The Franchise Memorandum

A Minnesota bankruptcy court granted Fantastic Sams summary judgment and enjoined a former franchisee from violating the post-termination noncompete in its franchise agreements after the franchisee rejected the agreements in bankruptcy. EllDan Corp. v. Fantastic Sams Franchise Corp., 2023 WL 3394917 (Bankr. Minn. May 11, 2023). When the former franchisee became unable to satisfy its debts to Fantastic Sams, it filed for bankruptcy, rejected its franchise agreements in that proceeding, and continued to operate four hair salons under a new name, from or near the same locations as its former franchises. Fantastic Sams moved to preliminarily enjoin the franchisee’s breach of its noncompete obligations. The parties subsequently agreed to submit the matter for summary judgment.

The court granted summary judgment in favor of Fantastic Sams. It found that the franchisee was violating the franchise agreements’ valid and enforceable noncompete provision. Furthermore, the court rejected the franchisee’s argument that its rejection of the agreements eliminated them in their entirety or limited Fantastic Sams to monetary relief in the bankruptcy proceeding. The court held that, under bankruptcy law, the franchisee’s post-petition rejection constituted a breach of the franchise agreements, leaving Fantastic Sams whatever remedies were available to it under non-bankruptcy law for such a breach.

*Amy Crea is a Summer Associate for Lathrop GPM who contributed to the writing of this post.