Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—EDPa: Default Judgment Set Aside In Breach of Franchise Agreement Suit , (May 14, 2013)

By Jody Coultas, J.D.

A default judgment in favor of franchisor Maaco Franchising, Inc. was set aside by the federal district court in Philadelphia in a contract dispute between Maaco and its franchisees (Maaco Franchising, Inc. v. Rollins, May 13, 2013, Padova, J.).

Maaco and the franchisees entered into a franchise agreement that licensed the franchisees to operate Maaco centers. The franchisees were obligated to pay a weekly royalty fee and advertising contribution, provide weekly sales reports, and pay for paint and supplies ordered from Maaco. In its trademark infringement and unfair Competition, breach of the post-termination covenant not to compete, and breach of franchise agreement claims, Maaco alleged that the franchisees failed to pay franchising fees and advertising contributions and failed to pay for paint and supplies ordered by Maaco.

Because the franchisees failed to timely answer the complaint, Maaco was granted default judgment. The franchisees moved to vacate the default. When determining to set aside an entry of default, courts look at whether the plaintiff will be prejudiced if the default is denied, whether the defendant appears to have a litigable defense, and whether defendant’s delay is due to culpable conduct.

The franchisees alleged facts that, if true, would establish that they did not breach the franchise agreement or any of their post-termination obligations to Maaco, according to the court. The franchisees alleged that Maaco misapplied the local advertising contributions and improperly demanded large market advertising expectations upon small market center. The franchisees also argued that they did not disclose any of Maaco’s trade secrets or proprietary information. The alleged facts could constitute a meritorious defense which, if proven, would allow the franchisees to prevail at trial.

Although the franchisee may have been negligent in failing to answer, the court found that the conduct fell fall short of the justifying the "extreme" sanction of refusal to set aside the entry of default. Courts refuse to set aside an entry of default in cases where the defendant engaged in "dilatory behavior that is willful or in bad faith." The franchisees argued that the delay in answering the complaint was not a result of culpable conduct because Maaco improperly served the named franchisee at his parents’ address rather than at his address. The franchisees contacted Maaco as soon as they discovered the entry of default. Maaco failed to present evidence that the franchisees’ failure to timely answer was the result of bad faith, or that the franchisee intentionally or willfully intended to stall litigation or prejudice Maaco.

Maaco would not be prejudiced if the default were set aside, despite contentions that the case would be further delayed, Maaco would incur substantial attorney’s fees, and the franchisees would continue to profit from their breach of contract. However, there was no evidence that Maaco’s ability to pursue its claims on the merits was hindered or that relevant evidence was lost or unavailable. The court rejected the argument that the accumulation of attorney’s fees was the kind of prejudice required to justify a refusal to set aside the entry of default.

The case is No. 13-766.

Attorneys: Constantine Thomas Fournaris (Wiggin and Dana LLP) for Maaco Franchising, Inc. Terrence P. Ruf, Jr. (Law Office of Terrence P. Ruf, Jr.) for James C. Rollins.

Companies: Maaco Franchising, Inc.

Cases: FranchisingDistribution PennsylvaniaNews