Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D.C. Minn.: Terminated franchisees barred from continuing to operate businesses, using franchisor trademarks, (Jul 3, 2013)

By John W. Arden, J.D., LL.M.

Terminated Pro-Cuts hair salon franchisees were preliminarily enjoined from continuing to operate hair salons at five former franchise locations—using the franchisor’s trademarks, trade dress, and confidential information—in violation of a noncompetition clause in the franchise agreements, the federal district court in St. Paul, Minnesota, has ruled (RPC Acquisition Corp. v. J&D World Corp., July 2, 2013, Frank, D.).

Besides being ordered to cease operations at the five locations, the franchisees were directed to return confidential information and promotional materials to the franchisor, de-identify the former franchise locations, and transfer telephone numbers and listings of the franchised locations to the franchisor.

Background. J&D World Corp. signed five franchise agreements with franchisor RPC Acquisition Corp. to operate five Pro-Cuts salons in the Dallas-Fort Worth metropolitan area. J&D’s owners—Tyler Huynh and Nghia Trinh Huynh—were personal guarantors of each of the franchise agreements.

These agreements were validly terminated, after RPC discovered that J&D and its owners were diverting products out of the franchise locations and failing to pay amounts due under the franchise agreements, according to the court. The defendants further refused to provide RPC with access to their books and records.

The five franchise agreements all included confidentiality provisions, requiring the franchisee to protect franchisor information and know-how; non-competition agreements, preventing terminated franchisees from being involved in competing enterprises for two years, within six miles of any franchise locations; and intellectual property provisions, requiring the franchisees to cease using the franchisor’s trademarks and confidential information upon termination. The franchise agreements specifically required franchisees to cancel their telephone numbers after termination or expiration of the agreements.

The defendants continued to operate hair salons in four of their former franchise locations in violation of the post-term non-competition agreements and continued to use Pro-Cut trademarks and materials, in violation of the franchise agreements, the court found.

Preliminary injunction. Based on the defendants’ post-termination conduct, the federal district court issued a preliminary injunction.

The court held that RPC had a substantial likelihood of succeeding on the merits of its claims that the defendants were infringing the franchise trademarks, that defendants were violating the post-term non-competition provisions of the franchise agreements, that the post-term non-competition agreements were reasonable in duration and geographic scope, and that the post-term non-competition agreements were necessary to protect RPC’s good will and confidential information.

The court further held that RPC demonstrated that it would be irreparably harmed without the injunctive relief. Specifically, continued operation of the former franchised businesses would: (1) damage the goodwill in the Pro-Cuts brand; (2) result in the defendants’ use of confidential information to unfairly compete with other Pro-Cuts franchisees; and (3) embolden other franchisees to breach their franchise agreements.

The balance of hardships weighed in favor of the franchisor, which would be irreparably harmed if a preliminary injunction did not issue. In contrast, issuance of the injunction would only bar the defendants from continued breaches of their contractual obligations, the court noted.

Finally, a preliminary injunction would be consistent with the strong public policy of protecting parties’ right to contract, protecting valid trademarks, and protecting a company’s confidential information and customer goodwill.

Attorney fees and costs. In addition to issuing a preliminary injunction, the court found that RPC was entitled to reasonable attorney fees, costs, and disbursements in bringing this action, as provided by the franchise agreements. RCP was directed to submit its reasonable attorney fees, costs, and disbursements incurred to this date.

The case is Civil No. 13-1400 (DWF/LIB).

Attorneys: Haley L Waller Pitts (Fredrickson & Byron, PA) for RPC Acquisition Corp.

Companies: RPC Acquisition Corp.; J&D World Corp.

Cases: FranchisingDistribution MinnesotaNews