The Franchise Memorandum

In December 2007, the Sixth Circuit Court of Appeals held that a Michigan district court had improperly denied a franchisor’s request for a preliminary injunction prohibiting its franchisees from competing against the franchisor’s business for a period of two years based upon the franchise agreement’s non-compete clause. Certified Restoration Dry Cleaning Network, L.L.C. v. Tenke Corp., 2007 WL 4372888 (6th Cir. Dec. 17, 2007). The franchisees, citizens of Ohio, had been terminated for failure to pay fees. The franchise agreement contained a post-termination non-compete clause prohibiting the former franchisees from engaging in any restoration dry cleaning businesses for two years within a 25-mile radius from the former franchise territory. After the franchisees indicated their intention to continue providing restoration dry cleaning services to clients they had served before entering into the franchise agreement, the franchisor threatened legal action. The franchisees beat the franchisor to the courthouse, however, as they filed a declaratory judgment action in Ohio state court seeking a determination of their obligations under the franchise agreement. The franchisor immediately removed the case to an Ohio federal court and moved to dismiss under the franchise agreement’s forum-selection clause, which listed Michigan as the appropriate forum. The franchisor subsequently filed a separate action against the franchisees in Michigan federal court seeking a temporary restraining order and preliminary injunction enforcing the franchise agreement’s non-competition clause.

The Michigan district court denied the franchisor’s request for injunctive relief, finding that the franchisor had not demonstrated a substantial likelihood of success on the merits because the non-competition covenant was ambiguous, the record was not sufficiently developed to conclude that the covenant was reasonable, and the comity considerations counseled against granting the injunction while the Ohio action was pending. The franchisor appealed to the Sixth Circuit, and while the appeal was pending, the Ohio district court granted the franchisor’s motion to dismiss the franchisees’ suit based upon the franchise agreement’s forum selection clause.

After reviewing the evidence, the Sixth Circuit held that the Michigan district court had improperly denied the franchisor’s request for a preliminary injunction. It found that the terms of the franchise agreement’s non-compete clause were “plain and unambiguous” and sufficiently reasonable and limited in time and scope to withstand judicial scrutiny. It also determined that the franchisor would suffer irreparable injury without the issuance of the injunction as franchisees’ competition could result in loss of customer goodwill and unfair competition.

The Sixth Circuit also held that the district court had improperly applied the “first-to-file” rule, which encourages comity among federal courts of equal rank, when it held that it would be improper to grant the franchisor’s requested injunction due to the pending Ohio action. “By filing in Ohio courts, [the franchisees] were attempting to forum shop as well as preempt resolution of the parties’ dispute by the proper forum,” the Court wrote. “Thus, the Ohio action was not entitled to any deference under the first-to-file rule.”