Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—3d Cir.: Terminated franchisees’ transfer of competing lawn care business violated consent injunction, (Apr 14, 2016)

By Michael Menzhuber, J.D., LL.M.

A district court did not abuse its discretion in finding that terminated Lawn Doctor franchisees violated a consent injunction when they transferred a competing lawn care business to a third-party, according to the U.S. Court of Appeals in Philadelphia. While the court’s award of attorney fees and costs was proper, an award of sanctions was an abuse of discretion because it wrongfully shifted the burden onto the franchisees to prove that they did not transfer Lawn Doctor’s customer list to the third party (Lawn Doctor, Inc. v. Rizzo, April 13, 2016, Per Curiam).

Lawn Doctor, Inc. alleged that Joseph and Anamaria Rizzo failed to abide by a noncompetition agreement after the termination of their franchise agreement. The parties entered into a settlement agreement which modified the restrictive covenant. After a magistrate judge determined that the Rizzos’ “irrigation services” business fell within the definition of “competitive business” as the term was used in the modified covenant, the settlement agreement was entered in favor of Lawn Doctor and its terms were then memorialized in a consent injunction.

Lawn Doctor later sought relief in district court, arguing that the Rizzos were violating the consent injunction by operating a competing lawn care business, Advanced Enviro Care, Inc. (AEC). The Rizzos argued that they had sold AEC to a third-party, Daniel Wilkerson. The district court ordered the new business to cease using any Lawn Doctor logos or phone numbers and awarded Lawn Doctor both attorneys’ fees and costs. After Lawn Doctor filed a motion for sanctions, the district court issued a letter ordering finding the Rizzos in contempt and awarded a sanction based on the fair market value of Lawn Doctor’s customer list.

The Rizzos argued that district court erred in determining that they violated the non-compete clause and that the civil contempt award was arbitrary. They also challenged the award of attorneys’ fees and costs.

The court determined that the district court did not abuse its discretion in finding that the Rizzos violated the consent injunction because: (1) they acted as a competitive lender when they transferred ownership of AEC to Wilkerson in exchange for a promissory note; and (2) AEC provided “irrigation services,” which fell within the modified covenant’s definition of a “competitive business.”

However, the district court abused its discretion by: (1) shifting the burden to the Rizzos to prove that Lawn Doctor’s customer service list had not been transferred as part of the deal with Wilkerson; and (2) basing its sanctions award on the fair market value of the customer list, which it assumed had been transferred to Wilkerson. Consequently, the court vacated and remanded the district court’s award of sanctions for consideration of compensatory damages consistent with the evidence of the record.

Finally, the court found that the district court’s decision to award attorneys’ fees as compensation for the contempt was not an abuse of discretion because the Rizzos willfully disregarded the consent injunction.

The case is No. 14-1759.

Attorneys: Jesse C. Ehnert (Paris Ackerman & Schmierer LLP) for Lawn Doctor Inc. Joseph Rizzo, pro se.

Companies: Lawn Doctor Inc.

Cases: FranchisingDistribution DelawareNews NewJerseyNews PennsylvaniaNews