May 6, 2015 - Franchise Articles by |

Novus Franchising, Inc. v. Dawson, 2013 WL 3970250 (C.A.8 (Minn.))

In many court cases in which a franchisor sues its former franchisee to prevent the former franchisee from operating an independent non-franchise-trademarked business after a termination of the franchise agreement, the franchisor prevails, in that the court issues an order preventing and banning the former franchisee from operating his or her business. However, in a recent case out of the Eighth Circuit federal court of appeals, which is one of the – if not the most — conservative of the thirteen federal circuit courts in the country, a three-judge appellate panel affirmed a trial judge’s refusal to grant the franchisor’s motion for a preliminary injunction to enforce the post-term covenant-not-to-compete in the franchise agreement.

Novus Franchising, Inc. v. Dawson involved an automotive glass repair franchise located in Richmond, Virginia. Novus, the franchisor, operates automotive glass repair franchises. Dawson, the franchisee, began a twenty-year relationship with Novus as one of its franchisees in 1990. In 2008, Dawson and Novus renewed the franchise covering the Virginia counties of Hanover and Henrico, including the metropolitan area of Richmond, Virginia. The major issue in the case was whether the court would enforce the non-compete clause in the franchise agreement following termination of the franchise. The non-compete clause stated as follows:

You agree that you, your Owners, the Personal Guarantors, and the members of your and their immediate families will not, for a period of two years after the termination or expiration of this Agreement, for your or their own account or as an employee, agent, consultant, partner, officer, director, member, or owner of any other person, firm, entity, partnership, company or corporation (a) seek to employ any person who is at that time employed by us or by any Novus franchisee without the prior consent of their employer, (b) own, operate, lease, franchise, license, conduct, engage in, consult with, be connected with, have any interest in, or assist any person or entity engaged in any other business that is in any way competitive with or similar to the Business System or the Business (including any glass repair and/or glass replacement or installation business) if that business is located within (i) your APR, (ii) or any area of primary responsibility we grant to any other Novus franchise or business, or (iii) within ten miles of any business location of any Novus franchise or business in the United States and its possessions.

The franchise agreement also contained language that indicated that Dawson agreed “that the time and geographical limitations set forth in [the non-compete] provision are reasonable and necessary to protect [Novus] and our franchises if this Agreement expires or is terminated by either party for any reason, and that this covenant not to compete is necessary to permit [Novus] the opportunity to resell and/or develop a new Novus business within [Dawson’s] APR.”

Dawson stopped paying the royalties in October 2010 because he claimed that he was unable to pay the royalty fees because Novus improperly granted a franchise in his territory to another franchisee, which, according to Dawson, “virtually destroyed Dawson's business, rendering it impossible for him to pay the minimum franchise fees.” Four months after Dawson stopped paying royalties, Novus sent him a Notice of Default letter, telling him that he had to cure the defaults or his franchise agreement would be terminated. When Dawson did not cure the defaults, the franchisor terminated him, at the same time reminding him of his post-termination obligations under the non-compete clause of the agreement.

The district court issued an order barring Dawson from using the Novus marks, but allowing Dawson to continue operating his independent business. Novus argued that the district court erred when it determined Novus would not suffer irreparable harm because Minnesota courts automatically infer irreparable harm from the breach of a valid and enforceable non-compete clause. Dawson made two arguments to rebut Novus’ claim that the franchisor was entitled to an inference of irreparable harm.

First, Dawson argued that a relatively recent 2006 United States Supreme Court case, eBay, Inc. v. MercExchange, undercut Minnesota's rule of inferring irreparable harm. In Ebay, the Supreme Court rejected a “general rule that courts will issue permanent injunctions against patent infringement absent exceptional circumstances.” The Supreme Court explained that it “has consistently rejected invitations to replace traditional equitable considerations with a rule that an injunction automatically follows a determination that a copyright has been infringed.” Further, although the eBay case was based on patent infringement, the circuit court pointed out that another federal court had suggested “a strong case can be made that eBay's holding necessarily extends to the grant of preliminary injunctions” in contexts other than patent infringement cases.

Second, Dawson argued that the long delay between the time he stopped paying royalties and the time Novus finally sought injunctive relief (seventeen months) rebutted any inference of irreparable harm to Novus.

In addition to making these two arguments regarding the impropriety of drawing an inference of irreparable harm, Dawson also asserted a third related defense that the very specific harm that would result from failing to enforce the post-term covenant — damage to the integrity of the franchise system itself – was not irreparable because it is too speculative as a matter of law. Similarly, Dawson also attacked as similarly speculative Novus’ suggestion that failure to enjoin Dawson would cause franchisees around the country to violate their non-compete agreements.

The circuit court ultimately determined that the district court did not abuse its discretion when it determined Novus failed to show irreparable harm under the particular facts involved in this case. The circuit court stated that “At a minimum, Novus's failure to seek injunctive relief for a period of seventeen months after Dawson quit paying royalties ‘vitiates much of the force of [Novus’s] allegations of irreparable harm.’” The circuit court went even further when it stated that “we question whether Novus's alleged injuries, i.e., “a loss of customers or customer goodwill,” are truly “irreparable” in the sense that they could not be addressed through money damages if Novus was successful following a trial on the merits.

In essence, the circuit court decided the case based on its conclusion that the delay of the franchisor in seeking an injunction rebutted any inference of irreparable harm to which Novus might have been entitled under Minnesota law. In this regard, the circuit court specifically sidestepped having to address the incredibly interesting point that it did “not address Dawson's claim that Minnesota law conflicts with the Supreme Court's decision in eBay.

Interestingly, after the circuit court set out its ruling and its rationale, it also ended its ruling by pointing out that its job in reviewing all decisions of trial courts on preliminary injunction motions is very deferential. In this regard, the circuit court explained that even if the district court had held the other way, it might not have been a reversible decision. “That the denial of [a motion for a preliminary injunction] would not have been reversible as an abuse of discretion, however, does not mean that granting it was such an abuse. The very concept of discretion presupposes a zone of choice within which the trial courts may go either way.”

Excerpts of Novus v.

Dawson

BYE, Circuit Judge.

……………………..

On March 26, 2012—over seventeen months after Dawson stopped making royalty payments—Novus filed a motion for a preliminary injunction seeking enforcement of the non-compete provisions of the franchise agreement and seeking to prohibit Dawson from using Novus's marks and products in his ongoing automotive glass repair business. Novus also requested a default judgment because Dawson had not responded to the complaint. The district court set a hearing for the two motions on May 8, 2012. Four days before the hearing, however, Dawson emailed the district court asking for an extension of the hearing date. The district court granted the request and reset the hearing for July 9, 2012. By the time of the July 9 hearing date, Dawson still had not filed an answer or moved to dismiss the complaint.

Dawson appeared at the July 9 hearing by phone, representing himself pro se.He explained he could not afford to hire an attorney because he was “barely putting food on the table and barely making our mortgage.”He said he had three children to support and “could be facing bankruptcy” as a result of the dispute with Novus. The district court questioned whether Dawson's corporation, CarMike, was subject to jurisdiction in Minnesota. The district court also asked Dawson whether he intended to file an answer to the complaint, and Dawson said he “would like to try to find a lawyer.”

On July 15, 2012, the district court entered an order granting Novus's motions in part and denying them in part. The district court dismissed CarMike from the suit for lack of personal jurisdiction after concluding Novus did not allege the corporation had any relationship to Dawson's franchise with Novus. The district court stated “Novus has not alleged any independent contacts that CarMike, Inc. has had with Minnesota, relying instead on Dawson's actions to establish jurisdiction over CarMike, Inc. However, Novus has not shown that Dawson was acting as CarMike, Inc.'s agent when he entered into a franchise agreement with Novus.” Addendum at 3.

The district court granted Novus's request for a preliminary injunction to prohibit Dawson from using Novus's marks and products. The district court did not, however, grant Novus's request to enforce the 2008 franchise agreement's noncompete clause as part of the preliminary injunction. The district court determined “Novus has not shown that it will suffer irreparable harm if Dawson continues to operate his business without using Novus products or services, nor has Novus shown that the balance of the harms or the public interest weighs against allowing Dawson to continue to operate his business without Novus marks or products.”Id. at 5.

…………………………….

Novus timely filed an interlocutory appeal of the district court's order. See28 U.S.C. § 1292(a)(1)(granting the courts of appeals jurisdiction over interlocutory orders of the district courts “granting, continuing, modifying, refusing or dissolving injunctions, or refusing to dissolve or modify injunctions”). On appeal, Novus contends the district court erred in refusing to enforce the non-compete provisions as part of the preliminary injunction issued against Dawson, erred in dismissing CarMike for lack of personal jurisdiction, and erred in granting Dawson an additional sixty days in which to file an answer.

II

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III

Finally, we address the district court's refusal to enforce the 2008 franchise agreement's non-compete clause as part of the preliminary injunction. “We review the denial of a motion for preliminary injunction for abuse of discretion.” Coyne's & Co., Inc. v. Enesco, L.L.C.,553 F.3d 1128, 1131 (8th Cir.2009).“A district court has broad discretion when ruling on a request for preliminary injunction, and it will be reversed only for clearly erroneous factual determinations, an error of law, or an abuse of its discretion.” Aaron v. Target Corp.,357 F.3d 768, 773–74 (8th Cir.2004). An abuse of discretion occurs when “a relevant factor that should have been given significant weight is not considered; when an irrelevant or improper factor is considered and given significant weight; and when all proper factors, and no improper ones, are considered, but the court, in weighing those factors, commits a clear error of judgment.” Kern v. TXO Prod. Corp.,738 F.2d 968, 970 (8th Cir.1984).

Requests for preliminary injunction are analyzed under the four factors set forth in  Dataphase Systems, Inc. v. CL Systems, Inc.,640 F.2d 109 (8th Cir.1981). The Dataphase factors are “(1) the threat of irreparable harm to the movant; (2) the state of balance between this harm and the injury that granting the injunction will inflict on other parties litigant; (3) the probability that movant will succeed on the merits; and (4) the public interest.”Id. at 114.In refusing to enforce the 2008 franchise agreement's non-compete clause, the district court focused on the irreparable harm factor. Because a “failure to show irreparable harm is an independently sufficient ground upon which to deny a preliminary injunction,” Watkins Inc. v. Lewis,346 F.3d 841, 844 (8th Cir.2003), we likewise focus on this factor to determine whether the district court abused its discretion in this instance.

Novus claims the district court abused its discretion when it determined Novus would not suffer irreparable harm because Minnesota courts infer irreparable harm from the breach of a valid and enforceable non-compete clause. See  Edin v. Jostens, Inc.,343 N.W.2d 691, 694 (Minn.Ct.App.1984)(“In a proper case irreparable harm to the employer may be inferred if it can be shown that the employee breached an enforceable restrictive covenant.”). Dawson counters that Novus is not entitled to an inference of irreparable harm in this case for two reasons.

First, Dawson argues a recent Supreme Court decision undermines Minnesota's rule of inferring irreparable harm. In  eBay, Inc. v. MercExchange, L.L.C.,547 U.S. 388 (2006), the Supreme Court rejected a “general rule that courts will issue permanent injunctions against patent infringement absent exceptional circumstances.” Id.at 391.The Court explained that it “has consistently rejected invitations to replace traditional equitable considerations with a rule that an injunction automatically follows a determination that a copyright has been infringed.” Id.at 392–93.Dawson argues eBay's holding requires courts to view as suspect any general rule creating a presumption or an inference in favor of automatically imposing an injunction. Indeed, the Eleventh Circuit has suggested “a strong case can be made that eBay's holding necessarily extends to the grant of preliminary injunctions” in contexts other than patent infringement cases.  North Am. Med. Corp. v. Axiom Worldwide, Inc.,522 F.3d 1211, 1228 (11th Cir.2008)(considering, but ultimately not deciding, whether eBay's prohibition against presumptions would apply to a preliminary injunction under the Lanham Act); see also  Salinger v. Colting,607 F.3d 68, 77–78 (2d Cir.2010)(applying eBay's holding to preliminary injunctions issued for alleged copyright infringement);  Seed Servs., Inc. v. Winsor Grain, Inc.,868 F.Supp.2d 998, 1005 (E.D.Cal.2012)(refusing to “assume the existence of irreparable injury” in a trademark infringement case based on eBay ).

Second, Dawson argues the long delay between the time he stopped paying royalties and the time Novus finally sought injunctive relief—a period of seventeen months—rebuts any inference of irreparable harm Novus may have had under the particular facts of this case. For this proposition, Dawson relies primarily upon our decision in  Hubbard Feeds, Inc. v. Animal Feed Supplement, Inc.,182 F.3d 598 (8th Cir.1999). There we affirmed a district court's denial of a request for a preliminary injunction, focusing in large part on the plaintiff's delay of nine years in asserting that another company was using its registered product without permission.  Id.at 603.We also cited with approval the Second Circuit's decision in  Tough Traveler, Ltd. v. Outbound Products,60 F.3d 964 (2d Cir.1995), where the court said delay alone may justify the denial of a preliminary injunction when the delay is inexplainable in light of a plaintiff's knowledge of the conduct of the defendant.  Id.at 968(citing  Citibank, N.A. v. Citytrust,756 F.2d 273, 276 (2d Cir.1985)(concluding a delay of nine months after receiving notice of a defendant's conduct alleged to be causing irreparable harm justified denial of a preliminary injunction)); see also  CHS, Inc. v. PetroNet, L.L.C.,Civ. No. 10–94 RHK/FLN, 2010 WL 4721073 at *3 (D.Minn. Nov. 15, 2010)(“It has long been recognized that delay in seeking relief ‘vitiates much of the force of … allegations of irreparable harm.’ “ (quoting  Beame v. Friends of the Earth,434 U.S. 1310, 1313 (1977))).

In addition to these two arguments countering Novus's claim that it is entitled to a presumption of irreparable harm under Minnesota law, Dawson also contends the particular harm Novus alleges—damage to the integrity of its franchise system—is not irreparable because it is too speculative. See  Anytime Fitness, Inc. v. Family Fitness of Royal, L.L.C.,No. 09–3503, 2010 WL 145259 at * 2 (D.Minn. Jan. 8, 2010)(concluding a concern about franchise integrity “is speculative” and “success on the merits … would dissuade … franchisees from ignoring their agreements”);  Novus Franchising, Inc. v. Dean,No. 10–2834, 2011 WL 1261626 at * 3 (D.Minn. Mar. 30, 2011)(“Novus objects that the potential damage to the integrity of its franchising system constitutes irreparable harm. It argues that failure to enjoin the Deans will cause franchisees around the country to violate their non-compete agreements. However, this potential is similarly speculative. The Magistrate Judge appropriately noted that success on the merits of the claim is the proper deterrent for this potential harm, not injunctive relief.”).

After considering all of the arguments made by both parties for and against the need for a preliminary injunction to enforce the non-compete clause, we conclude the district court did not abuse its discretion when it determined Novus failed to show irreparable harm under the particular facts involved in this case. “In order to demonstrate irreparable harm, a party must show that the harm is certain and great and of such imminence that there is a clear and present need for equitable relief.” Iowa Utils. Bd. v. Fed. Commc'ns Comm'n,109 F.3d 418, 425 (8th Cir.1996). At a minimum, Novus's failure to seek injunctive relief for a period of seventeen months after Dawson quit paying royalties “vitiates much of the force of [Novus’s] allegations of irreparable harm.” Beame,434 U.S. at 1313. Furthermore, we question whether Novus's alleged injuries, i.e., “a loss of customers or customer goodwill,” Appellant's Br. at 36, are truly “irreparable” in the sense that they could not be addressed through money damages if Novus is successful following a trial on the merits. Cf.  Gen. Motors Corp. v. Harry Brown's, L.L.C.,563 F.3d 312, 319 (8th Cir.2009)(affirming a district court's denial of a preliminary injunction where the district court “did not clearly err” by finding harm from “lost customer relationships was equivalent to a claim of lost profits” and “could therefore be compensated” as money damages).FN3

FN3.Having decided the delay involved in this particular case rebuts any inference of irreparable harm to which Novus may have been entitled under Minnesota law, we do not address Dawson's claim that Minnesota law conflicts with the Supreme Court's decision in eBay.

Ultimately, our decision to affirm is driven by the relevant standard of review. We have not identified any relevant factors the district court should have considered but did not, nor any improper factors that should not have been considered but were, nor any clear error of judgment on the part of the district court. The abuse-of-discretion standard means “the court has a range of choice, and that its decision will not be disturbed as long as it stays within that range and is not influenced by any mistake of law.” Kern,738 F.2d at 970;see also  Aaron v. Target Corp.,357 F.3d at 774(referring to this “range-of-choice” principle when reviewing a preliminary injunction order).“That the denial of [a motion for a preliminary injunction] would not have been reversible as an abuse of discretion, however, does not mean that granting it was such an abuse. The very concept of discretion presupposes a zone of choice within which the trial courts may go either way.” Kern,738 F.2d at 971. Here, the fact that the district court chose not to enforce the non-compete clause as part of a preliminary injunction does not fall outside the range of the district court's permissible choices.

IV

We lack appellate jurisdiction over the appeal of the order dismissing CarMike, and therefore dismiss that part of the appeal. We likewise dismiss the appeal of the order granting Dawson an extension of time to file an answer for the same reason. We affirm the district court's preliminary injunction order.

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