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Court Grants Franchisor’s Motion for Preliminary Injunction Against Franchisee Operating Competing Ice Cream Shop

An Ohio federal court granted a franchisor’s motion to preliminarily enjoin a franchisee from operating a competing business or suggesting any affiliation with the franchisor in Handel’s Enterprises, Inc. v. Schulenburg, 2018 WL 3077756 (N.D. Ohio June 22, 2018). In 2015, Handel’s Enterprises, an ice cream shop franchisor, and Schulenburg entered into a franchise agreement granting Schulenburg a franchise in Encinitas, California, and the option to open a second location in San Diego. The agreement contained a covenant not to compete with Handel’s during the term of the agreement or for two years afterwards. Schulenburg later took steps to open the San Diego location, but Handel’s ultimately did not approve the location he selected. Nevertheless, Schulenburg signed a lease for the location and refused to pay a franchise fee to Handel’s or produce a copy of the lease. Handel’s then filed suit in federal court in Ohio for breach of contract and a host of related claims and moved for a preliminary injunction. At the hearing on the motion, Schulenburg and his co-defendants conceded that they had opened a competing ice cream shop at the San Diego location.

In granting Handel’s motion, the court found each of the Sixth Circuit’s preliminary injunction factors to favor Handel’s. First, it found that Handel’s was likely to succeed on its misappropriation of trade secrets claim because of the precautions it took to protect its confidential information. The court also found that Handel’s was likely to succeed on its claim for violation of the franchise agreement’s noncompete provision because the covenant was based on the legitimate business interest of protecting Handel’s confidential information, and it was neither overbroad nor injurious to the public. Second, the court concluded that Handel’s was likely to suffer irreparable harm in the form of market confusion, unfair competition, and damage to franchisee relationships if the injunction were not granted. Third, the court discounted as self-inflicted any harm Schulenburg might suffer if the injunction were granted. Finally, the court found the public interest in enforcing contracts and fair competition to support granting the injunction. Schulenburg has appealed the district court’s decision.

Schulenburg also moved to dismiss the suit for lack of subject matter jurisdiction and improper venue, or, in the alternative, to stay or transfer the suit. The court found subject matter jurisdiction to lie on the basis of both federal question jurisdiction and diversity between the parties, and found venue properly denied based on the franchise agreement’s forum selection clause and Schulenburg’s business activities in Ohio.

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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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