The Franchise Memorandum

In Maaco Franchising, Inc. v. Augustin, 2010 U.S. Dist. LEXIS 83895 (E.D. Pa. Aug. 16, 2010), a Pennsylvania federal district court declined to impose sanctions on the franchisee defendants despite finding that they destroyed documents in bad faith during litigation with Maaco. This case involves the former franchisees’ operation of a competing business after Maaco terminated their franchise agreements for nonpayment. Maaco served several requests for documents and then sought sanctions against the franchisees for destroying documents during litigation and making false and misleading statements in their verified pleadings. It then moved for a preliminary injunction. At the injunction hearing, the franchisees admitted that they had shredded documents. The litigation continued after the injunction was granted in part and denied in part. Maaco sought dismissal of the franchisees’ counterclaims and affirmative defenses, exclusion of certain evidence at trial, and attorneys’ fees and costs.

In denying Maaco’s request for sanctions, the court described dismissal as a “severe” and “extreme” sanction. Even though the court found evidence that the franchisees failed to produce documents, were “less than truthful” in their pleadings, and acted in bad faith, the court held that Maaco failed to demonstrate how it had been prejudiced at that point in the litigation. The court noted that Maaco could present evidence of the destroyed documents at trial, which might result in the jury receiving a “spoliation inference,” i.e., an inference that “the destroyed evidence would have been unfavorable to the position of the offending party.” The court further noted that the franchisees were having difficulty obtaining new counsel, and that an award of attorneys’ fees and costs at this stage would worsen that problem and cause further delay in the litigation.  The court rejected Maaco’s arguments that the franchisee’s counterclaims and affirmative defenses lacked merit. As to the lesser sanction of excluding evidence at trial because it was not timely produced, the court determined that a sanction was premature given that trial had yet to be scheduled. Despite finding evidence of bad faith, the court noted that the franchisees still had time to cure any prejudice to Maaco if they could produce the requested documents before trial.