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Bankruptcy Filing May Not Prevent Enforcement of Non-Compete Against Franchisee
A U.S. district court recently held that a bankruptcy court abused its discretion in denying a franchisor's motion for relief from the U.S. Bankruptcy Code's automatic stay when the franchisee's bankruptcy petition was filed after the franchisor had previously filed litigation against the franchisee to enforce a covenant not to compete. See In re Stone Resources, Inc., 458 B.R. 823 (E.D. Pa. 2011). The district court's ruling is significant because it found that the relief that the franchisor sought ' the enforcement of the covenant not to compete ' could not be considered a “claim” that could be reduced to a claim for money damages in bankruptcy and thus was immune from the effects of the automatic stay.
This issue ' whether a non-competition covenant violation by a bankrupt franchisee can be remedied by a “claim” for money damages, or whether it can be addressed only through an equitable remedy such as an injunction ' has arisen frequently in bankruptcy cases and is important for a number of reasons. First, the characterization of a franchisor's cause of action will often determine the forum in which it is heard. Second, timing can be affected by the characterization of the claim. A claim for money damages addressed as part of the bankruptcy claims process may take a year or more to resolve, while an action for an equitable remedy usually can proceed immediately in the outside forum. Third, the franchisor's recovery on a claim for money damages resolved in the bankruptcy claims process typically may be heavily discounted to “cents on the dollar,” depending on case specifics. An equitable remedy, on the other hand, typically will be fully enforceable outside the bankruptcy process.
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“Baseball arbitration” refers to the process used in Major League Baseball in which if an eligible player's representative and the club ownership cannot reach a compensation agreement through negotiation, each party enters a final submission and during a formal hearing each side — player and management — presents its case and then the designated panel of arbitrators chooses one of the salary bids with no other result being allowed. This method has become increasingly popular even beyond the sport of baseball.