Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—D. Minn.: Fitness center franchisor awarded injunction to enforce noncompete covenant, halt trademark infringement, (Apr 16, 2014)

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

Fitness center franchisor Anytime Fitness, LLC (AF) was entitled to a preliminary injunction against a former franchisee, its operator Mark Ravich, a competing fitness center, and another individual, enjoining the former franchisee and Ravich from further violations of their covenants not to compete with AF and enjoining the defendants from infringing on AF’s trademarks, the federal district court in St. Paul, Minnesota, has decided (Anytime Fitness, LLC v. Edinburgh Fitness LLC, April 11, 2014, Frank, D.).

Background. After announcing his intention not to renew his franchise, Ravich allegedly opened a Fit 12 (a competing brand of fitness centers) franchise in the location of the former franchise, in violation of the agreement’s noncompete provisions. He allegedly operated the Fit 12 franchise based on the skills, knowhow, and goodwill obtained through operating an AF franchise and with stolen confidential membership information.

AF alleged that consultant Harley Mork and Ravich are involved in Fit 12 Minnetonka. The franchisor claims that Mork uses AF Names and Marks to advertise personal training services at both Fit 12 Minnetonka and the Fit 12 located at the site of the former AF franchise. Fit 12 Minnetonka is located approximately 100 yards from an AF franchise. Finally, AF alleges that the defendants are infringing AF’s trademarks.

The expired franchise agreement between AF and the franchisee contained a noncompete provision prohibiting the franchisee from having any involvement with a competing fitness center located within the franchise’s protected territory, or within 20 miles of any other AF franchise. The agreement also included a personal guaranty provision, requiring Ravish, as signee, to be personally bound to the agreement’s terms.

In addition, a provision was added to the agreement at Ravich’s request that stated, during the agreement’s term, the franchisor would not prevent the owners of the franchisee “from developing, acquiring or owning properties for the use as, or leasing as fitness centers, regardless of when and where built, acquired, or leased.” According to Ravich, this provision was added, because, as an owner and manager of shopping centers, he requires the ability to lease and operate fitness clubs in his other shopping centers, and he is also sometimes required to take over the business of lessees which could include fitness centers.

Preliminary injunction. In determining whether a preliminary injunction should be granted, a court considers four primary factors: (1) the likelihood of the moving party’s success on the merits; (2) the threat of irreparable harm to the moving party; (3) the state of balance between the alleged irreparable harm and the harm that granting the injunction would inflict on the other party; and (4) the public interest.

Likelihood of Success

Breach of noncompete covenant. Under Minnesota law, courts uphold non-compete agreements that are for the protection of the legitimate interest of the party in whose favor they are imposed, reasonable as between the parties, and not injurious to the public, the court noted. The franchisor claimed that Ravich and the former franchisee breached their post-term obligations not to compete. The defendants argued in response that the amendment language relating to Ravich’s in-term ability to operate fitness centers, “regardless of when and where built, acquired, or leased,” essentially nullified the agreement’s noncompete provision relating with respect to Ravich and the former franchisee. The court disagreed.

First, the noncompete covenant was reasonable and enforceable, the court ruled. Second, based on the evidence currently before it, AF established a likelihood of success on the merits of this claim. Ravich and the former franchisee were operating at least one fitness center in the same location in which they formerly operated an AF franchise, and were therefore in violation of the explicit language of the agreement.

The evidence supported AF’s view that the amendment was intended to allow Ravich to continue to engage in his primary business of commercial property ownership and management, thereby allowing him to work with tenants that have a fitness center or to take over the businesses of lessees in his shopping center. This was different, however, from Ravich’s and the former franchisee’s current conduct of owning and operating a competitor’s fitness center in the same location as the previous franchise—this was precisely the type of conduct a noncompete agreement is intended to prohibit, according to the court.

Since Ravich had at least some meaningful role in operating a second fitness center in Minnetonka within the prohibited distance of another AF franchise, he was in violation of the agreement with respect to that fitness center. Therefore, AF showed a likelihood of success on the merits of its breach of covenants claims as to both Fit 12 fitness centers.

Confidential member data. AF argued that Ravich and the former franchisee were misusing data from the former franchise, including all member data, that is otherwise the property of AF based on the franchise agreement’s language.

AF is likely to succeed on the merits of its claim for declaratory judgment that AF has ownership over the confidential membership data to the extent that the defendants are using the membership data to run the Fit 12 at the former franchise location, the court held. AF presented evidence that the defendants took the names and information of members of the franchised center and transferred those members (except those who quit) to their new Fit 12 center. This was not an authorized use of the data and likely a breach of the franchise agreement.

Trademark infringement. To establish a claim for trademark infringement, a plaintiff must show that: (1) it has valid, protectable trademarks, and (2) the unauthorized use of those trademarks creates a likelihood of confusion.

Here, AF adequately demonstrated a likelihood of success on the merits for its Lanham Act trademark infringement claim, the court held. AF presented evidence in the form of photographs and e-mails showing that the defendants continue to use the franchisor’s trademarks at the Fit 12 businesses. AF showed large illuminated signs and the defendants’ use of an anytimefitness.com e-mail address. The likelihood of consumer confusion was high, the court explained.

The defendants claimed that they fully addressed AF’s allegations to date, but only presented an affidavit in support of their claim. While the Court made no judgment as to the veracity of the affidavit, when balanced with the photographic evidence, e-mail evidence, and the franchisor’s affidavits, the court found in favor of the franchisor.

Irreparable harm. Allowing the defendants to continue operating two fitness centers based on knowledge and skills gained from the franchisor could cause damage to the goodwill of the franchisor. AF demonstrated irreparable harm through unfair competition, through misuse of the AF franchise membership information and other AF operational and development information, through loss of goodwill, and through other misuse of its trademarks because customers are now either with Fit 12 and not AF, or are no longer fitness center customers at all, the court reasoned.

AF further established irreparable harm to the franchise system on the whole. If the noncompete covenant was not enforced, the defendants and other franchisees could think that they could take advantage of AF’s knowledge, information, training, and goodwill to build a business, and then leave the system and start their own identical business to avoid paying fees, in the court’s view.

Balance of harms. The balance of the harms weighed in favor of granting a preliminary injunction. As outlined above, AF faced irreparable harm in the form of loss of goodwill, loss of customers, loss of proprietary information, and damage to the integrity and functioning of its franchise system as a whole. On the other hand, the defendants signed an agreement and could not now opt out of it. Any harm suffered was of their own making. Additionally, the defendants themselves did not argue serious financial harm or loss as a result of such a preliminary injunction.

Public interest. It is in the public interest to ensure that parties to franchise arrangements can contract on issues such as non-competition and then expect each other to abide by agreed upon terms. It is further in the public interest to ensure that individuals cannot take and misuse proprietary information and goodwill through a franchising system to their own financial benefit. Though there is a public interest in free competition, the other benefits to the public weighed in favor of a preliminary injunction here, the court determined.

The case is No. 14-348 (DWF/JJG).

Attorneys: James M. Susag (Larkin Hoffman Daly & Lindgren Ltd.) for Anytime Fitness, LLC. Robert M. Smith (Robert M. Smith Law Office) for Edinburgh Fitness LLC.

Companies: Anytime Fitness, LLC; Edinburgh Fitness LLC.

Cases: FranchisingDistribution MinnesotaNews