Jun 6, 2024 - Judge’s Distribution and Franchise Rulings from the Front Lines, Recent Published Cases by |

In the competitive realm of sports franchising, conflicts frequently emerge over the interpretation and enforcement of contractual terms. This is demonstrated by the case between National Arena League, Inc. (“National Arena League”), and WTX Indoor Football, LLC (“WTX”), the owner of the indoor football team the West Texas Desert Hawks. Nat’l Arena League, Inc. v. WTX Indoor Football, LLC, 2024 WL 2000647 (N.D. Ga. May 6, 2024). National Arena League sought a preliminary injunction against WTX to prevent it from joining and participating in the Arena Football League (AFL). The Court’s decision hinged on whether WTX’s actions constituted a breach of the Membership Agreement (“MA”) and whether National Arena League was entitled to injunctive relief.

National Arena League entered into a MA with WTX on August 12, 2022, for the team, then known as the West Texas Warbirds, to operate in Odessa, Texas, and compete in National Arena League’s indoor football league. According to the MA, the team would be National Arena League’s exclusive franchisee within a 35-mile radius of Odessa for a three-year term. The MA prohibited the team and its owners from participating in any other men’s professional or semi-professional arena or indoor football league in the United States for three years after the termination of the MA. Additionally, the MA granted National Arena League the right to terminate the MA upon any violation by WTX.

In August 2023, after only one year in National Arena League’s league, WTX left to join the AFL, which National Arena League claimed was a material breach of the MA, causing irreparable harm. National Arena League filed a motion for a preliminary injunction to enjoin WTX from joining the AFL, marketing its participation in the AFL, and playing in the AFL for the 2024 season.

The Court examined the requirements for granting a preliminary injunction: (1) substantial likelihood of success on the merits, (2) irreparable harm unless the injunction is issued, (3) the balance of harms favoring the movant, and (4) the injunction being in the public interest.

First, the Court found that National Arena League was substantially likely to succeed on the merits. The MA’s non-compete clause, which barred WTX from participating in other leagues, was considered enforceable under Georgia law, which treats franchise agreements similar to employment contracts. The Court deemed the non-compete provision reasonable in terms of time, territory, and scope, with the territorial restriction being nationwide due to the nature of National Arena League’s operations. While the three-year duration was longer than the typical two years considered reasonable, the Court noted that Georgia law allowed for modification (blue-penciling) to reduce the period to two years if necessary.

Second, the Court recognized that National Arena League would suffer irreparable harm without an injunction. National Arena League’s Co-Executive Director, Richard Bertz, testified that WTX’s move to the AFL would harm National Arena League’s brand by creating the perception that National Arena League’s league was inferior, potentially causing other teams to leave and diminishing National Arena League’s fan base and market presence in Texas.

Third, the Court balanced the harms and found that the potential damage to National Arena League’s market presence and reputation outweighed the harm to WTX from not participating in the AFL. While WTX would face monetary losses and other harms from withdrawing early from the AFL, these were consequences of WTX’s breach of the MA.

Fourth, the Court concluded that granting the injunction would not be adverse to the public interest. Upholding freely negotiated contracts serves the public interest, and enforcing a covenant not to compete was deemed consistent with this principle.

Finally, the Court addressed the requirement for security under Federal Rule of Civil Procedure 65, which mandates that a party seeking a preliminary injunction must provide security in an amount deemed appropriate by the Court to cover potential costs and damages incurred by the party wrongfully enjoined or restrained. After careful consideration of the potential financial impacts and the nature of the dispute, the Court set the security amount at $50,000. National Arena League promptly tendered this amount, demonstrating their commitment to adhering to legal requirements and their confidence in the validity of their claims against WTX. This security serves as a safeguard, ensuring that WTX is protected against any undue losses should the preliminary injunction be later found unwarranted.

In conclusion, the Court granted National Arena League’s motion for a preliminary injunction, finding that WTX’s actions likely breached the Membership Agreement (“MA”). WTX and associated parties were enjoined from participating in the AFL, engaging in related marketing activities, and maintaining publicly accessible promotional materials reflecting AFL participation. The Court’s decision underscored the enforceability of non-compete clauses in franchise agreements and highlighted the importance of upholding contractual obligations to prevent irreparable harm to business interests.

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