The Franchise Memorandum

A recent case from the Eastern District of Pennsylvania shows the lengths to which courts will go to enforce franchise agreements against personal guarantors and related parties. Tantopia Franchising Co. v. West Coast Tans of PA, LLC, 2013 U.S. Dist. LEXIS 8266 (E.D. Pa. Jan. 22, 2013). The relevant history began in 2002, when Tantopia Franchising Company entered into a franchise agreement with West Coast Tans (WCT) to operate a tanning salon in Philadelphia. Donald and Richard Weiss personally guaranteed WCT’s obligations under that agreement. In 2009, WCT ceased operations. A new entity called CTG, which was owned 90 percent by Donald’s wife, Rosalind Weiss, and 10 percent by Richard, entered into a lease for WCT’s former space. CTG, in turn, sold its assets to TMA, whose sole shareholder was Christopher Connors, the son of Richard’s deceased former fiancée. Tantopia obtained a preliminary injunction against WCT, Donald, Richard, and Rosalind Weiss, Christopher Connors, CTG, and TMA that enforced the post-term noncompete provisions of WCT’s franchise agreement. The court held that it could enforce the franchise agreement against persons who were not parties to it under the “well-established [rule] that a noncovenantor who benefits from the covenantor’s relationship with the competing business must abide by the same restrictive covenant agreed to by the covenantor.” It concluded that “TMA and Connors are a mere continuation of, or straw man for, Donald and Richard Weiss, West Coast Tans and CTG.”

The court also found that Tantopia demonstrated irreparable harm in several respects, including injury to reputation and goodwill, impediments to its ability to refranchise the area, and “irreparable harm in that permitting former franchisees to violate. . . the noncompete covenant will set a poor precedent for other franchisees.” The court, however, denied the portion of Tantopia’s motion to enforce its right of first refusal to purchase the former franchisee’s tanning equipment, because Tantopia had not shown irreparable harm by the defendants’ refusal to sell that equipment.