The Franchise Memorandum

A federal court in Connecticut denied thirty-five franchisees' collective motion for a preliminary injunction against their franchisor in Family Wireless #1, LLC v. Automotive Technologies, Inc., No. 3:15-cv-01310 (D. Conn. May 4, 2016). The franchisees sought to enjoin their franchisor, Automotive Technologies, Inc. ("ATI"), from withholding a five percent royalty on certain funds paid to the franchisees by Verizon Wireless. As subagents of Verizon, the franchisees sold wireless devices and service plans at their stores and were compensated for those sales in the form of "commissions" that Verizon paid directly to ATI, and which ATI then passed through to the franchisees. Although ATI had not previously collected royalties on the commissions, in January 2015 it began to withhold a five percent royalty on each payment, which it contended it had a right to do under the relevant franchise agreements. The franchisees argued that the commissions were "reimbursement payments" that were not subject to royalty charges and filed suit for breach of contract, unjust enrichment, and unfair trade practices. They then moved for a preliminary injunction to stop ATI from applying the royalty charges.

The court denied the franchisees' motion, focusing its analysis on the factor of irreparable harm. The court noted that a franchisee may establish irreparable harm when it demonstrates that, absent preliminary relief, it will face a "threat to the continued existence of its business." Here, the alleged losses at issue for each of the thirty-five franchisees consisted of less than five percent of their total revenues, which the court concluded did not threaten the franchisees with an imminent risk of losing their businesses. Because the franchisees could not establish irreparable harm, the court did not consider their likelihood of succeeding on the merits of their claims and denied the requested injunction.