Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Mich.: Wireless toy franchisor states claims against former franchisee over noncompete clause violation, (Apr 14, 2015)

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

A wireless toy company’s counterclaim and third-party complaint that a franchisee, and the franchise he formed, breached their franchise agreement was not subject to dismissal, according to the federal district court in Detroit (AKB Wireless, Inc. v. Wireless Toyz Franchise, LLC, April 13, 2015, Cox, S.). The franchisees sought motions to dismiss on the grounds that the franchisor failed to state a claim for declaratory judgment and that it did not state a cause of action for breach of contract.

Background. An individual, Alan Branham, entered into a franchise agreement with Wireless Toyz Franchise, LLC (Toyz) in order to open up a Wireless Toyz company. Branham later formed AKB Wireless, Inc. and assigned it all of his rights and obligations under the franchise agreement. While the franchise agreement was in effect, Branham and his wife formed a business entity to operate a cell phone store which operated as a competing wireless business. Toyz asserted declaratory judgment and breach of contract claims against both AKB and Branham (collectively “franchisees”) on the basis of, among other things, a violation of the agreement’s non-competition and/or confidentiality provisions.

Declaratory judgment. In both of its motions to dismiss, the franchisees asserted that Toyz failed to state a claim for declaratory judgment because it had an adequate remedy at law. The court rejected this assertion primarily on the basis of Rule 57 of the Federal Rules of Civil Procedure which expressly states that “The existence of another adequate remedy does not preclude a declaratory judgment that is otherwise appropriate.” The court, however, denied this portion of the motions to dismiss without prejudice because it had the discretion to grant declaratory judgment and, given that both Toyz and the franchisees had breach of contract claims, it might determine that declaratory relief is not appropriate.

Breach of contract. The franchisees also asserted that Toyz failed to state a cause of action for breach of contract because their alleged conduct could not constitute a breach of the franchise agreement. They asserted that Section 16 of the franchise agreement, which prohibits a franchise operator, its owners and their immediate families from engaging in competition with Toyz, either directly or indirectly, without the consent of Toyz, applies only upon the termination or expiration of the franchise agreement and, since none of these events had occurred, they were not bound by the provisions of this section. The court, however, rejected this assertion because Section 16 expressly provided that its provisions applied “during the term of the agreement.”

In his reply brief, Banham asserted that, even if Toyz was permitted to assert a breach of contract claim based on the non-compete provision, it should not be permitted to bring any other breach of contract claims and the court should go on to analyze their arguments as to any additional breaches. The court determined that there was no need to address arguments as to other alleged breaches because, even if they did have merit, Toyz had still sufficiently pleaded a breach of contract cause of action and such arguments would be more appropriate for the summary judgment stage of litigation.

The case number is: 14-13424.

Attorneys: John T. Hermann (John T. Hermann, Attorney at Law) for AKB Wireless, Inc. Brian Witus (Jaffe, Raitt, Heuer & Weiss PC) for Wireless Toyz Franchise, LLC.

Companies: AKB Wireless, Inc.; Wireless Toyz Franchise, LLC

Cases: FranchisingDistribution MichiganNews