Source: http://www.mulcahyllp.com/blog/provingafranchisorsirreparableinjurytoobtainapreliminaryinjunction.html
Timestamp: 2019-04-20 16:57:57+00:00

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When a franchisor grants a franchise, it licenses, among other things, its trade name and business operating system. By doing this, the franchisor trusts its franchisees, area representatives, and sub-franchisors with its most valuable asset—the brand. A key feature of a successful franchise system is the brand consistency amongst all of the franchised and company-owned units. For this reason, it is incumbent upon franchisors to enforce the terms of their franchise agreements.
In some instances, a franchisee’s breach of the franchise agreement, if not immediately stopped, may lead to injuries with no adequate remedy. Or, in other words, irreparable harm. For example, a franchisee may sign the agreement and begin developing the unit, then decide to instead operate it as a competing business at the last minute.
Area representatives and sub-franchisors also may engage in conduct that requires immediate action. A franchisor grants its area developers substantial control over its brand; it trusts the area developer with issuing franchises and even collecting royalties. Such a grant in discretion and power may also lead to irreparable injury. For instance, an area developer may sell franchises outside of its territory, thereby infringing on another’s territory. Or, a sub-franchisor may continue to hold itself out to be the franchisor or its agent. Where a franchisee’s or an area developer’s conduct threatens immediate and irreparable harm to the franchise system, the franchisor needs to stop the bleeding. A motion for a preliminary injunction to enjoin the injurious conduct is usually the answer.
In advocating for injunctive relief, franchisors ought to emphasize two important factors that are typically inherent in litigation with franchisees. First, often times these cases implicate the franchise system generally. Second, a franchisee’s conduct may also constitute trademark infringement, especially where an ex-franchisee continues to operate its business using the franchisor’s marks. As set forth below, these two factors can play a substantial role in the adjudication of a motion for a preliminary injunction.
Although the test applied to a motion for a preliminary injunction may vary across state and federal courts, there are generally four factors. The moving party must show (i) a likelihood of success on the merits, (ii) that it will suffer irreparable injury, (iii) on balance, the moving party will suffer a greater harm if the injunction is denied, and (iv) that the public will not be harmed by the issuance of the injunction. The sin quo non of injunctive relief, however, is the likelihood of irreparable injury absent the issuance of the order.
Franchising provides for a specialized analysis of this element. Given the particulars of the franchisee-franchisor relationship, franchisors must protect themselves from (i) customer or vendor diversion to competing businesses, (ii) misappropriation of trade secrets, (iii) damage to their brand, and (iv) damage to their franchise system and relationship with other franchisees. The cases bellow illustrate how courts analyze irreparable injury to a franchisor.
In Jay Bharat Developers, Inc. v. Minidis (“Jay”), 167 Cal.App.4th 437 (2008), the court granted a motion for a preliminary injunction precluding a terminated sub-franchisor from representing itself as such and from using the Red Brick Pizza trademark. The franchisor, Red Brick Pizza (“Red Brick”), terminated the sub-franchisor agreement for various violations of the franchise agreements. Id. at 441. The sub-franchisor “refused to honor the termination of the [sub-franchisor agreement] and continued to receive royalties from its former franchisees and withhold them from Red Brick.” Id.
After finding that Red Brick had satisfied its burden to prove the likelihood of success, the court found that Red Brick successfully proved irreparable harm. Id. at 446. The sub-franchisor’s breaches included failure to pay royalties and advertising fees, allowing its California franchise disclosure document registration to lapse, operating franchises outside of its territory, and failure to report income, among others. Id. at 442. The court found that, in their totality, the sub-franchisor’s breaches of the franchise agreements were of such character that Red Brick would suffer harm that “was more than monetary.” Id. at 446-47. Red Brick’s harm was “the lack of control over their Red Brick Pizza mark.” Id.
As this case illustrates, courts take note of the franchise relationship and a franchisor’s interest in protecting what could be a national or worldwide franchise system. A rogue sub-franchisor or franchisee could harm a franchisor’s brand in any given market in ways that cannot be remedied by an award of damages.
Courts also consider the effects to a franchisor’s ability to re-franchise an area of a terminated franchisee, and the franchisor’s credibility in the eyes of other existing franchisees. In Petland, Inc. v. Hendrix (“Petland”), No. 204CV224, 2004 WL 3406089 (Sept. 14, 2004 S.D. Ohio), the court granted a preliminary injunction precluding a former franchisee from operating a competing pet store. In that case, the franchisor, Petland, Inc. (“Petland”), terminated the franchise agreement due to the franchisee’s failure to remit royalty fees. Id., 2004 WL 3406089 *1. The underlying franchise agreement contained a non-compete clause forbidding the franchisee from operating a competing business within 15 miles during the franchise term and after any termination. Id. Following the termination, the franchisee continued to operate the pet store under the franchisor’s mark, Petland, and eventually operated a competing pet store under a different mark at the same location as its previous franchise. Id. The franchisor filed a motion for a preliminary injunction, seeking to enforce the non-compete provision. Id.
After finding that Petland proved the likelihood of success on the merits, the court analyzed whether the franchisor would suffer irreparable injury in the absence of an injunction. Id., 2004 WL 3406089, at *6. Petland argued that the “continued operation of the [competing store] presents irreparable injury that monetary damages cannot remedy.” Id. The court agreed. The competing store was serving customers that “might otherwise shop at a Petland franchise.” Id. Moreover, Petland’s ability to sell a franchise in that area was complicated by the presence of the competing business. Id. Finally, the court found that the franchisor’s credibility with its franchisees would be harmed if it did not enforce its non-competition covenant. Id.
Thus, the court found that a former franchisee’s breach of a post-termination non-compete provision harms the franchisor in two ways. First, a competing business would serve what were once customers of the franchise, and by extension, customers of the franchisor’s brand. The franchisor would not only lose the sales, but the goodwill built by relationships with consumers and the local market.
Second, the court considered the adverse consequences to the franchisor’s franchise system. The market for a franchise in that affected area is hindered by the presence of a competing store. Potential franchisees consider the potential profitability of a location when evaluating a franchise investment. One of the most important considerations of a potential franchisee is the presence of competition. As a result of the presence of a competing business, the franchisor’s efforts to re-franchise the area are complicated. In some markets, the presence of a competing business may make the franchisor’s efforts to sell a franchise impossible.
Furthermore, as the Petland court noted, a franchisor’s “failure to enforce its non-competition covenant would undermine its credibility with its franchisees, the relationships upon which its entire business model exists.” 2004 WL 3406089, at *7. A franchisor’s reputation with existing and potential franchisees is as important as its reputation with the end consumer.
In short, the analysis of irreparable injury is not confined to the specific underlying commercial relationship. The franchise system and its brand should be paramount considerations in the preliminary injunction enquiry.
The brand is the most valuable asset of a franchisor, and (typically) why franchisees decide to open a franchise. After all, consumers associate the products or services of a brand with the logo, marketing campaigns, and the brand-name. Franchisors protect their brand by registering and enforcing their trademark rights under federal and state laws. In some cases, a franchisee’s or a sub-franchisor’s conduct also constitutes trademark infringement. As a result, irreparable harm to a franchise system also implicates irreparable harm to its trademark. It is for this reason that trademark law proves to be a useful tool in the franchisor’s arsenal.
There is abundant case law finding that trademark infringement is, by its nature, an irreparable harm. See e.g., Rodeo Collection, Ltd. v. West Seventh, 812 F.2d 1215, 1220 (9th Cir. 1987) (“Once the plaintiff in an infringement action has established a likelihood of confusion, it is ordinarily presumed that the plaintiff will suffer irreparable harm if injunctive relief does not issue.”); Church of Scientology Int'l v. Elmira Mission of the Church of Scientology, 794 F.2d 38, 41 (2d Cir. 1986) (“Our cases clearly say that establishing a high probability of confusion as to sponsorship almost inevitably establishes irreparable harm”); International Kennel Club, Inc. v. Mighty Star, Inc., 846 F.2d 1079, 1092 (7th Cir. 1988) (“ trademark infringement [damages] are by their very nature irreparable”) (citation omitted); General Mills, Inc. v. Kellogg Co., 824 F.2d 622, 625 (8th Cir. 1987) (“Since a trademark represents intangible assets such as reputation and good-will, a showing of irreparable injury can be satisfied if it appears that [plaintiff] can demonstrate a likelihood of consumer confusion.”). It is therefore incumbent on the franchisor’s litigator to also draw from this body of law. After all, in many cases, a preliminary injunction against a franchisee or sub-franchisor is purposed to prevent injury to the brand.
The court’s decision in Krispy Kreme Doughnut Corp. v. Satellite Donuts, LLC 725 F.Supp.2d 389, 391 (S.D.N.Y. 2010) illustrates the application of the above presumption in franchise cases. In that case, Krispy Kreme terminated a franchisee’s two franchise agreements when the franchisee failed to pay its fees. Id., at 392-93. When it filed its action, it also moved for a preliminary injunction. Id., at 393. The franchisee argued that Krispy Kreme failed to demonstrate irreparable injury because it failed to explain how continued operation would damage its trademarks and goodwill. The court found this argument “unavailing.” Id., at 397. Citing the holding of Church of Scientology Int'l, 794 F.2d 38, the court noted that irreparable injury necessarily follows from the franchisee’s unauthorized and unlawful use of Krispy Kreme’s trademarks. The court granted the preliminary injunction.
In concert, alluding to broader interests in protecting a franchise system and a franchisor’s brand creates a powerful narrative for a court to understand not only why injunctive relief is necessary, but also the nuances in the franchisor-franchisee relationship.
This article was prepared by Filemon Carrillo (fcarrillo@mulcahyllp.com), of the Irvine law firm of Mulcahy LLP. Mulcahy LLP is a boutique litigation firm that provides legal services to franchisors, manufacturers and other companies in the areas of antitrust, trademark, copyright, trade secret, unfair competition, franchise, and distribution laws.
 See e.g., Integrated Dynamic Solutions, Inc. v. VitaVet Labs, Inc., 6 Cal.App.5th 1178, 1183 (2016); Nationwide Biweekly Administration, Inc. v. Owen, 873 F.3d 716, 730 (9th Cir. 2017); First Western Capital Management Co. v. Malamed, 874 F.3d 1136, 1141 (10th Cir. 2017).
 As a practical matter, most preliminary injunctions occur at the beginning of a lawsuit; it is often the conduct sought to be enjoined that gave rise to the litigation. Where it is advisable that a franchisor pursue a preliminary injunction, these proceedings provide the added benefit of educating the court early on about franchising generally.
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