The Franchise Memorandum

In Allegra Network LLC v. Cormack, 2012 U.S. Dist. LEXIS 117014 (E.D. Mich. Aug. 20, 2012), the court granted a preliminary injunction enforcing a post-termination covenant against competition. The franchisor terminated the franchise rights of an Insty-Prints Center based on its failure to pay royalty and advertising fees, report royalty figures, and use only the franchisor’s marks. When the franchisees began operating a competing business in the same location as their terminated franchise, the franchisor sought a preliminary injunction to enforce the noncompetition provision, which prevented the franchisees from having any direct or indirect interest in a competitive business within a ten-mile radius of their terminated franchise, or a five-mile radius of any other Insty-Prints Center for a period of two years. The franchisor also sought compliance with other post-termination obligations, including deidentification of the terminated franchise.

In considering whether to grant the franchisor’s motion, the court evaluated the four familiar elements of: likelihood of success on the merits, irreparable harm to the franchisor, harm to others, and the public interest. To determine whether the franchisor was likely to succeed on the merits, the court applied a Michigan statute which provides that noncompetition provisions in employment agreements will be upheld when they are reasonable in duration, geographic scope, and scope of the activities restrained. The court decided that both the duration and the geographic scope were reasonable. It also concluded that the franchisor had a reasonable interest in protecting its customer base, goodwill, and confidential information. Since the noncompetition provision was intended to protect those things, its scope was reasonable and the franchisor was likely to succeed in enforcing it. Next, the court found that the loss of customer goodwill would likely cause irreparable harm to the franchisor, that granting an injunction would not cause harm to third parties, and that an injunction would serve the public interest. Although the franchisees attempted to argue that they would suffer harm because they were not in a financial position to comply with the noncompetition provision, the court held that any harm to the franchisees was self-inflicted because they intentionally breached their franchise agreement.