Court Watch

In holding that the franchisor satisfied the requirements for injunctive relief, the district court explicitly declined to apply a presumption of irreparable harm to the franchisor's request for injunctive relief. The district court noted that although Ninth Circuit precedent previously held that once a likelihood of success on the merits was established in a trademark case then a presumption of irreparable harm could be applied, such precedent had been called into question by the Supreme Court's decision in eBay. In eBay, the Supreme Court held that courts should not categorically apply a presumption of irreparable harm in patent infringement cases based on a successful showing of likelihood of success on the merits.

The district court in 7-Eleven discussed the Ninth Circuit's struggle with the application of eBay to trademark and copyright infringement cases, noting that since eBay, Ninth Circuit courts have both applied and rejected the application of the presumption in copyright and trademark infringement cases. The 7-Eleven court ultimately concluded that application of the presumption under the facts was not appropriate, and that the “viability of the presumption of irreparable harm caused by trademark infringement is at best still an open question.” Even though it declined to apply the presumption of irreparable harm, the district court nonetheless found that the franchisor satisfied its burden by providing sufficient evidence of irreparable harm, namely that it would suffer a loss of control over its trademarks and the likelihood that customers would be confused by the misuse of the marks.

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Covenant Not to Compete in 25-Year-Old Contract Held Void Due to Later Addition of Choice-of-Law Provision

A bankruptcy court in the Eastern District of Texas recently held that through a series of contract amendments, a franchisor unknowingly rendered a covenant not to compete unenforceable. Allegra Network, LLC v. Ruth, Bus. Franchise Guide (CCH) '14,966 (Bankr. E.D. Tex. Jan. 10, 2013). In 1984, Insty-Prints, a Minnesota franchisor, entered into a 10-year franchise agreement with Michael and Elinoria Ruth for the operation of a printing shop in Texas. In 1995, the parties entered into an addendum agreement which extended the 1984 franchise agreement for another 10 years, changed the royalty provisions, and enlarged the franchisee's exclusive territory. During the second term, Insty-Prints assigned the franchise agreement to Allegra Network as part of a larger asset transfer. At the conclusion of the second term, in 2006, the parties entered into another renewal addendum agreement, which extended the franchise agreement for a third 10-year term. This 2006 addendum added a Michigan choice-of-law provision.

The Ruths then failed to make royalty payments, which led to the termination of the franchise agreement by Allegra Network in 2008. After termination, Allegra Network commenced a lawsuit against the Ruths for violation of the covenant not to compete, which was part of the original 1984 franchise agreement. The Ruths then filed a voluntary bankruptcy petition, Allegra Network's federal court action was stayed, and Allegra Network filed a complaint in the bankruptcy court based on the covenant not to compete.

At the trial of Allegra Network's claim, the bankruptcy court first considered the enforceability of the covenant not to compete. The insertion of the Michigan choice-of-law provision in 2006 made this question more interesting because Michigan considered covenants not to compete absolutely void before 1985. Without the addition of the Michigan choice-of-law provision, which was done at the insistence of Allegra Network, it is likely that either Minnesota or Texas law would have governed. Covenants not to compete were enforceable in 1984 under both Minnesota and Texas law. Because Michigan law applied and voided covenants not to compete before 1985, the court needed to determine whether the renewal agreements were new, distinct contracts or whether they constituted extensions of one, continuing contract that was effective in 1984.

The court explained that this issue required an examination of the parties' entire contractual relationship to determine their intent. The language of the renewal contracts specifically states that their purpose was to “amend and revise certain provisions of the Franchise Agreement … dated October 23, 1984.” The court found that in both renewals the parties supplemented, rather than supplanted, the original franchise agreement, and that they clearly intended to create one continuous contract. Therefore, because the covenant not to compete would have been void under Michigan law in 1984, it could not be revived later and remained unenforceable.

Even though the court found that the covenant not to compete was void, it also considered the issue of whether Allegra Network's alleged equitable remedy of enforcement of the covenant not to compete was discharged in bankruptcy. Under Fifth Circuit precedent, the court must analyze whether under the applicable state law the payment of money is an available alternative to equitable relief. If monetary damages are an available alternative, it is a dischargeable claim. The bankruptcy court determined that under Michigan law, monetary damages were available as an alternative to equitable relief, and that Allegra Network had not sustained its burden to show by a preponderance of the evidence that monetary damages were inadequate to compensate it for its harm. Therefore, even if the covenant were enforceable, the court held that it would be discharged in bankruptcy.

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No Damages Awarded to Plaintiff After Wrongful Termination

The case of FECO, Ltd. v. Highway Equipment Co., Inc., Bus. Franchise Guide (CCH) '14,967 (Iowa App. Jan. 9, 2013), arose out of the termination of a dealership agreement between a manufacturer, Highway Equipment, and an agricultural equipment dealer, FECO. Highway Equipment admittedly did not have good cause, as defined by the Iowa statute, to terminate and had not provided FECO with the notice period required by the statute. Therefore, FECO filed suit against Highway Equipment seeking monetary damages for wrongful termination of the dealership agreement. After a 2009 bench trial, the district court decided that the statute provided for equitable relief only, and that monetary damages were not available. The Iowa Court of Appeals reversed and remanded for a determination of damages.

On remand, the district court reviewed the trial testimony of the parties' competing damages experts and declined to award any damages, based on a finding that FECO had fully mitigated any loss suffered due to the wrongful termination. The court noted that FECO appeared to be in no worse situation, or possibly even a better situation, than before the termination.

In addition to arguing on appeal that the court should have credited its expert's testimony, FECO argued that Highway Equipment should not have been allowed to offer testimony regarding mitigation of damages because it had failed to plead mitigation as an affirmative defense. The district court rejected this argument, noting that the required affirmative defense is for failure to mitigate damages. A defendant may present evidence that a plaintiff has mitigated its damages, and thus the damages amount should be reduced, without pleading mitigation as an affirmative defense.

The district court also refused to award attorneys' fees and costs to FECO. On appeal, FECO argued that it should be allowed to recover attorneys' fees, despite the fact that it failed to recover any actual damages. Highway Equipment, on the other hand, argued that an award of attorneys' fees should be contingent on an award of damages. The court looked at the statute, which states that “[a] supplier violating this chapter shall compensate the dealer for damages sustained by the dealer as a consequence of the supplier's violation, together with ' reasonable attorneys' fees.” Iowa Code ' 322F.8(1). The court held that if attorneys' fees were awarded without an accompanying damages award, the “together with” language of the statute would be rendered irrelevant. Accordingly, the court held that attorneys' fees were not available to FECO.

Cynthia M. Klaus is a shareholder and Susan E. Tegt is an associate with Larkin Hoffman. They can be contacted at [email protected] and [email protected], respectively.

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CA Federal Court Seeks to Clarify eBay's Application of the Presumption of
Irreparable Harm

A California federal district court recently declined to apply a presumption of irreparable harm when it granted a franchisor's motion for a preliminary injunction on the franchisor's trademark infringement claim. 7-Eleven, Inc. v. Dhaliwal, No. 12-CV-02276-KJM-GGH, 2012 WL 5880462 (E.D. Cal. Nov. 20, 2012). The district court's conscious decision not to apply the presumption marks a step in the Ninth Circuit in clarifying whether the U.S. Supreme Court's determination in eBay Inc. v. MercExchange, LLC , 547 U.S. 388, 394 (2006), holding courts should not presume irreparable harm in patent infringement cases, applies also to trademark infringement claims. The 7-Eleven decision is important because its interpretation of the applicability of the eBay decision to trademark and copyright infringement actions is, and will continue to be, a recurring issue before courts nationwide.

In 7-Eleven, a 7-Eleven franchisee was terminated for breaching his franchise agreement with the franchisor, but continued to operate his store using the franchisor's trademarks. The franchisor filed suit and shortly thereafter moved for a preliminary injunction, seeking to eject the former franchisee from the store, enjoin the former franchisee from using the trademarks, and require the former franchisee to cease holding himself out as a 7-Eleven franchisee.

In holding that the franchisor satisfied the requirements for injunctive relief, the district court explicitly declined to apply a presumption of irreparable harm to the franchisor's request for injunctive relief. The district court noted that although Ninth Circuit precedent previously held that once a likelihood of success on the merits was established in a trademark case then a presumption of irreparable harm could be applied, such precedent had been called into question by the Supreme Court's decision in eBay. In eBay, the Supreme Court held that courts should not categorically apply a presumption of irreparable harm in patent infringement cases based on a successful showing of likelihood of success on the merits.

The district court in 7-Eleven discussed the Ninth Circuit's struggle with the application of eBay to trademark and copyright infringement cases, noting that since eBay, Ninth Circuit courts have both applied and rejected the application of the presumption in copyright and trademark infringement cases. The 7-Eleven court ultimately concluded that application of the presumption under the facts was not appropriate, and that the “viability of the presumption of irreparable harm caused by trademark infringement is at best still an open question.” Even though it declined to apply the presumption of irreparable harm, the district court nonetheless found that the franchisor satisfied its burden by providing sufficient evidence of irreparable harm, namely that it would suffer a loss of control over its trademarks and the likelihood that customers would be confused by the misuse of the marks.

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Covenant Not to Compete in 25-Year-Old Contract Held Void Due to Later Addition of Choice-of-Law Provision

A bankruptcy court in the Eastern District of Texas recently held that through a series of contract amendments, a franchisor unknowingly rendered a covenant not to compete unenforceable. Allegra Network, LLC v. Ruth, Bus. Franchise Guide (CCH) '14,966 (Bankr. E.D. Tex. Jan. 10, 2013). In 1984, Insty-Prints, a Minnesota franchisor, entered into a 10-year franchise agreement with Michael and Elinoria Ruth for the operation of a printing shop in Texas. In 1995, the parties entered into an addendum agreement which extended the 1984 franchise agreement for another 10 years, changed the royalty provisions, and enlarged the franchisee's exclusive territory. During the second term, Insty-Prints assigned the franchise agreement to Allegra Network as part of a larger asset transfer. At the conclusion of the second term, in 2006, the parties entered into another renewal addendum agreement, which extended the franchise agreement for a third 10-year term. This 2006 addendum added a Michigan choice-of-law provision.

The Ruths then failed to make royalty payments, which led to the termination of the franchise agreement by Allegra Network in 2008. After termination, Allegra Network commenced a lawsuit against the Ruths for violation of the covenant not to compete, which was part of the original 1984 franchise agreement. The Ruths then filed a voluntary bankruptcy petition, Allegra Network's federal court action was stayed, and Allegra Network filed a complaint in the bankruptcy court based on the covenant not to compete.

At the trial of Allegra Network's claim, the bankruptcy court first considered the enforceability of the covenant not to compete. The insertion of the Michigan choice-of-law provision in 2006 made this question more interesting because Michigan considered covenants not to compete absolutely void before 1985. Without the addition of the Michigan choice-of-law provision, which was done at the insistence of Allegra Network, it is likely that either Minnesota or Texas law would have governed. Covenants not to compete were enforceable in 1984 under both Minnesota and Texas law. Because Michigan law applied and voided covenants not to compete before 1985, the court needed to determine whether the renewal agreements were new, distinct contracts or whether they constituted extensions of one, continuing contract that was effective in 1984.

The court explained that this issue required an examination of the parties' entire contractual relationship to determine their intent. The language of the renewal contracts specifically states that their purpose was to “amend and revise certain provisions of the Franchise Agreement … dated October 23, 1984.” The court found that in both renewals the parties supplemented, rather than supplanted, the original franchise agreement, and that they clearly intended to create one continuous contract. Therefore, because the covenant not to compete would have been void under Michigan law in 1984, it could not be revived later and remained unenforceable.

Even though the court found that the covenant not to compete was void, it also considered the issue of whether Allegra Network's alleged equitable remedy of enforcement of the covenant not to compete was discharged in bankruptcy. Under Fifth Circuit precedent, the court must analyze whether under the applicable state law the payment of money is an available alternative to equitable relief. If monetary damages are an available alternative, it is a dischargeable claim. The bankruptcy court determined that under Michigan law, monetary damages were available as an alternative to equitable relief, and that Allegra Network had not sustained its burden to show by a preponderance of the evidence that monetary damages were inadequate to compensate it for its harm. Therefore, even if the covenant were enforceable, the court held that it would be discharged in bankruptcy.

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No Damages Awarded to Plaintiff After Wrongful Termination

The case of FECO, Ltd. v. Highway Equipment Co., Inc., Bus. Franchise Guide (CCH) '14,967 (Iowa App. Jan. 9, 2013), arose out of the termination of a dealership agreement between a manufacturer, Highway Equipment, and an agricultural equipment dealer, FECO. Highway Equipment admittedly did not have good cause, as defined by the Iowa statute, to terminate and had not provided FECO with the notice period required by the statute. Therefore, FECO filed suit against Highway Equipment seeking monetary damages for wrongful termination of the dealership agreement. After a 2009 bench trial, the district court decided that the statute provided for equitable relief only, and that monetary damages were not available. The Iowa Court of Appeals reversed and remanded for a determination of damages.

On remand, the district court reviewed the trial testimony of the parties' competing damages experts and declined to award any damages, based on a finding that FECO had fully mitigated any loss suffered due to the wrongful termination. The court noted that FECO appeared to be in no worse situation, or possibly even a better situation, than before the termination.

In addition to arguing on appeal that the court should have credited its expert's testimony, FECO argued that Highway Equipment should not have been allowed to offer testimony regarding mitigation of damages because it had failed to plead mitigation as an affirmative defense. The district court rejected this argument, noting that the required affirmative defense is for failure to mitigate damages. A defendant may present evidence that a plaintiff has mitigated its damages, and thus the damages amount should be reduced, without pleading mitigation as an affirmative defense.

The district court also refused to award attorneys' fees and costs to FECO. On appeal, FECO argued that it should be allowed to recover attorneys' fees, despite the fact that it failed to recover any actual damages. Highway Equipment, on the other hand, argued that an award of attorneys' fees should be contingent on an award of damages. The court looked at the statute, which states that “[a] supplier violating this chapter shall compensate the dealer for damages sustained by the dealer as a consequence of the supplier's violation, together with ' reasonable attorneys' fees.” Iowa Code ' 322F.8(1). The court held that if attorneys' fees were awarded without an accompanying damages award, the “together with” language of the statute would be rendered irrelevant. Accordingly, the court held that attorneys' fees were not available to FECO.

Cynthia M. Klaus is a shareholder and Susan E. Tegt is an associate with Larkin Hoffman. They can be contacted at [email protected] and [email protected], respectively.

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