Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Pa.: Injunction suit met amount in controversy threshold, (Sep 9, 2013)

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

Franchisor Soft Pretzel Franchise Systems, Inc.’s action against a terminated franchisee and its two owners for preliminary injunctive relief to enforce a covenant not to compete and an equipment buy-back provision contained in the parties’ franchise agreement satisfied the minimum amount in controversy requirement of federal diversity jurisdiction, the federal district court in Philadelphia has determined (Soft Pretzel Franchise Systems, Inc. v. Taralli, Inc., September 5, 2013, Surrick, R.). The franchisee’s motion to dismiss was denied.

Background. After terminating the franchisee, Taralli, Inc., for alleged nonpayment of royalty, advertising, and legal fees, the franchisor informed the franchisee and its owners, Steven and Lisa Pisasale, that it intended to exercise its right, pursuant to the franchise agreement, to purchase the franchisee’s equipment, including a proprietary pretzel stringing machine. The defendants refused to sell the equipment to the franchisor and continued to operate a competing pretzel business out of the location of the former franchise. The franchisor initiated arbitration proceedings against the franchisee and owners, requesting permanent injunctive relief and $60,000 in damages for breach of the franchise agreement.

The franchisor also filed the instant suit, requesting injunctive relief pending the outcome of the arbitration, the court noted. The defendants contended that the franchisor could not establish that the amount-in-controversy exceeded the statutory $75,000 threshold.

Analysis. The Third Circuit has held that “the amount in controversy in a petition to compel arbitration or appoint an arbitrator is determined by the underlying cause of action that would be arbitrated.” Jumara v. State Farm Ins. Co., 55 F.3d 873, 877 (3d Cir. 1995). Although the instant case was not an action to compel arbitration, that reasoning was instructive in determining the jurisdictional amount, the court explained.

Here, the franchisor requested preliminary injunctive relief pending the outcome of the arbitration proceeding. The preliminary injunction was the first step in a litigation which sought as its goal the same permanent injunctive relief, in addition to damages. Accordingly, the court looked to the amount in controversy claimed in the underlying arbitration proceeding.

In the arbitration proceeding the franchisor: (1) requested monetary damages as a result of the breach of the franchise agreement; (2) sought to enforce the franchisor’s right to purchase the franchise equipment, including the proprietary pretzel stringing machine; and (3) sought to permanently enjoin the defendants from the continued operation of a pretzel business at the former franchise location, and from any further violations of the covenant not to compete clause in the parties’ agreement.

With respect to request one, the franchisor claimed that the defendants paid approximately $15,000 per year in royalties. At the time of the termination of the agreement, the defendants had three years and six months left in the franchise term. Thus, the franchisor sought $52,500 in lost future royalty payments.

The franchise agreement stated that the franchisor would pay “book value” for a franchisee’s equipment upon termination of the franchise agreement. Book value is defined as the amount paid for the property less depreciation, using a straight line depreciation method on a ten year depreciation schedule, the court observed. The defendants purchased the equipment for $125,000 in 2006. Pursuant to the depreciation formula, the franchisor asserted that the equipment was now worth $50,000.

The franchisor valued its third request at $20,000—the initial franchise fee paid by the defendants. This amount when combined with the $52,500 estimate of unpaid royalties, and the $50,000 estimated value of the equipment, far exceeded the $75,000 jurisdictional threshold, the court reasoned. Therefore, without making an exact determination as to the value of the damages or other injunctive relief requested, the court was compelled to conclude that the amount in controversy requirement was satisfied and that the court had jurisdiction over the subject matter of this suit.

The case is Civil Action No. 13-3790.

Attorneys: Jeffrey C. Zucker (Surrin Zucker Steinberg & Wixted, PC) for Soft Pretzel Franchise Systems Inc.

Companies: Soft Pretzel Franchise Systems, Inc.

Cases: FranchisingDistribution PennsylvaniaNews