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Eighth Circuit Denies Injunction to Stop Competition by Former Franchisee, and District Court Allows Counterclaim

The United States Court of Appeals for the Eighth Circuit last month upheld a district court’s denial of injunctive relief for a franchisor that had waited too long to enforce a former franchisee’s post-termination covenant against competition. Novus Franchising, Inc. v. Dawson, 2013 U.S. App. LEXIS 16103 (8th Cir. Aug. 5, 2013). The district court subsequently allowed the franchisee’s counterclaims under the Minnesota Franchise Act to proceed. Novus Franchising, Inc. v. Dawson, 2013 U.S. Dist. LEXIS 117717 (D. Minn. Aug. 20, 2013). This case began in 2012, when Novus Franchising, Inc. filed suit and moved for a preliminary injunction to enforce the franchise agreement’s post-term noncompetition provisions and to prohibit the former franchisee from using Novus’s trademarks and products in his ongoing automotive glass repair business. Although the Minnesota district court granted Novus’s request to prohibit Dawson from using the franchisor’s trademarks and products, the court denied the request to enforce the post-term covenant, concluding that Novus would not suffer any irreparable harm.

On appeal, Novus claimed that Minnesota courts infer irreparable harm from the breach of a valid and enforceable noncompete clause. In affirming denial of the injunction, the Eighth Circuit reasoned that the lengthy delay between the time Dawson ceased paying royalties and the time Novus sought injunctive relief—a period of over seventeen months—rebutted any inference of irreparable harm. Further, the appellate court questioned whether the franchisor’s alleged injuries of loss of customers or customer goodwill were truly irreparable, or whether monetary damages were sufficient.

In response to the franchisor’s filing of the action, Dawson asserted counterclaims alleging common law fraud and a violation of the Minnesota Franchise Act. After the Eighth Circuit’s decision on the injunction issues, the district court separately ruled that none of the counterclaims were barred by Minnesota’s three-year statute of limitations. As to Dawson’s Minnesota Franchise Act claim, the court held that the “discovery rule” applies to a claim for misrepresentation or fraud, meaning that Dawson could proceed on the basis that he did not discover the facts underlying the fraud until within the three-year statutory period. The court further held that when a cause of action contains a “damages” element, the statute of limitations does not begin to run until at least some damage has been sustained. In applying this rule, the court concluded that Dawson did not begin to sustain damages until almost two years after he learned of the alleged misrepresentation and well within the statutory period.

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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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