Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Pa.: Default judgment stands against terminated auto body repair franchisees, (Mar 24, 2014)

By Linda O’Brien, J.D., LL.M.

Two terminated franchisees of an auto body and repair franchise were unable to demonstrate good cause for setting aside the entry of a default judgment in an action brought against them by their former franchisor, the federal district court in Philadelphia has ruled (Maaco Franchising, Inc. v. Gaarder, March 21, 2014, Ludwig, E.).

Maaco Franchising is in the business of franchising Maaco Auto Painting & Bodyworks Centers, which specialize in motor vehicle painting, body repair, and other automotive services. Its franchise agreements grant franchisees the right to use trade names, service marks, and trademarks and to operate under the Maaco proprietary business system. The agreements condition the grant of any franchise on the franchisee’s covenant not to compete, during and for a period following termination of the franchise agreement.

In 2006, Maaco entered into a franchise agreement with James Gaarder, who assigned his rights in the agreement to MCC Humble Auto Paint, Inc. The agreement required Gaarder and Humble Auto to pay Maaco a weekly royalty fee, submit weekly reports of gross receipts, and contribute to an advertising fund. After the defendants failed to make the required payments, Maaco sent Gaarder and Humble Auto a notice of default and, ultimately, a notice of termination of the franchise agreement.

Gaarder and Humble Auto continued to operate their Maaco center. Maaco filed suit, seeking to enforce the termination of the franchise agreement, collect the amounts due under the agreement, and enjoin them from operating their Maaco center and using the Maaco system and marks, in violation of the Lanham Act and the franchise agreement’s post-termination covenants. The case was temporarily suspended while the defendants filed several unsuccessful petitions in bankruptcy. After Gaarder and Humble Auto failed to answer Maaco’s complaint or respond to its motion for preliminary injunction pursuant to court order, a default was entered against them. The defendants subsequently moved to set aside the default.

The court found that the defendants failed to present a potentially meritorious defense and engaged in willful conduct aimed at delaying the case. An entry for default may be set aside for good cause and factors to consider are whether (1) the plaintiff will be prejudiced; (2) the defendant has a meritorious defense; and (3) the default was the result of the defendant’s culpable conduct.

Prejudice. Maaco was prejudiced by the years of delay in recovering the unpaid fees under the franchise agreement, the court determined. To set aside the default and proceed with litigation would further delay relief to Maaco and allow the defendants to continue to ignore their obligations and covenants under the franchise agreement. Moreover, the defendants readily admitted that they did not pay the required fees and have been operating a competing location notwithstanding the post-termination of the franchise agreements.

Meritorious defense. The defendants asserted as a defense that Maaco violated the franchise agreement by failing to provide adequate training and ongoing support for the defendants’ efforts to succeed. As a result, they were no longer required to abide by the terms of the agreement. The court noted that the defendants’ defense was not meritorious because, even if the defendants could prove a breach by Maaco, they could not excuse their admitted continued operation of the Maaco franchise without payment of the required fees.

Culpable conduct. Finally, the defendants conduct was culpable, according to the court. The defendants unsuccessfully sought bankruptcy protection multiple times, which suggested a purpose to delay the case so they could continue to operate their auto body business. Their financial difficulties did not excuse their failure to file an answer to the complaint when ordered to do so. The defendants’ argument that they failed to understand the exigency of the matter until after the default was entered was rejected as suspect. The long delay leading to a court order requiring the filing of an answer was attributable solely to the defendants’ questionable conduct in bankruptcy court. Thus, their conduct to delay prosecution of Maaco’s case could be reasonably characterized as willful and in bad faith, the court concluded.

The case is No. 11-3087.

Attorneys: Constantine Thomas Fournaris (Wiggin And Dana LLP) for Maaco Franchising, Inc. Jeffrey M. Goldstein (Goldstein Law Firm PLLC) for James M. Gaarder and MCC Humble Auto Paint, Inc.

Companies: Maaco Franchising, Inc.; MCC Humble Auto Paint, Inc.

Cases: FranchisingDistribution PennsylvaniaNews