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The Franchise Memorandum

Ohio Federal Court Denies Area Representative’s Request to Enjoin the Nonrenewal of Agreement

A federal court in Ohio denied an area representative’s request to enjoin the nonrenewal or termination of two of its area representative agreements. KAM Development, LLC v. Marco’s Franchising, LLC, 2020 WL 6146482 (N.D. Ohio Oct. 10, 2020). In 2010, Marco’s granted KAM two area representative agreements in which KAM agreed to solicit potential franchisees and service existing franchisees in Charlotte, North Carolina, and Columbia, South Carolina, for ten years. Each agreement provided up to four renewal periods of five years each, so long as KAM satisfied certain requirements, including the satisfaction of development obligations. In May 2020, KAM provided notice of its intent to renew the Columbia Agreement, but Marco’s advised that KAM was ineligible because of performance deficiencies. After further correspondence, KAM filed a motion for a temporary restraining order against Marco’s regarding the Columbia agreement, which was granted on September 11, 2020. On September 15, 2020, Marco’s sent KAM a notice of default of the Charlotte agreement. KAM then filed a motion for preliminary injunction against Marco’s. The court held a multi-day evidentiary hearing to consider the motion with regard to both agreements.

When considering a preliminary injunction, a plaintiff must establish that it is likely to succeed on the merits of the case, that it would suffer irreparable harm without the injunction, that the balance of equities favors the plaintiff, and that an injunction is in the public interest. As to the first factor, the court found KAM was unlikely to prevail on the merits. KAM had failed to meet the development requirements set forth under the Charlotte agreement and it was unlikely that it could meet those before December 31, 2020. Because the Columbia agreement required KAM to be in compliance with all agreements between the parties, KAM also was not eligible for renewal of the Columbia agreement. As to the second factor, the court reversed its prior finding of irreparable harm in its temporary restraining order. The court found KAM would not suffer an irreparable loss of goodwill because, if KAM prevailed in the litigation, it could inform its unit franchisees of its victory and any goodwill would be restored; further, KAM did not put forth evidence of any loss it would suffer from failing to service franchisees. Any loss to KAM would also be compensable by money damages. Third, the court stated it is “cautious when it comes to forcing parties whose relationship has soured to continue contracting with one another” and found the balance of equities favored not granting the injunction. Finally, because the parties did not focus on the public interest argument, that factor was not heavily weighted in either direction. Therefore, given that KAM was unlikely to succeed on the merits, would not likely suffer irreparable harm, and the balance of equities favored not forcing parties to contract with each other once the relationship had soured, the court denied KAM’s motion for preliminary injunction and permitted Marco’s not to continue the agreements.

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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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