Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Ariz.: Bathroom remodeling franchisee enjoined from violating non-compete clause, (Jul 19, 2016)

By Jody Coultas, J.D.

Former ReBath, LLC franchisee New England Bath Incorporated (NEBI) was enjoined by the federal district court in Phoenix from violating a covenant not to compete and from falsely advertising work done while still affiliated with ReBath (ReBath, LLC v. New England Bath Inc., July 15, 2016, Rayes, D.).

ReBath, a bathroom remodeling franchisor, discovered that franchisee NEBI conducted business outside of its exclusive territory. NEBI refused to pay damages for breaching the franchise agreements. After the agreements expired, NEBI also purportedly failed to comply with the post-expiration obligations. ReBath filed suit, and moved for an injunction to bar NEBI from continuing to operate a competing remodeling business in violation of the non-compete clause in the franchise agreement.

ReBath was likely to succeed on the merits of its breach of contract claim, according to the court. The covenant not to compete agreed to by NEBI prohibited NEBI from operating a competing business within 50 miles of the franchise territory for one year. While Arizona law does not look favorably on covenants not to compete, such clauses that protect legitimate business interests are legal and enforceable. Legitimate interests include protecting confidential information, trade secrets, and business goodwill. NEBI did not dispute that after operating a ReBath franchise for a number of years, it switched its name. In this case, the covenant not to compete protected ReBath’s legitimate business interest in keeping franchisees from simply switching names overnight. The language prohibiting NEBI from engaging in bathroom remodeling services was also not overly broad, according to the court, as it did not prohibit NEBI from providing other remodeling services or plumbing services. Finally, the court dismissed NEBI’s argument that the geographic restrictions were unenforceable.

The court also found that ReBath was likely to succeed on the merits of its false advertising claim. ReBath argued that NEBI had engaged in false advertising by customer testimonials on its website because the work being discussed was done using ReBath’s products and methods. According to the court, the goodwill acquired from the remodeling work at issue belonged to ReBath, and NEBI’s advertisement of that goodwill as belonging to the new business was false advertising. The court also noted that the doctrine of fair use, asserted by NEBI, did not apply in this case and did not protect NEBI’s use of the testimonials.

The remaining preliminary injunction factors also weighed in favor of issuing an injunction, according to the court. ReBath established that it would suffer irreparable harm absent an injunction based on the possibility of the loss of customers and goodwill. Courts often find that franchises will suffer irreparable harm when a former franchisee is allowed to ignore covenants not to compete. The balance of harms and public interest also tipped in favor of ReBath and an injunction. NEBI would not be harmed by an injunction, and the public has an interest in the enforcement of valid contracts.

NEBI was enjoined from using ReBath’s trademarks, suggesting an affiliation with ReBath, operating a bathroom remodeling business within 50 miles of its former franchise territory, and from using ReBath’s trade secrets.

The case is No. 2:16-cv-01700-DLR.

Attorneys: Donna Howard Catalfio (Bergin Frakes Smalley & Oberholtzer PLLC) for ReBath LLC. Andrew Borders Turk (Clark Hill PLC) for New England Bath Inc.

Companies: ReBath LLC; New England Bath Inc.

Cases: FranchisingDistribution Advertising ArizonaNews