Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Ky.: Franchisee denied injunction enjoining termination, franchisor interference, (Sep 3, 2015)

By Michael Menzhuber, J.D., LL.M.

A LeafGuard gutter system franchisee was denied a preliminary injunction, prohibiting the franchisor from terminating their distributorship agreement and from interfering with the franchisee’s sale of its territory and assets to another franchisee. The federal district court in Lexington, Kentucky denied the injunction because the franchisee had not demonstrated a likelihood of success on the merits of its action against the franchisor or irreparable injury in the absence of injunctive relief. The court also concluded that the public interest was not affected and that a balancing of harms did not weigh in favor of either party (LeafGuard of Kentuckiana, Inc. v. LeafGuard of Kentucky, LLC, September 2, 2015, Reeves, D.).

Background. LeafGuard of Kentuckian, Inc. (L-K) operated a franchise to manufacture, sell and install the LeafGuard gutter system pursuant to distributorship agreement with the franchisor, Englert, Inc. The distributor agreement, which was renewable in two-year terms, could be terminated if the L-K failed to pay royalties or attain its annual lineal footage sales target. The distributor agreement also contained potentially competing provisions regarding whether Englert’s consent was required for L-K to sell its franchise.

L-K did not meet its lineal footage sales requirements in 2012, 2013 and 2014. Representatives of Englert indicated that they would give L-K an opportunity to turnaround its business. However, correspondences between the parties during late 2014 and early 2015 led to the conclusion that the distributor agreement would be terminated by April 1, 2015, if L-K’s business had not improved dramatically. Anticipating this likely occurrence, L-K entered into a purchase agreement with LeafGuard of Kentucky (LGK) to purchase all of L-K’s assets, including the franchise. During their initial discussions, LGK’s owner was not aware of the ongoing dispute between L-K and Englert or that L-K’s distributor agreement was in danger of being terminated within a few days.

L-K and Englert agreed that their distributor agreement gave Englert a right of first refusal. However, they disagreed about whether the agreement required Englert’s consent for a sale of a franchise. Each party cited a provision of the agreement in support of their position.

Proceeding on its belief that consent was required, Englert offered its consent conditioned on L-K relinquishing certain assets to pay-off past due royalties. Englert also disclosed that it would not renew the distributor agreement at the conclusion of the current two-year term, which would end January of 2017. On June 25, 2015, LGK’s owner gave notice that it no longer wished to pursue purchasing L-K’s franchise and requested a return of its escrow deposit. A few weeks later, on July 14, 2015, Englert terminated the distributor agreement.

L-K filed suit against Englert, LGK, and LGK’s owner, alleging that Englert: (1) breached the distributor agreement; (2) breached its duty of good faith and fair dealing; and (3) tortuously interfered with the purchase agreement involving the sale between L-K and LGK. Contemporaneous with the filing, L-K moved for injunctive relief to prohibit Englert from terminating the distributor agreement and to prevent Englert from interfering with the sale of its territory and assets to LGK.

Injunctive Relief. The court noted four factors to be considered when evaluating motions for injunctive relief: (1) the likelihood of success on the merits; (2) whether the injunction would save the plaintiffs from irreparable injury; (3) whether the injunction would cause substantial harm to others; and (4) whether the public interest would be served by the injunction.

With respect to L-K’s claims that Englert breached the distributor agreement and the covenant of good faith and fair dealing by unilaterally terminating the agreement, the court decided that there was no likelihood of success on the merits because: (1) the distributor agreement specifically allowed for termination, without notice, upon L-K’s default; (2) L-K’s argument that Englert’s offer to cure was “commercially unreasonable” was not likely to withstand the plain language of the agreement; (3) the testimony of L-K’s owner regarding his understanding of the general release signed in September 2014 weighed against an L-K’s express estoppel argument; and (4) L-K’s equitable estoppel argument was undermined by evidence that L-K was continuously warned about the repercussion of default for months prior to termination. The court also determined there was no likelihood of success on merits of L-K’s tortious interference claims.

L-K argued that, based on its interpretation of the distributor agreement, Englert’s consent was not required for the sale of LGK. However, Englert asserted its consent was required and, like L-K, offered a legitimate explanation for its interpretation of the agreement. The court concluded that proof that L-K “might prevail” fell short of the “likelihood to prevail” standard.

The court determined that L-K would not suffer irreparable harm in the absence of injunctive relief. L-K argued that it would lose its valuable reputation and cited two cases in support of its theory that the loss of goodwill of a business can support a claim for injunctive relief. The court, however, distinguished these cases because the goodwill at issue could not be assigned a monetary value, while L-K was seeking to enforce a purchase agreement with LGK that specifically assigned a value of $303,350 for good will. The court also noted that L-K had introduced comprehensive profit and loss figures and determined that these figures would provide an adequate remedy if L-K prevailed on some or all of its claims.

The court found that, with respect to Englert’s alleged interference with the sale to LGK, a lost profits calculation could also be performed. It noted that the purchase agreement with LGK provided for a sale price of $520,000. Because the contract had a monetary value, interference with the contract could be assigned a monetary value.

With respect to substantial harm, Englert argued that it would suffer such harm if it was forced to continue its business relationship with L-K. However, the court noted that L-K had struggled to meet the demands of the distributor agreement for three years. Therefore, a few more months of low performance by L-K would not be a substantial harm. The court also determined that a delay in Englert’s plan to open an office in the disputed territory was not a substantial harm because there was no evidence that Englert would lose any investment if its plan was delayed.

Finally, the court concluded that the public interest was not affected because, regardless of whether injunctive relief was granted, homes in the area would be able to find a LeafGuard gutter system supplier.

The case is No. 5:15-237-DCR.

Attorneys: Jessica Katherine Winters (The Getty Law Group, PLLC) for LeafGuard of Kentuckiana, Inc. William W. Allen (Gess, Mattingly & Atchison, PSC) for LeafGuard of Kentucky, LLC. Adam M. Smith (Stites & Harbison PLLC) for Englert, Inc.

Companies: LeafGuard of Kentuckiana, Inc.; Englert, Inc.

Cases: FranchisingDistribution KentuckyNews