Antitrust Law Daily Wrap Up, FRANCHISING AND DISTRIBUTION—EDPa: Ex-AAMCO Franchisee’s Motion for Reconsideration of Preliminary Injunction Order Denied, (Nov 20, 2012)

By Tobias J. Gillett, J.D., LLM

The federal district court in Philadelphia has denied reconsideration of its order granting AAMCO Transmissions, Inc.’s motion for preliminary injunction against its former franchisee Paramvir Singh (AAMCO Transmissions, Inc. v. Singh, November 16, 2012, Kelly, R.). The order enjoined Singh from operating a competing automobile transmission repair business within ten miles of any AAMCO franchise location, pursuant to the non-compete clause in AAMCO’s franchise agreement with Singh.

Singh had previously operated an AAMCO transmission repair franchise in Bellevue, Washington, until an AAMCO audit of his business uncovered “widespread and continuing under reporting of sales” in an effort to avoid paying franchise fees to AAMCO on those sales. Following the audit, Singh sold his franchise to AAMCO’s affiliate company in exchange for an agreement to release him from his debt to AAMCO. Despite a non-compete clause in his franchise agreement barring him from “engag[ing] in the transmission repair business within a radius of ten (10) miles of the former center and any other AAMCO center” for two years after termination of the agreement, Singh opened an independent transmission repair business in Bothell, Washington, within ten miles of three AAMCO centers.

AAMCO filed a motion to obtain a preliminary injunction enforcing the clause, and on October 1, 2012, the district court entered an order granting the motion. In reaching this result, the court determined that AAMCO would be likely to succeed on the merits of its action to enforce the clause, since the covenant not to compete was “reasonably limited in both time and territory.” The court, applying Pennsylvania law, determined that a non-compete clause lasting two years, extending only to transmission repair, and covering an area within a ten-mile radius of any AAMCO center was sufficiently limited in both duration and geographic scope. The court stated that irreparable harm to AAMCO would result from loss in value of its franchises if the court did not enforce the clause. The harm to AAMCO outweighed the harm to Singh, since Singh was aware of the potential harm when he signed the agreement and when he opened a competing business. The court also found that enforcement of the clause would support the public interests in “ensuring the contractual rights and obligations of the parties are upheld,” and in “maintaining the viability of franchise systems.” The court also noted that Singh had neglected to attend the proceeding.

In denying Singh’s motion for reconsideration, the court applied the Third Circuit standard from Harsco Corp. v. Zlotnicki, 779 F.2d 906 (3d Cir. 1985), under which a “party seeking reconsideration must demonstrate at least one of the following grounds: ‘(1) an intervening change in the controlling law; (2) the availability of new evidence that was not available when the court granted the motion . . . or (3) the need to correct a clear error of law or fact or to prevent manifest injustice.” In applying this standard, the court first observed that Singh had dropped his initial claim that he was denied his constitutional due process rights due to an alleged failure to deliver notice of the hearing to his correct address, and therefore did not consider that claim.

The court moved on to address Singh’s argument that the court in its prior decision had “totally ignored the overbreadth analysis” provided by the court in a separate case, AAMCO Transmission, Inc. v. Dunlap, 2011 WL 3586225, CCH Business Franchise Guide ¶ 14,680 (E.D. Pa. Aug. 16, 2011), which had construed an identical non-compete clause and concluded that “a ten-mile geographic prohibition from the site of the center at issue was reasonable, ‘as opposed to ten-miles from any AAMCO center.’” The court noted that neither that case nor a New Jersey district court case, which had found the same non-compete clause reasonable and enforceable, was binding on the court.

Moreover, the court observed that the Dunlap court had cited a decision which found the AAMCO clause “unduly burdensome,” but limited it to the Denver and Aurora metropolitan areas rather than finding it wholly unenforceable. The court noted that limiting the clause in Singh’s case to just the Puget Sound metropolitan area would still bar him from operating his Bothell business. Furthermore, the Dunlap court also cited a decision that found a ten-mile radius from the franchisee’s location reasonable, but declined to decide whether a ten-mile radius from all franchises would be reasonable. The court concluded that it was “certainly not established law in this circuit, and even in this district, that a non-compete covenant which prohibits a former franchisee from operating a like business within a radius of ten miles of any other franchise is unreasonable and not enforceable.” The court also noted that under Pennsylvania law covenants not to compete are strictly construed, and cited several Pennsylvania cases finding a ten-mile geographic area reasonable.

As Singh could not establish any of the Harsco Corp. grounds for reconsideration, the court denied his motion.

The case is Civil Action No. 12-2209.

William B. Jameson (Cottman Transmission Systems, LLC) for AAMCO Transmissions, Inc. Paramvir Singh, pro se.

Cases: FranchisingDistribution PennsylvaniaNews