Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—EDMich: Health Club Franchisor Would Not Be Irreparably Harmed By Violation of Noncompete, (May 2, 2013)

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

Health club franchisor Curves International, LLC, would not be irreparably harmed by a terminated franchisee’s continued violation of a restrictive covenant in the parties’ franchise agreement because money damages would compensate the franchisor and its large system was not seriously threatened, the federal district court in Bay City, Michigan, has decided (Curves International, Inc. v. Shapes Fitness, LLC, April 29, 2013, Ludington, T.). Thus, Curves’ motion for a temporary restraining order enforcing the covenant was denied.

Background. Curves and the franchisee, Complete Spirit & Body Resource, LLC, entered into a franchise agreement in February 2009. Bonnie Sue Ritter and Catherine Ann Stajkowski, the principals of the franchisee, individually guaranteed the franchisee’s obligations pursuant to guaranty agreements.

Curves alleges that the franchisee stopped paying the fees required under the franchise agreement and it asserts that as of March 6, 2013, it was owed $13,725 in royalty, advertising, and late fees. Curves terminated the agreement and brought suit against the franchisee and the two principals (collectively, the "Defendants") .

The agreement contained a number of restrictive covenants that extended for one year following termination. Among those covenants were restrictions that prevented the Defendants from operating other fitness facilities, or any similar business, within ten miles of any Curves Fitness Facility (including the former franchise location). Further, for one year after termination, the Defendants could not pursue other Curves Franchises’ employees, interfere with any Curves Franchisee’s business relationships, divert customers or business from other Curves locations, or use Curves’ registered trademarks.

According to Curves, the Defendants violated those restrictive covenants since the termination. Curves’ motion for an ex parte motion for a temporary restraining order and a preliminary injunction was before the court.

Analysis. The issuance of a temporary restraining order required specific facts that clearly showed that an immediate and irreparable injury, loss, or damage would occur to the movant in the absence of such an order, the court noted. This was because an ex parte temporary restraining order was an extraordinary remedy. Further, notice to an adverse party was grounded in the fundamental values of our judicial system.

Curves failed to demonstrate the likelihood of harm necessary to enjoin the Defendants’ actions without notice and before Defendants’ appearance, the court ruled. Curves alleged that the Defendants’ actions would lead to "loss of [Plaintiff’s] employees, member goodwill and confidential information and will deprive it from being able to realistically compete in the fitness industry in Essexville, and such harms cannot be readily measured in damages."

Money damages would be available to remedy the loss of Curves’ employees, and it was at least open to question whether Curves, the world’s largest franchisor of fitness clubs, would be unable to compete in the location of the former franchise—Essexville, Michigan—a town of fewer than 4,000, because of the Defendants’ conduct. Even if true, however, such harm was compensable monetarily, the court held.

Loss of customer goodwill and the use of confidential information, however, represented closer questions because money damages for such injuries could be difficult to quantify. In this case, however, these potential harms did not support the drastic remedy of granting a temporary restraining order without reasonable notice and a response from the Defendants, according to the court.

The Defendants’ actions did not realistically threaten the viability of Curves’ robust business, only its ability to generate revenue for a limited period of time while the Defendants appeared and responded. This harm could be remedied with monetary damages should Curves prevail.

In addition, the confidential information that Curves feared the Defendants would capitalize upon— the use of membership lists—threatened similarly limited injury: the loss of potential customers. Such an injury could be fully compensated by monetary means and did not support the issuance of a temporary restraining order. Notwithstanding the denial of the request for a temporary restraining order, the court ordered a hearing to entertain Curves’ request for a preliminary injunction.

The case is No. 13-11859.

Attorneys: Kimberly M. Large Mika Meyers Beckett & Jones PLC for Curves International, Inc.

Companies: Curves International, Inc.; Complete Spirit & Body Resource, LLC.

Cases: FranchisingDistribution MichiganNews