The Franchise Memorandum

A Federal Court in Tennessee recently denied a franchisor’s motion for preliminary injunction and dissolved a temporary restraining order that had previously been put in place, because the franchisor could not demonstrate a likelihood of success on the merits of its claims, did not establish irreparable harm, and the customers of the defendant would be substantially harmed if the preliminary injunction were ordered. Freedom Franchise Sys., LLC v. CHOTO Boat Club LLC, 2022 WL 1206569 (E.D. Tenn. Apr. 21, 2022). Freedom Franchise Systems, a boat-club franchising company, sued Choto Boat Club, the purchaser of a marina in which a Freedom franchised business was operated by a Freedom franchisee. Upon the sale, Choto and its owner took over operations of the franchised business without Freedom’s written consent and without offering Freedom a right of first refusal. Freedom sued Choto for, among other things, theft of trade secrets and intentional interference with its business relationships, and Freedom sought a temporary restraining order and preliminary injunction on the basis of those claims. The court initially issued a temporary restraining order, concluding that Freedom had met its burden and established that its customer data was likely entitled to trade-secret protection and that Choto was using this data in likely violation of confidentiality agreements. The court then scheduled an evidentiary hearing to determine whether to dissolve the temporary restraining order or convert it into a preliminary injunction.

Following the evidentiary hearing, the court concluded that Freedom had not actually established a likelihood of success on the merits. After reviewing the evidence, the court found that the data Freedom claimed to be trade secret was membership information that was meant to be shared with third parties, contained no confidentiality protections, and may not have belonged to Freedom in the first place. As to Freedom’s intentional interference claims, the court found that there was no contract involving Freedom in which Choto could have tortiously interfered, because the contracts with the former franchisee’s customers were between the former franchisee and the customers, not Freedom. The court also found that Freedom failed to demonstrate irreparable harm, as any harm Freedom incurred would be compensable with monetary damages. Finally, weighing against an injunction, the court found Choto’s members would be substantially harmed if Choto were enjoined from operations, given that summer boating season is rapidly approaching, and boat-club members already paid their dues and expected to be able to use Choto’s services.