Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—8th Cir.: Refusal to enforce glass repair franchise agreement’s noncompete clause was not an abuse of discretion, (Aug 5, 2013)

By Peter Reap, J.D., LL.M.

The federal district court in Minneapolis did not abuse its discretion in refusing to enforce a noncompete clause in a franchise agreement between automotive glass repair business franchisor Novus Franchising, Inc., and franchisee Michael Dawson, the U.S. Court of Appeals in St. Louis has decided (Novus Franchising, Inc. v. Dawson, August 5, 2013, Bye, K.). Thus, the lower court’s preliminary injunction was affirmed. In addition, the appellate court lacked jurisdiction over the franchisor’s appeal of both the district court’s order dismissing the franchisee’s company, CarMike, Inc., and the district court’s order granting the franchisee an extension of time to file an answer.

Dawson, the franchisee, stopped paying the royalties due under the 2008 franchise agreement in October 2010. He alleges he was unable to pay the royalty fees because Novus granted a franchise in his territory to another person, rendering it impossible for him to pay the minimum franchise fees.

On October 21, 2011, a full year after Dawson stopped paying royalties, Novus notified him it was terminating the 2008 franchise agreement, the court noted. On February 29, 2012, Novus filed suit against Dawson and CarMike in federal district court in the District of Minnesota. The suit asserted claims for breach of the franchise agreement, conversion of Novus's equipment, trademark infringement, violation of the Minnesota Deceptive Trade Practices Act, unjust enrichment, unfair competition, and a demand for an accounting. With respect to CarMike, Novus alleged Dawson was "a corporate officer of CarMike" and that Dawson "entered into the Franchise Agreement with a Minnesota-based corporation, carried on an extensive business relationship with a Minnesota corporation, and his breaches of contract have given rise to injuries in the State of Minnesota."

On March 26, 2012, over 17 months after Dawson stopped making royalty payments, Novus filed a motion for a preliminary injunction seeking enforcement of the non-compete provisions of the franchise agreement and seeking to prohibit Dawson from using Novus's marks and products in his ongoing automotive glass repair business. Novus also requested a default judgment because Dawson had not responded to the complaint.

The district court dismissed CarMike from the suit for lack of personal jurisdiction after concluding Novus did not allege the corporation had any relationship to Dawson's franchise with Novus. The district court stated "Novus has not alleged any independent contacts that CarMike, Inc. has had with Minnesota, relying instead on Dawson's actions to establish jurisdiction over CarMike, Inc. However, Novus has not shown that Dawson was acting as CarMike, Inc.'s agent when he entered into a franchise agreement with Novus."

The district court granted Novus's request for a preliminary injunction to prohibit Dawson from using Novus's marks and products. The district court did not, however, grant Novus's request to enforce the 2008 franchise agreement's noncompete clause as part of the preliminary injunction. The district court determined "Novus has not shown that it will suffer irreparable harm if Dawson continues to operate his business without using Novus products or services, nor has Novus shown that the balance of the harms or the public interest weighs against allowing Dawson to continue to operate his business without Novus marks or products." The district court also gave Dawson 60 days to file an answer to the complaint. Dawson later retained an attorney and filed an answer.

On appeal, Novus contended the district court erred in refusing to enforce the non-compete provisions as part of the preliminary injunction issued against Dawson, erred in dismissing CarMike for lack of personal jurisdiction, and erred in granting Dawson an additional 60 days in which to file an answer.

Dismissal of Carmike. The district court included the dismissal of CarMike in its order addressing Novus's request for injunctive relief, and the dismissal had the practical effect of denying Novus a preliminary injunction against CarMike. The district court did not, however, enter a certification under Rule 54(b) of the Federal Rules of Civil Procedure with respect to CarMike's dismissal. Absent a Rule 54(b) certification, an order dismissing one party for lack of personal jurisdiction while allowing suit to continue against the remaining defendants is not a final, appealable order, the court noted.

In Carson v. American Brands, Inc., 450 U.S. 79 (1981), the Supreme Court recognized a distinction between orders that specifically deny injunctive relief and those orders that merely have the practical effect of doing so. Carson requires a litigant to show the order might have some serious, perhaps irreparable, consequence and that the order can be effectually challenged only by immediate appeal. The order dismissing CarMike for want of personal jurisdiction was subject to the Carson test because it did not specifically deny an injunction against CarMike, but had the practical effect of doing so, according to the appellate court.

The order dismissing CarMike for lack of personal jurisdiction did not satisfy Carson's requirements because the dismissal order would not result in irreparable consequences if it was not immediately appealed, the court determined. CarMike's dismissal did not prevent Novus from seeking injunctive relief against CarMike in a court where personal jurisdiction over the corporation should not be disputed, such as a state or federal court in Virginia, the court reasoned. In addition, as Novus itself argued, the injunction against Dawson applies to those "in active concert or participation" with Dawson, which certainly would include CarMike if Dawson caused CarMike to use Novus's marks and products in violation of the injunction. Thus, CarMike's dismissal did not result in irreparable consequences such that an immediate appeal was required to effectually challenge the district court's decision.

The order dismissing CarMike would also be reviewable if it were "inextricably intertwined" with the district court's partial grant and partial denial of Novus's claim for injunctive relief. The issue whether Minnesota courts have personal jurisdiction over CarMike is an analytically separate inquiry from whether Novus is entitled to injunctive relief against Dawson or CarMike. The resolution of Novus's appeal of the preliminary injunction did not "necessarily resolve" the question whether the district court erred in dismissing CarMike for lack of personal jurisdiction, the court held. Thus, the appellate court lacked jurisdiction over Novus's claim that the district court erred in dismissing CarMike for lack of personal jurisdiction.

Extension of time to file answer. Novus's appeal of the district court order granting Dawson an additional 60 days to file an answer was an interlocutory decision that clearly did not fall within the contours of 28 U.S.C. § 1292(a)(1), and thus there was appellate jurisdiction over the claim only if it was inextricably intertwined with the properly reviewable claim involving the preliminary injunction.

The resolution of the question whether the district court abused its discretion in refusing to enforce the noncompete clause as part of its injunctive relief did not necessarily resolve the question whether the district court abused its discretion when it gave Dawson an extension of time in which to answer the complaint. Thus, this part of the appeal was dismissed for lack of appellate jurisdiction.

Refusal to enforce noncompete clause. In refusing to enforce the 2008 franchise agreement's non-compete clause, the district court focused on the irreparable harm factor. Novus claimed the district court abused its discretion when it determined Novus would not suffer irreparable harm because Minnesota courts infer irreparable harm from the breach of a valid and enforceable noncompete clause. Dawson countered that Novus was not entitled to an inference of irreparable harm in this case for two reasons.

First, Dawson argued a recent Supreme Court decision undermines Minnesota's rule of inferring irreparable harm. In eBay, Inc. v. MercExchange, L.L.C., 547 U.S. 388 (2006), the Supreme Court rejected a "general rule that courts will issue permanent injunctions against patent infringement absent exceptional circumstances." Dawson argues eBay's holding requires courts to view as suspect any general rule creating a presumption or an inference in favor of automatically imposing an injunction. Second, Dawson argued the long delay between the time he stopped paying royalties and the time Novus finally sought injunctive relief—a period of 17 months—rebutted any inference of irreparable harm Novus may have had under the particular facts of this case.

In addition to these two arguments countering Novus's claim that it was entitled to a presumption of irreparable harm under Minnesota law, Dawson also contended the particular harm Novus alleged, damage to the integrity of its franchise system, was not irreparable because it was too speculative.

After considering all of the arguments made by both parties, the district court did not abuse its discretion when it determined Novus failed to show irreparable harm under the particular facts involved in this case, the appellate court ruled. At a minimum, Novus's failure to seek injunctive relief for a period of 17 months after Dawson quit paying royalties vitiated much of the force of Novus's allegations of irreparable harm. Furthermore, the court questioned whether Novus's alleged injuries, i.e., "a loss of customers or customer goodwill," were truly "irreparable" in the sense that they could not be addressed through money damages if Novus was successful following a trial on the merits.

The case is No. 12-2982.

Attorneys: Kay Nord Hunt (Lommen & Abdo) for Novus Franchising, Inc. Matthew Joseph Goggin (Carlson & Caspers) for Michael L. Dawson.

Companies: Novus Franchising, Inc.; CarMike, Inc.

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