Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—E.D. Wis.: Franchisee convicted of fraud granted preliminary injunction against termination, (Oct 14, 2014)

By Edward L. Puzzo, J.D.

The franchisee of a secondhand clothing franchise, convicted of misdemeanor fraud in receiving state health insurance assistance, was entitled to a preliminary injunction against the franchisor’s efforts to terminate his franchise based on the conviction, the federal district court in Green Bay, Wisconsin has ruled (Romper Room, Inc. v. Winmark Corporation, October 10, 2014, Griesbach, W.).

Winmark Corporation was the franchisor of Once Upon a Child (OUAC) secondhand clothing stores. Greg Gering was an OUAC franchisee, operating stores in Green Bay and Appleton, Wisconsin for over ten years.

In July 2014, Gering pleaded guilty to collecting more than $25,000 in benefits from BadgerCare—a government-subsidized health insurance program for Wisconsin citizens who earned too much to qualify for Medicaid but not enough to buy insurance on their own without help—over three years, despite earning more than $600,000 during that period. In a plea agreement with the state, Gering pleaded guilty to three counts of misdemeanor theft by fraud and was sentenced to 30 days in jail and ordered to pay $30,000 in fines. On July 18, 2014, a story was reported in a newspaper account carrying the headline “Once Upon a Child owner sentenced to jail for BadgerCare fraud.”

Three days after the newspaper account appeared, franchisor Winmark notified Gering that it intended to terminate the OUAC franchise pursuant to a provision in the franchise agreement allowing termination for a franchisee’s pleading guilty to violating a law that adversely impacted the reputation of the business or materially impaired the goodwill associated with the “Once Upon a Child” name or marks. Winmark stated that termination would occur after 90 days, on October 22, 2014, and that it viewed the default as incurable.

Gering commenced this action, contesting the termination on the basis of a lack of good cause for termination and a failure to provide 60 days for cure, under the Wisconsin Fair Dealership Law (WFDL). Of immediate concern, Gering moved for a preliminary injunction prohibiting Winmark from terminating the franchise agreements during the pendency of the litigation. The court agreed to impose the preliminary injunction.

Phases of analysis. The court explained that, in deciding whether to grant a motion for a preliminary injunction, there was a threshold phase and a balancing phase to the analysis.

Irreparable harm. The threshold phase required a showing that, absent the preliminary injunction, movant would suffer irreparable harm. The court found that irreparable harm to the franchisee was shown because, if the preliminary injunction were not granted, the franchise would be terminated within two weeks and the franchisee’s stores would be closed, presenting the danger of insolvency of the franchisee and its inability to continue to pay its long-term leases and fund its lawsuit against the franchisor without the income from the business.

Adequate remedy at law. The threshold phase also required a showing that the movant had no adequate remedy at law. If the franchisee’s stores were closed and later reopened, there would be a loss of goodwill and difficulty rehiring employees who would be laid off if they found employment elsewhere in the interim. There was no adequate remedy at law for these damages, the court concluded.

Success on the merits. Finally, the threshold phase required a showing that movant’s claim—that the proposed termination violated the WFDL—had some likelihood of succeeding on the merits. Winmark alleged that Gering’s conviction provided good cause for termination due to its adverse affect on the reputation of the franchised business. Winmark, however, offered little evidence that its “Once Upon a Child” name or marks had been materially impaired, the court stated. Sales in the franchisee’s stores increased since the newspaper story, the court noted. There was no suggestion in the newspaper story that Gering had used his business to commit his crimes. His personal reputation was certainly harmed, but the court could not conclude that the reputation of the franchised business was adversely impacted in any long lasting or meaningful way. The court further stated that it could not say definitively that Gering’s misdemeanor conviction for fraud constituted good cause for termination, because it was unrelated to the profitability of the business. Thus, the court concluded that plaintiff had some likelihood of success on the merits in its lawsuit against the franchisor.

Balancing phase. Since the movant met the requirements of the threshold phase, the court stated that the next phase of the inquiry was balancing the irreparable harm that the movant would endure without the protection of the preliminary injunction against any irreparable harm the nonmoving party would suffer if the court were to grant the requested relief. Here, termination would impact the franchisee by the loss of employment to about 32 employees, possible insolvency, and the loss of ongoing business. Winmark, on the other hand, had already suffered whatever damage to its reputation it was likely to occur. Assuming the franchisee continued to make payments to the franchisor required under the agreement and complied with the remaining provisions of the agreement, the balancing phase weighed in favor of granting the preliminary injunction against the termination, the court concluded.

The case is Civil Action No. 14-C-1217.

Attorneys: Kevin J. Palmersheim (Haley Palmersheim SC) for Romper Room, Inc. and Romper Room II, Inc. Ansis V. Viksnins (Lindquist & Vennum PLLP) for Winmark Corporation.

Companies: Romper Room, Inc.; Winmark Corporation.

Cases: FranchisingDistribution WisconsinNews