Another Franchise Decision in One Sentence: Former Franchisee Manager Not Liable for ‘Violating’ Post-term Restrictive Covenant
Pillar to Post, Inc. v. Md. Home Inspectors, Inc., Civil Action No. DKC 18-3761, 2020 U.S. Dist. LEXIS 41327 (D. Md. Mar. 10, 2020)
Where Pillar to Post, Inc. (“Pillar to Post”) a franchisor of home inspection businesses, sued its former franchisee, James Williams (“J. Williams”) and his daughter (Rachel Oslund) for violation of the post-term restrictive covenant, and where the franchisee’s daughter (who had a management role in the franchise before it went out of business) had not herself signed the franchise agreement, and even though the franchise agreement stated that all officers of the franchisee were bound by the franchise agreement, the Court refused to hold the daughter liable for operating an independent business either under the franchise agreement or the “closely related doctrine.”
EXCERPTS OF CASE
Pillar to Post, Inc. v. Md. Home Inspectors, Inc.
United States District Court for the District of Maryland
March 10, 2020, Filed
Civil Action No. DKC 18-3761
2020 U.S. Dist. LEXIS 41327 *; 2020 U.S.P.Q.2D (BNA) 10151; 2020 WL 1158583
Unless otherwise noted, the facts outlined here are set forth in the amended complaint, (ECF No. 23), and construed in the light most favorable to Plaintiff.
Pillar to Post, Inc. (“Pillar to Post”) is a Delaware corporation and franchisor of home inspection businesses.2 In 2006, James Williams (“J. Williams”) began operating a Pillar to Post franchise in Maryland called Maryland Home Inspectors (“MHI”). MHI operated under a franchise agreement (the “Franchise Agreement”) with Pillar to Post. In recent years, J. Williams began to transition management of the business to his daughter, Rachel Oslund.
On December 22, 2017 (the “Petition Date”), MHI filed for bankruptcy. From the Petition Date through October 4, 2018, MHI operated as a debtor-in-possession under the Bankruptcy Code. On September 24, 2018, Ms. Oslund announced that she would be leaving MHI to start a [*3] new home inspection business with Neil Roseman. That business eventually became LodeStar, LLC, and Oslund would eventually bring her previous staff at MHI — Shipe, Johnson, Bennett, White, Vierling, and Richard M. Williams (“R. Williams”) — with her, while her father retired. As a result of Oslund’s departure, MHI announced that it would be closing its business and converting the Bankruptcy Case to Chapter 7.
In a series of e-mail communications and in-person meetings in September and October 2018, Oslund, J. Williams, Roseman, and certain MHI staff members discussed their transition from MHI to LodeStar as a “changeover.” Ms. Oslund retained her old business phone number at MHI explicitly for the purpose of maintaining connections with previous MHI clients at LodeStar. Ms. Oslund also sent an e-mail to a list of customers and referral sources (the “Referral List”) informing them that she and her team would be operating a new business with the “[s]ame great service. Same Passion for radon education. New name.”
On November 30, 2018, the Bankruptcy Court entered an Order Modifying Automatic Stay, which permitted Pillar to Post to try to enforce its termination and non-monetary post-termination [*4] rights under the Franchise Agreement. On December 4, 2018, Pillar to Post sent MHI a Notice of Termination, which terminated the Franchise Agreement.
On December 6, 2018, Plaintiffs filed this suit. (ECF No. 1). On March 11, 2019, Plaintiffs, without objection from Defendants, filed an amended complaint (the “Amended Complaint”). (ECF No. 23). On March 29, 2019, all Defendants, except MHI, filed their motion to dismiss. (ECF No. 26). Plaintiffs responded in opposition, (ECF No. 31), and Defendants replied, (ECF No. 36).
2 Pillar to Post, Inc. also operates as a distinct, Canadian corporation under the same name. The Canadian Pillar to Post, Inc. is also a plaintiff in this action.
- Count I: Breach of Contract
Plaintiffs’ first claim is that Ms. Oslund “breache[d]. . . the non-compete provision in the Franchise Agreement.” (ECF No. 23, at 19). Defendants argue that Ms. Oslund is not bound by the Franchise Agreement. (ECF No. 26-1, at 29). Plaintiffs allege that Ms. Oslund was an officer of MHI, (ECF No. 23, ¶¶ 2, 3, 53), and thus bound by Section 17.3 of the Franchise Agreement. That section states:
Franchisee covenants that, except as otherwise approved in writing by Franchisor, Franchisee, or if the Franchisee [*12] is a corporation or limited liability company, then its officers, directors, shareholders, and members shall not, for a continuous uninterrupted period commencing upon the expiration or termination of this Agreement (regardless of the cause for termination) and continuing for two (2) years thereafter (and in the case of any violation of this covenant, for two (2) years after the violation ceases), either directly or indirectly, for itself, or through, on behalf of, or in conjunction with any person or legal entity, own, maintain, operate, engage in, be employed by, provide assistance to, or have any interest in (as owner or otherwise) any business that offers products or services which are the same as or similar to the products or services offered by the Pillar to Post® home inspection franchise under the Pillar to Post® System within the Non-Exclusive Territory or within 25 miles of the perimeter of the Non-Exclusive Territory.
(ECF No. 26-6, at 30).
Regardless of the language of Section 17.3, Ms. Oslund was not a signatory to the Franchise Agreement, and under Maryland law, “[t]he general rule is that one cannot be held to a contract to which he is not a party.” Mehul’s Inv. Corp. v. ABC Advisors, Inc., 130 F. Supp. 2d 700, 707 (D. Md. 2001). What is more, the Franchise Agreement [*13] itself implies that an additional step can be required of the franchisee to effectuate extension of the provision to non-signatory officers. Section 17.7 states that:
At Franchisor’s request, Franchisee shall obtain and furnish to Franchisor executed covenants similar in substance to those set forth in this Section 17 (including covenants applicable upon the termination of a person’s relationship with Franchisee) from any or all of the following persons: (a) all managers of Franchisee and any other personnel employed by Franchisee who have received or will receive training from Franchisor; (b) all officers . . . of Franchisee[.]
(ECF No. 26-6, at 31). Plaintiffs do not allege that Pillar to Post, as Franchisor, ever requested such a covenant from Ms. Oslund or anyone else. Ms. Oslund, therefore, is not a party to any agreement with a restrictive covenant and is not bound by any restrictive covenant with Pillar to Post.
Plaintiffs seek to circumvent Ms. Oslund’s non-signatory status through the “closely related doctrine.” (ECF No. 31, at 19-20). The closely related doctrine holds “that a non-signatory to a contract may nonetheless be bound by that contract’s forum-selection clause if the non-signatory is so [*14] ‘closely related’ to the dispute that it becomes ‘foreseeable’ that it will be bound.” Peterson v. Evapco, Inc., 238 Md.App.1, 33, 188 A.3d 210 (2018) (emphasis added). The closely related doctrine is irrelevant because it has never, to this court’s knowledge, been applied to a non-compete clause. Plaintiffs’ suggestion that the court in Peterson “held under Maryland law that a non-signatory was subject to a confidentiality doctrine,” (ECF No. 31, at 19), is incorrect. Because Ms. Oslund is not bound by the non-compete clause of the Franchise Agreement, Plaintiffs have failed to state a claim as to this count.