IP Law Daily, TRADEMARK—M.D. Pa.: Koala insulation franchisor denied injunction against franchisee that rebranded, (Sep 12, 2025)

By Donielle Tigay Stutland, J.D.

The court concluded that the restrictive covenants for the franchisee not to complete were unreasonable and unenforceable and there was no evidence that a former franchisee was continuing to use marks of the franchisor.

The federal district court in Harrisburg, Pennsylvania denied a request for an injunction from a home insulation franchise company Koala Insulation Franchisor, LLC, brought against former franchisee Lotus & the Rooster Holdings Company and its owner Salim Michel Makhlouf. The court found a lack of evidence that the former franchisee was continuing to use the franchisor’s trademarks or logos. The court also determined that restrictive covenants for the former franchisee not to complete were unreasonable and unenforceable, and it denied the franchisor’s request for an injunction (Koala Insulation Franchisor, LLC v. Lotus & The Rooster Holdings Co., No. 1:25-cv-01008-KMN (M.D. Pa. Sept. 10, 2025)).

Background. Salim Michel Makhlouf and his operating entity Lotus & the Rooster Holdings Company opened a home insulation franchise of Koala Insulation Franchisor, LLC. In March 2022, Makhlouf signed agreements (the “2022 Agreements”) with Koala to franchise three Pennsylvania territories.

Makhlouf alleged that soon thereafter the relationship between franchisee and franchisor went south, and that his training and support from the franchisor was sub-par. The franchisee also alleged that he did not make any profits in his first year of business. Nonetheless, in October 2023, fearing the entry of more competition, the franchisee acquired two adjacent Koala insulation territories via agreements (the "2023 Agreements”). The franchisee alleged that he continued to have financial struggles, in part due to the minimum royalty payments to be made to the franchisor.

In late 2024–early 2025, the franchisee reached out to the franchisor in an attempt to negotiate royalty relief, but the franchisor offered only a franchise-wide deal requiring a release of claims, which the franchisee rejected. The franchisee’s sales reporting and royalty payments became sporadic. The franchisor issued a default notice in March 2025 and terminated the agreements shortly after, despite an arbitration request from the franchisee. Upon termination, the terms of the franchise agreements required the franchisee to cease operating a Koala franchise and cease the use of Koala’s Marks and propriety systems and equipment. The franchise agreements also imposed certain restrictive covenants, which prohibited the franchisee from owning or operating any competitive business in his old territories, within 100 miles of his old territories, or within 100 miles of the territory of any Koala franchise operating at the time the agreement was terminated.

The franchisee rebranded his business to Cozy Penguin, which was also a home insulation business, and he continued to operate his business with the same home office, warehouse, phone number, equipment, and some employees. The franchisee serviced two customers who had projects that had been initiated during his operation as a Koala franchisee. The former Koala franchisee also operated the Cozy Penguin with the same Google Business profile he created for his Koala franchises, though now branded for the Cozy Penguin.

Koala filed for a preliminary injunction on June 4, 2025, seeking to stop trademark misuse and enforce the non-compete covenants in the agreements.

Use of Marks. The court began its analysis by looking at the franchisor’s request to enjoin the franchisee from using the Koala marks. The court concluded that the franchisor showed no evidence that “Makhlouf is currently misusing Koala’s Marks or other materials, or would do so in the future.” The franchisor sought to enjoin the use of software by the former franchisee, however the court determined that the software, “Housecall Pro” is not a confidential or proprietary program, and the franchisor had not identified some other confidential method, procedure, or technique that the former franchisee was using. The court similarly did not find that the franchisor offered sufficient continued use of the Koala marks by the former franchisor. The court indicated that “the fact that one invoice, which was not submitted into evidence, contained a reference to Koala Insulation, does not represent an on-going issue worthy of a preliminary injunction.”

Restrictive Covenants. With respect to the covenants not to compete from the 2022 agreements, the court noted that they are governed by Florida law. Under Florida law, “For a restrictive covenant to be enforceable,” a party must “plead and prove the existence of one or more legitimate business interests justifying the restrictive covenant.”

The court concluded that the franchisor failed to plead a legitimate business interest to justify the restrictions. Koala argued Cozy Penguin’s misappropriation of customer goodwill, however, the court rejected this claim, finding that, “there are no legitimate concerns about lingering customer goodwill.” The court noted that the former franchisee’s office was his home, most customers are not repeat customers given the nature of the product and services lasting 15-20 years and no proprietary systems associated with the franchisor to show that this was not a valid business interest.

As to the 2023 agreements for the additional territories, the court highlighted that those non-compete covenants are governed by Virginia law. The court laid out that under Virginia law, restrictive covenants “are enforceable only if ‘narrowly drawn to protect the employer’s legitimate business interest,... not unduly burdensome on the employee’s ability to earn a living, and... not against public policy.’” The court noted that it would review the Lodestar factors in the Virginia restrictive covenant analysis: the function, geographic scope, and duration of the covenant. Additionally, it is the franchisor who bears the burden of proving the function and geographic scope contained in the covenant is reasonable. The court determined that the franchisor has not identified legitimate business interests it needs to protect, nor has it provided the court with the information necessary to determine the exact geographic scope of the covenants. As such, the court found the covenants unreasonable and denied the franchisor’s request to have them enforced.

The Case is No. 1:25-cv-01008-KMN.

Judge: Neary, K.

Attorneys: Lindsey M. Cook (Barley Snyder LLP) for Koala Insulation Franchisor, LLC. Stefanie Pitcavage Mekilo (Babst Calland Clements & Zomnir, P.C.) for Lotus & The Rooster Holdings Co.

Companies: Koala Insulation Franchisor, LLC; Lotus & The Rooster Holdings Co.

Cases: Trademark PennsylvaniaNews