The Franchise Memorandum

A federal district court in Michigan recently denied a franchisee's motion to dismiss its franchisor's counterclaims for breach of contract and a declaratory judgment. AKB Wireless, Inc. v. Wireless Toyz Franchise LLC, 2015 U.S. Dist. LEXIS 48005 (E.D. Mich. Apr. 13, 2015). The franchisor, Wireless Toyz, alleged that AKB had breached its franchise agreement by, among other things, violating the agreement's covenant not to compete and confidentiality provisions. AKB argued that the franchise agreement's noncompetition and confidentiality provisions only applied upon termination or expiration of the franchise agreement. Since they were still operating their franchise at the time they formed a competing business, they claimed those provisions did not apply to them.

The court found, however, that another provision of the agreement prohibited AKB from engaging in competitive activity during the term of the agreement. The court also rejected AKB’s argument that Wireless Toyz failed to state a claim for declaratory relief because it had an adequate remedy at law, pointing out that Federal Rule of Civil Procedure 57 expressly provides that the existence of another remedy does not preclude an otherwise appropriate action for a declaratory judgment. Finally, the court refused to consider whether Wireless Toyz’s other breach of contract claims should be dismissed, holding that the adequacy of one of its allegations of breach was sufficient to deny the motion.