

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In Atlanta Bread Company Int’l, Inc. v. Lupton-Smith, 2009 WL1834215 (Ga. June 29, 2009), the Georgia Supreme Court held that in-term and post-term covenants against competition in franchise agreements are subject to a strict scrutiny standard of review, rendering them more difficult to enforce in Georgia. In this case, the franchise agreements between Atlanta Bread Company International, Inc. (“ABCI”) and the franchisee prohibited the franchisee from owning or engaging in any “bakery/deli business whose method of operation is similar to that employed by store units ...

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One year after issuing its original opinion, the Ninth Circuit has reaffirmed its order vacating that portion of an arbitrator’s award that enforced a broad covenant against competition in the franchise context. In Comedy Club, Inc. v. Improv West Associates, 553 F.3d 1277 (9th Cir. Jan. 29, 2009), the Ninth Circuit considered again its previous decision in light of an order from the United States Supreme Court vacating its prior opinion.

As previously reported in Issue 100 of The GPMemorandum, the arbitrator in this dispute enforced a broad in-term covenant against competition ...

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In Atlanta Bread Company International, Inc. vs. Lupton-Smith et al., 2008 WL 2264863 (Ga. Ct. App. June 4, 2008), the Georgia Court of Appeals affirmed the trial court’s grant of summary judgment holding that the in-term and post-term non-compete covenants in the franchise agreements between Atlanta Bread Company International, Inc. (“ABCI”) and various companies owned by Sean Upton-Smith were unenforceable. The in-term non-compete covenant prohibited Upton-Smith from owning or engaging in any “bakery/deli business whose method operation is similar to that ...

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In late March, the United States District Court for the District of New Jersey denied a defendant-franchisee’s motion for reconsideration of a grant of summary judgment, finding the court’s previous decision that the franchisee had violated its post-termination covenant not to compete was correct as a matter of law. Jackson Hewitt Inc. v. Childress, 2008 WL 834386 (D.N.J. March 27, 2008). The court’s initial ruling granting plaintiff-franchisor Jackson Hewitt Inc.’s (“JHI”) motion for summary judgment and enjoining the franchisee from further competition for a ...

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Last month the United States District Court for the District of New Jersey granted franchisor Jackson Hewitt Inc.’s (“JHI”) motion for summary judgment against a former franchisee, finding that the franchisee had clearly violated the post-termination covenant not to compete in his franchise agreement and enjoining him from further competition for a period of 24 months. Jackson Hewitt Inc. v. Childress, 2008 WL 199539 (D.N.J. Jan. 22, 2008).

The franchisee had operated two JHI franchises in Alabama for four years before notifying the company of his intention to cease ...

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The Franchise Memorandum is a collection of postings on summaries of recent legal developments of interest to franchisors brought to you by Lathrop GPM LLP. 

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