Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Conn: Wireless franchisees denied preliminary injunction over withheld royalties, (May 9, 2016)

By Linda O’Brien, J.D., LL.M.

A group of Wireless Zone franchisees were unable to demonstrate irreparable harm in order to obtain preliminary injunctive relief against the franchisor for imposing a new royalty on franchisee reimbursement payments, the federal district court in New Haven, Connecticut has ruled (Family Wireless #1, LLC v. Automotive Technologies, Inc., May 4, 2016, Hall, J.).

Automotive Technologies, Inc. (ATI) is a franchisor of a chain of “Wireless Zone” stores that sell cellular/wireless telephones, wireless accessories, wireless data devices, and wireless service plans. ATI is an agent of Verizon, a wireless telecommunications provider. Under the terms of ATI’s franchise agreement, a customer buys a cellular phone and Verizon service plan from the franchisee, and the service plan contract is assigned to Verizon. Verizon pays ATI a commission, called an “Installment Offset” (IO), which ATI pays to the franchisee as reimbursement for the purchase price of the wireless device sold to the customer. ATI also pays its franchisees “performance incentive payments” (PIPs) for the sale of certain phones.

In May 2015, ATI announced a change to its business model, which included ATI’s imposition and withholding of a five percent royalty on IO payments. ATI indicated that if the franchisees did not agree with the change, ATI would begin withholding PIPs. In September 2015, 42 Wireless Zone franchisees filed suit against ATI, alleging breach of contract, unjust enrichment, and unfair trade practices. Before the court was the plaintiffs’ motion for preliminary injunction, requesting that ATI be prohibited from either withholding the five percent royalty on the IO payments made by Verizon or ceasing to pay PIPs.

The court determined that the plaintiff franchisees failed to show that they would be irreparably harmed absent injunctive relief. First, the franchisor did not seek to terminate the franchise agreements entirely or to withhold the franchisees’ main source of revenue. From financial summaries submitted by certain franchisees, the court calculated that the IO payments made up from 23.76 to 37.23 percent of the franchisees’ total revenues. Accordingly, a five percent royalty would be the equivalent of merely 1.96 percent of the franchisees’ total gross revenue. Similarly, the PIPs were no more than 2.05 percent of the franchisees’ total gross revenue. In the court’s view, the plaintiffs did not appear to be at risk of losing substantially all of their business.

Additionally, the court was unwilling to find irreparable harm, since (1) three franchisees did not provide estimated profit or loss projections for 2016 in order to determine if ATI’s conduct would impact the viability of their business; (2) two franchisees failed to provide any financial data; (3) 11 franchisees projected earning profits in 2016; and (4) the remaining franchisees projected net losses for 2016 without providing financial information on company equity, credit, or cash on hand. Therefore, the plaintiffs failed to show how any projected losses stemming from the withholding of a five percent royalty or PIPs would generate irreparable harm justifying a preliminary injunction, the court concluded.

The case is No. 3:15-cv-01310-JCH.

Attorneys: Briar S. Siljander (Cooper & Riesterer) and Allan P. Hillman (Kern & Hillman, LLC) for Family Wireless #1, LLC and 4 One Enterprises, LLC. Constantine T. Fournaris (Wiggin and Dana LLP) and Homayune A. Ghaussi (Warner Norcross & Judd, LLP) for Automotive Technologies, Inc.

Companies: Family Wireless #1, LLC; 4 One Enterprises, LLC; Automotive Technologies, Inc.

Cases: FranchisingDistribution ConnecticutNews