Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—N.Y. Sup.: Franchisor denied preliminary injunction against operation of competing learning center, (Dec 21, 2015)

By Michael Menzhuber, J.D., LL.M.

A franchisor of children’s learning centers was denied a preliminarily injunction, barring a former franchisee from operating a competing business at a site alleged to be the former franchise location. The New York Supreme Court in Brooklyn determined that there was not a likelihood of success on the merits of the franchisor’s common law claims because the facts were in dispute (Daekyo America v. Gunsberger, December 15, 2015, Partnow, M.).

Daekyo America, Inc. (Daekyo), a children’s learning center franchisor, alleged that: (1) it entered into a franchise agreement with Josh Gunsberger to operate a franchise in Greenpoint, Brooklyn; (2) the franchise agreement was terminated on September 18, 2014; (3) it had a franchise relationship with Gunsberger for a center located in Williamsburg, Brooklyn; (4) Gunsberger closed the Williamsburg center on February 15, 2015; and (5) Gunsberger was now operating the location as a JEI learning center (JEI), a direct competitor of Daekyo.

The franchisor further contended that: (1) all of its franchisees were provided an operation manual and confidential information, which included customer/student lists; (2) the franchise agreement required a franchisee to contact Daekyo to give it the opportunity to take over a business and the lease, which Gunsberger failed to do; and (3) a post-termination non-compete covenant precluded competition within 25 miles for two years.

Daekyo filed a complaint that alleged breach of contract, tortious interference, and misappropriation of trade secrets. It then moved for a preliminary injunction to enjoin the operation of the Williamsburg Center and the return of all of Daekyo’s confidential and proprietary information.

Preliminary injunction. In support of its preliminary injunction motion, Daekyo presented evidence that: (1) there was a likelihood that it would succeed on the merits; (2) it would suffer irreparable injury absent a preliminary injunction; and (3) a balancing of the equities was in its favor. Specifically, Daekyo contended that it was seeking the preliminary injunction because Gunsberger violated the non-compete provisions of the Greenpoint franchise agreement, which are in effect until September 18, 2016, by his involvement with JEI. Gunsberger responded by arguing that, since the termination of the Greenpoint franchise, he had not operated nor had any involvement in the JEI at the Williamsburg Center.

JEI opposed the motion for a preliminary injunction on the grounds that: (1) Gunsberger was never a Daekyo franchisee at the Williamsburg Center; (2) it never operated a Daekyo franchise at the Williamsburg Center; (3) it did not have any franchise or contractual relationship with Gunsberger; (4) it did not engage in tortious interference or conspire to engage in unfair competition, misappropriate trade secrets, or breach the contract at issue or cause it to be breached; (5) it did not knowingly contact Daekyo’s parents or student customers at the Williamsburg Center; and (6) it did not possess any confidential and/or proprietary information of Daekyo’s.

The court determined that, because the facts were in such a sharp dispute, Daekyo had not demonstrated a likelihood of success on the merits. Consequently, it denied Daekyo’s request for a preliminary injunction. It did, however, require Gunsberger to comply with any post-termination covenant related to the Greenpoint franchise with which he was not yet in compliance.

The case is No. 505946/15.

Attorneys: Alan L. Poliner (Kim & Bae PC) for Daekyo America Inc. Joseph R. Donahue (Brickfield & Donahue) for JEI Self-Learning Systems, Inc. Russ Nazrisho (Nazrisho & Associates PC) for Joshua Gunsberger.

Companies: Daekyo America Inc.; JEI Self-Learning Systems, Inc.

Cases: FranchisingDistribution NewYorkNews