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Illinois Federal Court Denies Motion to Dismiss Franchisor’s Noncompete Claims

On the other hand, a federal court in Illinois has allowed a franchisor to continue pursuing its breach of noncompete claims against a former franchisee. Auto Driveaway Franchise Sys., LLC v. Auto Driveaway Richmond, LLC, 2019 WL 3302223 (N.D. Ill. July 23, 2019). Defendant Jeffrey Corbett was an Auto Driveaway franchisee until his three franchise agreements were terminated in September 2018. The agreements had two-year post-termination covenants against competition. Following the termination, however, Corbett and his wife allegedly set up and operated a competing business called Tactical Fleet. Auto Driveaway brought a successful motion for preliminary injunction, as reported in Issue 237 of the GPMemorandum. Corbett appealed the injunction, but the Seventh Circuit affirmed in Auto Driveaway Franchise Sys., LLC v. Auto Driveaway Richmond, LLC, 928 F.3d 670 (7th Cir. 2019). Following the failed appeal, Corbett and Tactical Fleet filed motions with the district court to dismiss Auto Driveaway’s first amended complaint, advancing four main arguments, which were in turn rejected by the court.

The first two arguments involved ambiguous language in the franchise agreements relating to the term of the agreements — in some places the stated term was three years and five years in others. The parties continued to operate beyond the expiration of the agreements, on what Auto Driveaway argued was a month-to-month basis. Corbett and Tactical Fleet first argued that the two-year covenants against competition were no longer enforceable because the franchise agreements had expired by their terms more than two years earlier, and no covenant attached to the implied month-to-month contracts that followed. However, the court concluded that it would be improper at the motion to dismiss stage to determine the meaning of the ambiguous language relating to the term of the agreements. And, in any case, extrinsic evidence suggested the parties understood at least one of the agreements to have a longer term that would extend the covenant to the conduct in question. Second, the court observed that, to the extent the parties continued to act as if the express contract were in force after it expired, the entirety of the material terms — including the covenant not to compete — remained intact. But a guarantor’s liability cannot be extended beyond a guaranty’s precise terms, so the court dismissed Auto Driveaway’s claims for breach of a personal guaranty. Third, the court concluded that the post-expiration agreements had not violated the Illinois Franchise Disclosure Act, as the defendants argued, because (a) Corbett, not Auto Driveaway, had refused to renew the agreements, and (b) none of Corbett’s franchises were located in Illinois. Finally, Tactical Fleet argued that it was not subject to the court’s personal jurisdiction because it was not an Illinois company and had insufficient contacts with the state. But the court found that Tactical Fleet could have reasonably anticipated being haled into court in Illinois, since Tactical Fleet was an alleged continuation of Corbett’s franchise set up to avoid his post-termination obligations to Auto Driveaway.

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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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