Antitrust Law Daily Wrap Up, FRANCHISING & DISTRUTION—EDMich: Oil Change Business Franchisee Violated Noncompete Covenant by Allowing Competing Business to Occupy Former Franchise Location, (Feb 4, 2013)

By Peter Reap, J.D., LLM

A terminated oil change business franchisee, Darwich Brothers, LLC, and Magid Darwich, who signed the franchise agreement as a guarantor (Collectively, the “defendants”), breached the noncompete covenant in their franchise agreement by allowing a competing business to occupy the same location as their former franchise, the federal district court in Ann Arbor, Michigan, has decided (Victory Lane Quick Oil Change, Inc. v. Darwich, January 31, 2013, O’Meara, J.). However, the defendants were not liable under the Lanham Act for the use by the competing business of a “colorable imitation” of the franchisor’s (Victory Lane Quick Oil Change, Inc.’s) trademark.

Background. On November 15, 2008, Victory Lane and Darwich Brothers LLC entered into an agreement allowing Darwich Brothers to operate a Victory Lane quick oil change franchise in Saline, Michigan. Defendant Magid Darwich signed the agreement as guarantor for Darwich Brothers.

Victory Lane terminated the franchise agreement on March 7, 2011. On March 11, 2011, Darwich Brothers sold the assets of the terminated franchise, the Saline location, to Belal Darwich. Belal Darwich formed Mazh, LLC, and began operating an oil change business there as Saline Quick Lube. Darwich Brothers intended to transfer the lease of the location to Mazh, but the landlord refused to sign the transfer. Therefore, Darwich Brothers is still the tenant of the Saline location.

Victory Lane argues that the logo used by Saline Quick Lube mimics and is a “colorable imitation” of Victory Lane’s trademarked logo. Victory Lane contends that Saline Quick Lube’s logo and sign infringes upon its mark and violates the Lanham Act.

Victory Lane brought suit against Magid Darwich, Belal Darwich, Darwich Brothers, and Mazh. The franchisor sought a preliminary injunction on its Lanham Act and non-compete agreement claims, which the court granted on June 29, 2011.

The parties stipulated to the entry of judgment against Belal Darwich and Mazh, leaving Victory Lane’s claims against Magid Darwich and Darwich Brothers remaining. The franchisor seeks partial summary judgment on its breach of contract and Lanham Act claims against these defendants.

Breach of the noncompete covenant. The parties’ franchise agreement contained a noncompete covenant stating that the owners and guarantors of the franchise, for a period of two years after termination or expiration, shall not “be connected with, have any interest in or assist any person or Entity engaged in any Competitive Business which is located within 25 miles of the Franchised Location, within 10 miles of any other existing or proposed Victory Lane Center, or within any exclusive area granted by Victory Lane or any affiliate of Victory Lane pursuant to a Master Franchise Agreement or other territorial agreement.”

In evaluating the reasonableness of a non-compete clause, Michigan courts generally examine the clause’s duration, geographic scope, and the type of employment prohibited. They also consider the reasonableness of the competitive business interests justifying the clause.

Here, Magid Darwich and Darwich Brothers did not dispute the reasonableness of the noncompete provision. Rather, they disclaimed any interest in the competing business, Saline Quick Lube. They contended that Saline Quick Lube was owned by Belal Darwich and Mazh, who were not parties to the franchise agreement and were not subject to the non-compete.

Magid Darwich and Darwich Brothers made this same argument in response to Victory Lane’s motion for preliminary injunction, and the court rejected it because Darwich Brothers remained the tenant at the Saline Quick Lube location, as the landlord would not agree to transfer the lease to Mazh. As the tenant, Darwich Brothers was allowing Saline Quick Lube to occupy the same location as the former Victory Lane franchise. Accordingly, Darwich Brothers is arguably “connected with,” has an “interest in,” or is “assist[ing] any person or Entity engaged in any Competitive Business” in violation of the noncompete covenant. In light of this, the court found that the franchisor was likely to prevail on the merits of its breach of contract claim.

Magid Darwich and Darwich Brothers have not set forth a genuine issue of material fact for trial and the court granted the franchisor’s motion for summary judgment as to its breach of contract claim.

Lanham Act Claim. In its preliminary injunction order, the court found that Victory Lane was likely to prevail on the merits of its Lanham Act claim, because the competing business was using a logo that was a “colorable imitation” of its trademark. Victory Lane failed to present evidence, however, that Darwich Brothers or Magid Darwich were responsible for creating or using the “Saline Quick Lube” logo that was similar to the Victory Lane mark. Rather, the evidence indicated that Belal Darwich and Mazh were using the Saline Quick Lube logo.

Victory Lane did not show that Darwich Brothers or M. Darwich owned or were actually involved in operating Saline Quick Lube and it did not cite authority suggesting that allowing Belal Darwich and Mazh to use the Saline location was sufficient to render Magid Darwich and Darwich Brothers liable under the Lanham Act. Because Victory Lane has not satisfied its burden of demonstrating that Darwich Brothers and Magid Darwich are liable under the Lanham Act, the court denied Victory Lane’s motion on this point.

This is Case No. 11-11786.

Attorneys: Derk A. Wilcox (Tishkoff & Associates, PLLC) for Victory Lane Quick Oil Change Inc. David E. Ghannam (David E Ghannam, PC) for Magid Darwich.

Companies: Victory Lane Quick Oil Change, Inc.; Darwich Brothers, LLC; Mazh, LLC.

Cases: FranchisingDistribution MichiganNews