Posts tagged with "franchise agreement"

Covenants Not To Compete in Franchise Agreements

Covenants Not To Compete in Franchise Agreements
Pirtek USA, LLC v. Zaetz, 408 F.Supp.2d 81

Pirtek USA, LLC was a franchise company that operated as a business system “consisting of the sale, assembly and installation of industrial and hydraulic hoses, fixed tube assemblies and related components and services”. Pirtek entered into a Franchise Agreement with Mr. Irwin Zaetz in September 1999 to license him to operate a Pirtek business. The agreement contained a non-compete clause that prohibited Mr. Zaetz from operating or working for a competing business within a limited geographical area for a two-year period after the termination of the franchise agreement. Pirtek and Mr. Zaetz terminated their franchise agreement on April 22, 2005 and the parties went their separate ways. Pirtek was able to sell that particular franchise to another party, Ms. Ashely Geddes, while Mr. Zaetz and his son proceeded to operate their own business, Hose Medic. This new company provided many of the same services as Pirtek franchises and covered the same general geographical area. Additionally, the registered address for Hose Medic was the same one Mr. Zaetz used to register his franchise with Pirtek.
Pirtek alleged that Mr. Zaetz used his son’s company as a front to avoid the enforcement of the covenant not to compete. More specifically, the company alleged that Mr. Zaetz used Pirtek’s proprietary information to help his son base the new company on the Pirtek business model. Pirtek sued Mr. Zaetz in federal court and requested that the court issue a temporary injunction to prevent further contractual violations while the court tried the case. The court denied its request and refused to issue a temporary injunction.
Pirtek sued on three accounts, claiming that Mr. Zaetz breached the non-compete by 1) operating a competing hose installation and repair business, 2) infringing on its intellectual property rights, and 3) violating several post-termination provisions of the franchise agreement. The court found that Pirtek did not meet the burden of proof necessary to show that Mr. Zaetz was in breach of the non-compete. Pirtek asserted that their business interests were threatened by Mr. Zaetz’s use of the words “hose”, “assembly”, and a graphic of a cog when advertising and discussing the new company. This, according to this court, was an unfounded assertion because the words were too general to create confusion among consumers and negatively affect Pirtek’s business operations. Pirtek was not able to establish that it had suffered any hardship or was likely to do so in the future if an injunction was not issued. Imminent harm, according to the courts, is a requisite factor for granting a temporary injunction, and a court is not obligated to grant one if this crucial factor is missing.
The court pointed out however that the denial of the temporary injunction did not necessary mean that Pirtek would not be able to obtain a permanent injunction later. It counseled Pirtek that later stages of litigation could result in the enforcement of the covenant. It noted that Pirtek had some strong evidence to present and use in subsequent stages of the case but that its current request must be denied because it “failed to demonstrate irreparable harm”.
If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

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Covenants Not To Compete in Franchise Agreements

Covenants Not To Compete in Franchise Agreements
Pirtek USA, LLC v. Zaetz, 408 F.Supp.2d 81

Pirtek USA, LLC was a franchise company that operated as a business system “consisting of the sale, assembly and installation of industrial and hydraulic hoses, fixed tube assemblies and related components and services”. Pirtek entered into a Franchise Agreement with Mr. Irwin Zaetz in September 1999 to license him to operate a Pirtek business. The agreement contained a non-compete clause that prohibited Mr. Zaetz from operating or working for a competing business within a limited geographical area for a two-year period after the termination of the franchise agreement. Pirtek and Mr. Zaetz terminated their franchise agreement on April 22, 2005 and the parties went their separate ways. Pirtek was able to sell that particular franchise to another party, Ms. Ashely Geddes, while Mr. Zaetz and his son proceeded to operate their own business, Hose Medic. This new company provided many of the same services as Pirtek franchises and covered the same general geographical area. Additionally, the registered address for Hose Medic was the same one Mr. Zaetz used to register his franchise with Pirtek.
Pirtek alleged that Mr. Zaetz used his son’s company as a front to avoid the enforcement of the covenant not to compete. More specifically, the company alleged that Mr. Zaetz used Pirtek’s proprietary information to help his son base the new company on the Pirtek business model. Pirtek sued Mr. Zaetz in federal court and requested that the court issue a temporary injunction to prevent further contractual violations while the court tried the case. The court denied its request and refused to issue a temporary injunction.
Pirtek sued on three accounts, claiming that Mr. Zaetz breached the non-compete by 1) operating a competing hose installation and repair business, 2) infringing on its intellectual property rights, and 3) violating several post-termination provisions of the franchise agreement. The court found that Pirtek did not meet the burden of proof necessary to show that Mr. Zaetz was in breach of the non-compete. Pirtek asserted that their business interests were threatened by Mr. Zaetz’s use of the words “hose”, “assembly”, and a graphic of a cog when advertising and discussing the new company. This, according to this court, was an unfounded assertion because the words were too general to create confusion among consumers and negatively affect Pirtek’s business operations. Pirtek was not able to establish that it had suffered any hardship or was likely to do so in the future if an injunction was not issued. Imminent harm, according to the courts, is a requisite factor for granting a temporary injunction, and a court is not obligated to grant one if this crucial factor is missing.
The court pointed out however that the denial of the temporary injunction did not necessary mean that Pirtek would not be able to obtain a permanent injunction later. It counseled Pirtek that later stages of litigation could result in the enforcement of the covenant. It noted that Pirtek had some strong evidence to present and use in subsequent stages of the case but that its current request must be denied because it “failed to demonstrate irreparable harm”.
If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

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Court Enforces Non-Compete Agreements Connected to Franchise Agreements

Court Enforces Non-Compete Agreements Connected to Franchise Agreements
Carvel Corporation v. DePaola, 2001 Conn. Super. LEXIS 1190

Carvel Corporation sells retail manufacturing licenses and related goods/services to franchises that operate Carvel ice cream stores. Misters Leopold and David DePaola operated two such Carvel stores in Waterbury, Connecticut. The two men contracted with Carvel on November 1, 1990 to obtain a retail manufacturer’s license for Carvel franchise store # 1578 for a period of ten years. The parties entered into non-compete and trade secrets agreements on March 22, 1991. Later that year, on September 11, 1997, the DePaolas entered into an agreement for a license for Carvel franchise store # 2704. Several restrictive covenants accompanied this second franchise agreement. The DePaolas were prohibited from operating ice cream stores within two miles of their previous Carvel locations for a period of three years following the abandonment or expiration of each respective license agreement. Additionally, the covenants stated that legal disputes would be “interpreted, governed, and construed pursuant to New York law”.
On October 31, 2000 the first license agreement expired but Carvel alleged that the DePaolas continued to operate that location as an independent ice cream store. The company learned a few weeks later that the DePaolas had begun to operate the second location in the same manner, as an independent ice cream store not classified as a Carvel franchise. Carvel Corp. sued the DePaolas for breach of the restrictive covenants and specifically claimed that they would disclose valuable and proprietary trade secrets during their current and future business activities. Carvel requested that the court issue two injunctions: one to order the DePaolas to cease using and to return any and all Carvel property and a second to cease the operation of their independent ice cream stores in order to comply with the non-compete agreements. The DePaolas were compliant with returning Carvel property but took issue with the company’s request that they cease their operations of the two ice cream stores. The agreement had a choice of law provision designating New York law as controlling, but the Superior Court of Connecticut sitting in New Britain was able to adjudicate the case because of the similarities in New York and Connecticut laws’ treatment of non-compete and other employment agreements.
The court found in favor of Carvel Corporation and ordered that the DePaolas cease their operations of their two independent ice cream stores in Waterbury, CT in order to comply with the non-compete agreement. To reach its decision regarding the enforceability of the underlying employment contract between the parties, the court analyzed whether Carvel had a legitimate business interest that warranted protection, the degree to which the restrictions were reasonable, and to what extent the restrictions would make the DePaolas bear occupational hardships.
The court held that Carvel did have a legitimate business interest that was threatened by the DePaolas’ continued business activities. While the company did not exercise physical control or have a leasehold interest over the stores, the company had an interest in its goodwill and name recognition that was connected to the customers of the DePaolas’ ice cream stores. Next, the court held that the restrictions, both time and geographical, were reasonable in scope and enforceable by an injunction. The stated purpose of the restrictions was to “prevent dilution of the exclusivity of the valuable Carvel know-how and Carvel trade secrets”. The restrictions enumerated in the non-compete agreement were firm enough to protect Carvel’s legitimate interest but limited enough so as not to unnecessary restrict the DePaolas’ economic activities.
The DePaolas claimed that should an injunction be issued, they would “lose both their income and their investment” because the “hardships would be immediate, devastating, and irreparable”. The court rejected this argument however and held that the DePaolas had entered into the agreements on their own accord without coercion and as such were responsible to bear the risk of hardships that may be the product of the agreements’ terms.
In light of a legitimate business interest and reasonable restrictions, the court granted Carvel’s request for an injunction restraining the DePaolas’ actions in order to prevent further violations of the legally binding non-compete agreements.
If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

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Court Enforces Non-Compete Agreements Connected to Franchise Agreements

Court Enforces Non-Compete Agreements Connected to Franchise Agreements
Carvel Corporation v. DePaola, 2001 Conn. Super. LEXIS 1190

Carvel Corporation sells retail manufacturing licenses and related goods/services to franchises that operate Carvel ice cream stores. Misters Leopold and David DePaola operated two such Carvel stores in Waterbury, Connecticut. The two men contracted with Carvel on November 1, 1990 to obtain a retail manufacturer’s license for Carvel franchise store # 1578 for a period of ten years. The parties entered into non-compete and trade secrets agreements on March 22, 1991. Later that year, on September 11, 1997, the DePaolas entered into an agreement for a license for Carvel franchise store # 2704. Several restrictive covenants accompanied this second franchise agreement. The DePaolas were prohibited from operating ice cream stores within two miles of their previous Carvel locations for a period of three years following the abandonment or expiration of each respective license agreement. Additionally, the covenants stated that legal disputes would be “interpreted, governed, and construed pursuant to New York law”.
On October 31, 2000 the first license agreement expired but Carvel alleged that the DePaolas continued to operate that location as an independent ice cream store. The company learned a few weeks later that the DePaolas had begun to operate the second location in the same manner, as an independent ice cream store not classified as a Carvel franchise. Carvel Corp. sued the DePaolas for breach of the restrictive covenants and specifically claimed that they would disclose valuable and proprietary trade secrets during their current and future business activities. Carvel requested that the court issue two injunctions: one to order the DePaolas to cease using and to return any and all Carvel property and a second to cease the operation of their independent ice cream stores in order to comply with the non-compete agreements. The DePaolas were compliant with returning Carvel property but took issue with the company’s request that they cease their operations of the two ice cream stores. The agreement had a choice of law provision designating New York law as controlling, but the Superior Court of Connecticut sitting in New Britain was able to adjudicate the case because of the similarities in New York and Connecticut laws’ treatment of non-compete and other employment agreements.
The court found in favor of Carvel Corporation and ordered that the DePaolas cease their operations of their two independent ice cream stores in Waterbury, CT in order to comply with the non-compete agreement. To reach its decision regarding the enforceability of the underlying employment contract between the parties, the court analyzed whether Carvel had a legitimate business interest that warranted protection, the degree to which the restrictions were reasonable, and to what extent the restrictions would make the DePaolas bear occupational hardships.
The court held that Carvel did have a legitimate business interest that was threatened by the DePaolas’ continued business activities. While the company did not exercise physical control or have a leasehold interest over the stores, the company had an interest in its goodwill and name recognition that was connected to the customers of the DePaolas’ ice cream stores. Next, the court held that the restrictions, both time and geographical, were reasonable in scope and enforceable by an injunction. The stated purpose of the restrictions was to “prevent dilution of the exclusivity of the valuable Carvel know-how and Carvel trade secrets”. The restrictions enumerated in the non-compete agreement were firm enough to protect Carvel’s legitimate interest but limited enough so as not to unnecessary restrict the DePaolas’ economic activities.
The DePaolas claimed that should an injunction be issued, they would “lose both their income and their investment” because the “hardships would be immediate, devastating, and irreparable”. The court rejected this argument however and held that the DePaolas had entered into the agreements on their own accord without coercion and as such were responsible to bear the risk of hardships that may be the product of the agreements’ terms.
In light of a legitimate business interest and reasonable restrictions, the court granted Carvel’s request for an injunction restraining the DePaolas’ actions in order to prevent further violations of the legally binding non-compete agreements.
If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

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Four-Prong Test Applied to Enforce Non-Compete Provision in a Franchise Agreement

Four-Prong Test Applied to Enforce Non-Compete Provision in a Franchise Agreement
Money Mailer Franchise Corporation v. Wheeler, 2008 Conn. Super. LEXIS 2260

Mr. Douglas Wheeler entered into a Franchise Agreement with Money Mailer Franchise Corporation on February 28, 2003 wherein he was assigned a mailing territory comprised of thirteen zip codes in Fairfield and New Haven counties. Money Mailer was a business that franchised a system of providing direct mail order advertising and related services. The Franchise Agreement contained a covenant not to compete that prohibited Mr. Wheeler from engaging “in any Competitive Activities with the Territory [his thirteen zip codes] or within the territory of any other “Money Mailer” franchise then in operation” for a period of two years following termination. This essentially obligated Mr. Wheeler to not engage in any competing business enterprise within fifty miles of any Money Mailer franchise.
Mr. Wheeler sold his franchise to Mr. Javier Ferrer on October 31, 2007 for $130,000. He executed an additional non-compete agreement in connection with this transaction wherein he promised not to compete for three years following the closing of the deal. In February 2008, he began to work as an Independent Contractor for Direct Advantage, a direct competitor engaged in the same business(es) as Money Mailer. Money Mailer sued Mr. Wheeler for breach of the Franchise Agreement and requested that the court enforce the provisions contained in the non-compete agreement. Mr. Wheeler acknowledged that he was involved in the exact same business addressed and prohibited in the non-compete agreement and admitted to soliciting several of Money mailer’s previous and current customers.
The Connecticut state court granted Money Mailer’s request for injunctive relief and ordered the enforcement of the restrictive covenant. The court stated that the purpose of injunctive relief was to preserve the status quo of the parties until the case was definitively decided. It further noted the relevant standard of review for granting a request for an injunction and specified four factors: 1) no adequate remedy at law, 2) plaintiff would experience irreparable harm if the request was not granted, 3) plaintiff was likely to prevail on the merits of the case, and 4) an injunction would sustain the balance of the parties’ equities. The court concluded that Money Mailer’s case met all of these requisite factors and its complaint warranted relief in the form of a temporary injunction.
The court concluded that an injunctive order was necessary to balance the parties’ interests during the legal proceedings and that the temporary injunction would essentially restore the parties to their relative positions before the alleged violation of the non-compete agreement. Money Mailer was able to demonstrate that Mr. Wheeler’s actions had a detrimental impact its business interests. Additionally, the court found that Money Mailer was likely to prevail on the merits of its complaint, specifically citing that Mr. Wheeler’s own testimony provided abundant evidence of activities that should trigger the enforcement of the restrictive covenant. For these enumerated reasons, the court granted Money Mailer’s request for an injunction restraining Mr. Wheeler from further violations of the non-compete provisions contained in the Franchise Agreement executed between the parties in 2003.
If you have any questions relating to your non-compete agreement or would like to discuss any element of your employment agreement, please contact Joseph C. Maya, Esq. by phone at (203) 221-3100 or via e-mail at JMaya@Mayalaw.com.

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