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The Franchise Memorandum

District Court Grants Preliminary Injunction Enforcing Noncompete Provision Against Franchisee

On the other hand, a federal district court in Illinois granted in part and denied in part a franchisor’s motion for a preliminary injunction against a recently terminated franchisee who established a competing business. Auto Driveaway Franchise Sys., LLC v. Corbett, Bus. Franchise Guide (CCH) ¶ 16,300 (N.D. Ill Oct. 26, 2018). Auto Driveaway—a business offering vehicle transportation and shipping management services—sought a preliminary injunction and temporary restraining order against Corbett, the owner of the franchise at issue, seeking to enforce a noncompete covenant in the parties’ franchise agreement that prohibited him from engaging in a “competitive business” for two years at or within 50 miles of his formerly franchised office or within 50 miles of any other Auto Driveaway office. Auto Driveaway alleged that Corbett had established a new business that provides similar services to those provided by Auto Driveaway in proximity to other Auto Driveaway businesses, in violation of the covenant. Auto Driveaway sought to prevent Corbett from operating the competing business in Richmond, Virginia, the city where his franchised office had been located, and from setting up a new location within 50 miles of another Auto Driveway franchisee located in Manteca, California.

Applying Virginia law, the court held that there was a better than negligible chance that Auto Driveaway would succeed in showing a breach of the noncompete provision of the franchise agreement and that the balance of harm weighed in favor of Auto Driveaway. Auto Driveaway was able to demonstrate that its goodwill was being harmed because Corbett’s business could cause a potential loss of customers, was displaying Auto Driveaway’s trademarks while providing similar services as Auto Driveaway, and was actively soliciting and obtaining Auto Driveaway’s customers. The court further reasoned that any harm to Corbett from an injunction requiring him to uphold the terms of the franchise agreement would be minimal. While the court granted the preliminary injunction in part, it denied Auto Driveaway’s request to freeze the assets of Corbett’s new business and to obtain an accounting of records related to that business because such relief would be intrusive, alter the status quo, and was not necessary to remedy the immediate threat of harm posed by Corbett. Corbett has appealed the district court’s decision to the Seventh Circuit.

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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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