Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—DMd: Insurance Adjusting Business Franchisee Not Entitled to Injunction Against Termination, (Jun 10, 2013)

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

An insurance adjusting business franchisee—Manuel A. Noya—was not entitled to a preliminary injunction barring franchisor Frontier Adjusters, Inc. and its affiliates (collectively, the “franchisor”) from terminating one of the parties’ 13 existing franchise agreements (“the Original Agreement”) that was due to expire on June 9, 2013, on its own terms because the franchisee failed to demonstrate a clear likelihood of success on the merits of its claims, or an irreparable harm that was actual and imminent, the federal district court in Baltimore has decided. Additionally, Noya was granted leave to file a second amended complaint (Noya v. Frontier Adjusters, Inc., June 7, 2013, Quarles, W.).

Background. The parties entered into their Original Agreement on October 4, 1983. In 2003, the franchisee executed his final option to renew the Original Agreement, and it was due to expire June 9, 2013.

A dispute between the parties developed when Frontier announced implementation of its Frontier Adjusters National and Regional Customer Program (the “FANRCP”) in 2009. According to the franchisee, the changes the franchisor sought to implement through FANRCP would “devastate” his business. In 2013, the franchisee filed this suit, alleging claims such as tortious interference, breach of contract, and RICO. In May, the franchisee filed the instant motions to file a second amended complaint and for injunctive relief.

Second amended complaint. Because the franchisee had already filed an amended complaint, further amendment was possible only with the opposing party’s written consent or with the court’s leave, the court observed. The franchisor did not oppose the motion.

The franchisee sought leave to amend in light of new facts and developments. Amendment was unlikely to prejudice the franchisor, who had yet to be served, the court noted. In addition, the franchisee did not appear to have acted in bad faith. Thus, leave to file a second amended complaint was granted.

Preliminary injunction. To obtain a preliminary injunction, a movant must show: (1) he is likely to succeed on the merits; (2) he is likely to suffer irreparable harm absent relief; (3) the balance of the equities favors him; and (4) injunctive relief is in the public interest.

Only two, breach of contract and civil conspiracy, of the nine counts in the second amended complaint sought injunctive relief, the court noted. Further, the franchisee’s likelihood of success on the conspiracy claim depended on the viability of the other tort causes of action.

The franchisee argued that he was likely to succeed on the merits because “Frontier Adjusters had no basis to terminate” the Original Agreement. Contrary to the franchisee’s assertion, the franchisor has not “terminated” it. To the extent that the franchisee contests the Original Agreement’s June 9, 2013 end date, the Agreement is ending by its own express terms—not because of any action by Frontier.

Moreover, an injunction ordering the franchisor not to terminate the Agreement would expire when the Agreement did. Although the franchisee’s Original Agreement could expire, his Baltimore-based business would be preserved, at least in part, by the agreement he had already executed with a third-party to sell that original franchise, the court determined.

Finally, the franchisee’s remaining 12 agreements with the franchisor were unaffected by the Original Agreement’s expiration. As the franchisee offered no other ground for success on his claims, the likelihood of success was far from clear, according to the court.

The franchisee argued that the Original Agreement’s impending expiration would “cause the immediate and irreparable evaporation of the [franchisee’s 30-year] family business and all value of that business.”

Only one of the franchisee’s 13 franchise agreements with the franchisor would expire on June 9, 2013. The remaining 12 agreements accounted for more than 40% of the franchisee’s annual sales. Moreover, the franchisee had already entered into an agreement to sell the franchise that was the subject of the Original Agreement to a third-party. The franchisor has consented to the sale and waived its right of first refusal, and the buyer has already fulfilled all of the conditions to the sale, including having executed new franchise agreements. Thus, the franchisee did not clearly show that the expiration of the Original Agreement posed a legitimate threat of imminent financial ruin, the court held.

Further, even if imminent irreparable harm had been shown, preliminary injunctive relief would be inappropriate in light of the franchisee’s considerable delay in seeking it. The franchisee knew of the Original Agreement’s expiration date in 2003, when he exercised the final renewal option. The FANRCP, which gave rise to the franchisee’s claims, was announced in 2009 and fully implemented in 2010. The franchisee did not file suit until almost three years later, on March 31, 2013, and waited an additional seven weeks before seeking preliminary injunctive relief.

The case is Civil No. WDQ-13-0965.

Attorneys: Harry M. Rifkin for Manuel A. Noya. Elise Marcela Balkin Ice (Ulmer and Berne LLP) for Frontier Adjusters, Inc.

Companies: Frontier Adjusters, Inc.

Cases: FranchisingDistribution MarylandNews