May 6, 2015 - Franchise Articles by |

RE/MAX of New England, Inc., and RE/MAX, LLC, Plaintiffs v. Prestige Real Estate, Inc., d/b/a LAER Realty Partners, Stacey Alcorn, and Andrew F. Armata, Defendants, U.S. District Court, D. Massachusetts, July 7, 2014.

A real estate brokerage franchisor RE/MAX of New England, Inc. was denied a temporary restraining order or preliminary injunction after one of its franchisees terminated its relationship with RE/MAX and started to do business under a different name. According to the Court, in denying RE/MAX's motion for temporary restraining order and preliminary injunction, the real estate franchisor failed to demonstrate a likelihood of success on the merits of any of its claims. The franchisee, Prestige Real Estate, Inc. entered into 13 franchise agreements with RE/MAX, each for a different real estate office. Three of the agreements had expired prior to the dispute and had been continued on a month-to-month basis. The other ten agreements were active when, in April 2014, Prestige sent RE/MAX a demand letter terminating their relationship. The franchisee, Prestige, subsequently started doing business as LAER Realty Partners.

In rejecting the franchisor’s request for preliminary injunction, the Court began its analysis by setting out the rule that “A covenant not to compete is enforceable if it (1) is necessary to protect a legitimate business interest; (2) is reasonably limited in time and space; and (3) is consonant with the public interest.” The important twist in the case law in Massachusetts on this issue is that “Courts will not enforce non-compete provisions if their sole purpose is to limit ordinary competition.”

The franchisor relied for its case on the violation of two different covenants not to compete: “in-term” covenants with respect to the ten franchises with unexpired agreements, and post-term covenants for the three offices operating month-to-month after the expiration of agreements. With regard to the in-term covenant, it obligated the franchisee to refrain from owning a non-RE/MAX real estate services business or affiliating with any other business that offers goods and services in competition with the plaintiffs. The franchisee argued that it was no bound under this provision because it had legitimately terminated all of the agreements as of April 14, 2014, when the franchisee sent the franchisor the Chapter 93A demand letter.

Alternately the franchisee argued that RE/MAX’s unfair acts or practices and breach of the implied covenant of good faith and fair dealing created a constructive termination of the agreements. The franchisor rejected this argument and contended that the franchisee had no right to terminate any of the agreements and was still bound by them. On this issue, because the case was being heard at an early procedural stage, the Court held that “It is not possible to make a reliable assessment of either side’s position on the current record.”

However, the Court did flesh out this issue further when it stated that “Even if the agreements are still in force, the defendants persuasively argue that the non-compete provisions limit only ordinary competition and are, therefore, unenforceable as a matter of law. Certain interests, such as the need to protect confidential information, trade secrets, and good will, warrant the use of a covenant against competition.” Unlike another case pointed to by RE/MAX, the Court held that this case did not involve the franchisee signing documents acknowledging the “proprietary and confidential nature of the information he was acquiring.” Nor did the case involve the RE/MAX franchise have “access to operating manuals, recipes, marketing and promotion strategies, new product development, and the locations of sites for new stores.”

Incredibly, on the slim record, the Court actually ruled that there were no trade secrets involved with the RE/MAX franchise relationship:

There are no trade secrets involved here. The plaintiffs’ best argument is that the defendants have the benefit of knowing RE/MAX general business strategies. Given the nature of the real estate brokerage business, however, there is reason to wonder whether any good will generated by the various offices is due to RE/MAX branding and methods or the work and personal relationships of the agents. At the very least, the record does not convincingly support the former possibility.

Finally, regarding the in-term covenant, the Court held that RE/MAX has not “shown that the prospect of harm that is irreparable in the necessary sense. That is, they have not shown the inadequacy of a damages remedy.”

With regard to the post-termination covenants, RE/MAX argued that the three offices where franchise agreements had expired are bound by post-term non-compete covenants. Unlike almost all other franchise agreements, the RE/MAX agreements did not contain a post-term covenant. The plaintiffs, nevertheless, claimed that §2.E of the agreement, dealing with holdover franchisees, bound the franchisee to terms introduced in newer versions of the standard franchise agreement, as they might evolve. In this regard, Section 2.E of the relevant franchise agreement stated that, upon expiration, the franchise “will be deemed to be operating on a month-to-month basis under the terms and conditions of the franchise agreement and other agreements being used by us at the time of expiration of the Term, and from time-to-time thereafter ….”

After considering RE/MAX’s argument, the Court stated that “If the plaintiffs are correct, then §14.1 of current agreements will apply to those three offices.” Section 14.1 stated:

You agree that upon termination, expiration, or non-renewal of this Agreement, neither you nor your Owners … will, for a period of one (1) year from the effective date of such termination, expiration, or non-renewal … directly or indirectly operate, manage, own or have any ownership interest in any business that is a licensee or franchisee of any franchising organization or network that competes with [RE/MAX] …

The Court then refused to find that the franchisee was currently operating in association with a competing franchise real estate network. “Though they may be part of the Prestige “network,” the offices are apparently simply places where Prestige conducts business. They are not franchisees or licensees of Prestige, nor of any other organization.” The Court bolstered its conclusion with an explanation of the purpose of the provision in the franchise agreement: “The provision is aimed at preventing former RE/MAX franchisees from becoming licensees or franchisees of a “franchising organization” or a “franchising network.” LAER is not a licensee or franchisee of any franchising organization or network.”

Last, the franchise agreement required the franchisee, upon termination, to assign all telephone numbers and domain names to the RE/MAX. The franchisee argued that RE/MAX never owned any of the telephone numbers because Prestige purchased them, and in any event, there is “no risk of consumer confusion.” The Court agreed with the franchisee in that “success in the real estate industry is likely founded more on relationships between potential buyers and sellers, on the one hand, and individual agents and brokers, on the other.” The Court continued that “It is also likely that personal references from friends and acquaintances are a major source of new business.” At the end of the day, the Court refused to order a transfer of the phone number since the Court did not see any consumer confusion, and found that “the importance of telephone numbers in generating new business is less substantial than other factors.”

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