Antitrust Law Daily Wrap Up, FRANCHISING & DISTRIBUTION—WDWis: Former Franchisee Not Held in Contempt for Assisting Successor, (May 17, 2013)

By William Zale, J.D.

A former auto glass repair franchisee, who had been enjoined from violating a post-termination covenant not to compete, was not held in contempt by the federal district court in Madison, Wisconsin for assisting a successor entity, (Novus Franchising, Inc. v. Superior Entrance Systems, Inc., May 16, 2013, Conley, W.). The court did, however, order the former franchisee to pay the franchisor $1,000 and immediately remove any references (including those on any decommissioned vehicles, in telephone messages, or on websites) linking the former franchisee’s business to auto glass repair services.

The court had upheld, with modifications, the covenant not to compete found in the franchise agreement, which included provisions barring the franchisee for two years from consulting with, being connected with, or assisting any person or entity legally connected with or in effective successorship to the franchisee, Superior Glass. The court enjoined the Superior Glass and its owner Knute Pedersen from violating the modified post-termination covenant.

Superior Glass sold its windshield repair business to a newly-formed company named SGI Windshield Repair (SGIWR), owned by three Superior Glass employees (though not Pedersen), and located in the same building as Superior Glass. Superior Glass actively referred its existing customers and all new requests for windshield repair to SGI Windshield Repair. Although the defendants were not be found in contempt at this point, the court said that it “remains disturbed” by Superior Glass’s and Knute Pedersen’s deliberate orchestrated transfer of the glass repair business to achieve only arguably technical compliance with the terms (if not the spirit) of the court’s injunction, while at the same time preserving all of its value with the least impact on Superior Glass.

The crux of the disagreement between the parties was whether Pedersen’s actions as President of Superior Glass qualify as consulting with, being connected with, having any interest in, or assisting SGI Windshield Repair (SGIWR). Pedersen is not directly assisting SGIWR, the court found, and the defendants’ witness at the contempt hearing testified that Pedersen has scrupulously avoided involvement in all dealings between Superior Glass and SGIWR.

Although the defendants had “come very close to the line,” the court noted that Superior Glass, Inc. had jumped through a number of legal hoops to divest itself officially of its windshield repair business, at some cost to itself. It had cancelled relevant promotions, advertisements and signs, and jeopardized its existing windshield replacement business by losing its replace/repair classification for insurance referrals.

These expenditures of money and time demonstrated defendants’ substantial compliance with the injunction, according to the court. But in light of defendants’ sharp practices, failure to get approval for its aggressive actions in advance, and remaining technical violations of the injunction, the court ordered that Superior Glass promptly pay the franchisor $1,000 and immediately remove any reference (including on any decommissioned vehicles, in telephone messages or on websites) linking Superior Glass, Inc. to windshield repair or rock-chip repair services.

The case is No. 12-cv-204-wmc

Attorneys: James Michel Susag (Larkin Hoffman Daly & Lindgren, Ltd) for Novus Franchising, Inc. Kyle Hoff Torvinen (Knudson, Torvinen, Jones & Kirk SC) for Superior Entrance Systems, Inc.

Companies: Novus Franchising, Inc.; Superior Entrance Systems, Inc.; Superior Glass, Inc.

Cases: FranchisingDistribution WisconsinNews