Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E. D. Mich.: 1-800 Water Damage wins injunction against former franchisee for continued use of trademarks, (Aug 2, 2024)

By Wendy Biddle, J.D.

In violation of the franchise agreement, franchisors continued to use trademarks in an online review platform.

After a franchisee stopped paying royalties and required equipment, it rebranded its franchise, directly competing with the franchisor in the same geographic market as its former franchise in violation of its franchise agreement. Additionally, the franchisee continued to use the franchisor’s trademarks. The federal district court in Detroit, Michigan granted the franchisor’s motion for a preliminary injunction precluding use of the franchisor’s trademarks, concluding all the factors weighed in favor of granting the injunction, including the likelihood of success on the breach of contract claims (1-800 Water Damage International, LLC v. Restoration RX, LLC, No. 2:24-cv-10110-LVP-CI (E.D. Mich. July 31, 2024)).

1-800 Water Damage International LLC (1-800 Water Damage) is a property damage and restoration company that has 180 franchises across the U.S. In 2019, the plaintiff and the defendants entered into a franchise agreement where the defendants would operate a franchise in the Salt Lake City, Utah area.

The franchise agreement required the defendants to operate the franchise for ten years, contribute 2% of their gross sales to a national marketing fund monthly, required the defendants to purchase certain equipment, and pay monthly royalties on certain services. The agreement also contained non-compete provisions precluding the defendants from operating a competing business in the same geographic territory or from using 1-800 Water Damage intellectual property.

In 2023, the plaintiffs provided the defendants with a purchase order for $23,000 in equipment, which the defendants approved and received. However the defendants never made any payments on the equipment. Four months after receiving the equipment, the plaintiffs called to discuss a payment plan. Later that same day, the defendants emailed the plaintiff informing them they would like to know how to exit their contract and asking for a statement of contributions and expenditures for the national marketing fund, which the plaintiffs failed to provide.

In December 2023, the defendants informed the plaintiff they were closing the franchise because the current model was unsuccessful and they had to hire their own marketing firms to market the business, despite the national marketing fund. They discussed options, including waiving the defendant’s royalty obligations, but not agreement on the termination of the franchise was reached.

In January 2024, the defendants rebranded their business to Restoration RX and offered competing restoration services. The defendants continued to use the plaintiff’s trademarks and their Google Business Profile, Facebook pages, and online reviews.

1-800 Water Damage filed suit asserting claims for breach of contract, unjust enrichment, and trademark infringement. 1-800 Water Damage then filed a motion for a preliminary injunction, which the defendants opposed.

In order to prevail on a motion for preliminary injunction, the plaintiff must show that there is a likelihood of success on the merits; the irreparable harm which could result without the requested relief; the possibility of substantial harm to others; and the impact on public interest.

Likelihood of success. The defendants dispute the validity of the non-compete provisions, asserting that the plaintiff did not have any legitimate interests. The court found that an employer’s reasonable competitive business interest include preventing anti-competitive use of confidential information, like customer lists and pricing. Because the plaintiff’s customers and customer lists were a protected interest, the court found that the non-compete provision is likely enforceable.

First substantial breach rule. The defendants next argued that there is no likelihood of success for the plaintiffs because the first substantial breach rule precludes relief. The defendants argued that the plaintiffs were the first to breach the contract when they failed to provide the advertising statements as required by the franchise agreement. However, the court concluded that the defendants likely committed the first substantial breach when they failed to pay for the required equipment, and then also failed to pay for the required royalties for three consecutive months. Additionally, the court found that the failure to provide the marketing statements was likely not a substantial breach because it did not negatively impact the defendants’ obligations or cause them to violate the terms of the agreement. The court therefore found the first substantial breach rule to be inapplicable.

Unclean hands. The defendants also argued that the unclean hands doctrine precluded relief. The court also found this doctrine inapplicable. After requesting the marketing statements, the parties tried to come to an agreement on moving forward, including the plaintiff offering to waive the overdue royalty payments. That was not an indication of bad faith, the court found. The failure to produce the marketing statements did not render the plaintiff’s hands unclean to disqualify it from equitable relief. The court therefore found that the plaintiff has shown a likelihood of success on the breach of contract claims.

Irreparable harm. The defendants maintained a Google Business Profile when they were operating their 1-800 Water Damage franchise. That profile contained reviews. When the defendants rebranded, they simply changed the name on their Google Business Profile, but retained the reviews written for when it was a 1-800 Water Damage franchise. This caused a mix of reviews for both businesses to be together, likely causing customer confusion, especially if the reviews for the new business were negative and the old franchise were positive. The plaintiff argued that without an injunction, the defendants will continue to benefit from unfair competitive advantage by diverting business that belongs to 1-800 Water Damage franchises. The court agreed that there would be an unfair competitive advantage and consumers could be confused over what the association is with 1-800 Water Damage and Restoration RX. The court concluded that the factor weighs in favor of issuing an injunction.

Balance of harm to others. The court next looked at the harm that the defendants could face if the injunction were granted and balanced that with the harm the plaintiff would suffer without the injunction. The plaintiff argued that the only harm that could arise would be the defendants and its consumers and would be self-inflicted. The court agreed, finding that the harm would be minimal because the injunction would be narrowly tailored to preclude the use of the 1-800 Water Damage intellectual property. The factor was deemed to weigh in favor of granting the injunction.

Public interest. The court concluded that the public interest would be served by fair competition and the enforcement of laws. This factor also weighed in favor of granting the injunction.

Security bond. As to the appropriate bond, the plaintiff argued that through the franchise agreement, the defendants waived any right to damages in the event of a wrongfully issued injunction, making bond unnecessary. The court agreed that the parties agreed to waive the bond agreement through the franchise agreement.

Attorney fees. Lastly, the plaintiff sought attorney fees and costs associated with the injunction. However, the court held that the award of attorney fees is typically reserved for the end of litigation, but a party may receive relief through an award called pendente lite. However, the party seeking relief must comply with the procedural rules, specifically Local Rules 54.1.2(a)-(b). The plaintiffs failed to do so, so the court denied the request for attorney fees.

The court granted the preliminary injunction concluding that all the factors weighed in favor of issuing the preliminary injunction to prevent further violations of the non-compete provisions on the use of the plaintiff’s trademarks.

The Case is No. 2:24-cv-10110-LVP-CI.

Judge: Parker, L.

Attorneys: Louis G. Fiorilla (Saxton & Stump LLC) for 1-800 Water Damage International LLC. Mark W. Peyser (Howard & Howard Attorneys PLLC) for Restoration RX LLC and Gerald E. Cleveland.

Companies: 1-800 Water Damage International, LLC; Restoration RX LLC

Cases: FranchisingDistribution MichiganNews