Lifestyle Improvement Ctrs., LLC v. E. Bay Health, LLC

Lifestyle Improvement Centers, LLC, d/b/a Positive Changes Hypnosis Centers, Plaintiff, v. East Bay Health, LLC, et al., Defendants.

Case No. 2:13-cv-735

UNITED STATES DISTRICT COURT FOR THE SOUTHERN DISTRICT OF OHIO EASTERN DIVISION

DATE: October 7, 2013

Judge Graham

Opinion and Order

This matter is before the court on the motion of plaintiff Lifestyle Improvement Centers, LLC for a preliminary injunction to enforce a non-compete provision against defendants. The court held an evidentiary hearing on August 13, 2013 and ordered additional briefing as to whether Ohio or California law applies to this dispute. The court also advised the parties that it was considering consolidating the hearing on the preliminary injunction with the trial on the merits under Federal Rule of Civil Procedure 65(a)(2) and gave the parties an opportunity to submit additional evidence.

For the reasons that follow, the court finds that California law applies and that the non-compete provision is unenforceable under California law. Lifestyle's motion for a preliminary injunction is denied and defendants are entitled to judgment as a matter of law on Lifestyle's claims for breach of the non-compete provision.

I. Background

Much of the factual background of this dispute is uncontroverted. Lifestyle is a limited liability company organized under the laws of Virginia and having its principal place of business in Dublin, Ohio. Lifestyle offers "self-improvement" hypnosis therapy — aimed at, among other things, helping individuals lose weight, manage stress, and stop smoking — and sells related self-improvement products through franchises doing business as Positive Changes Hypnosis Centers. In 2006, Lifestyle had approximately 56 franchise locations in the United States and Canada. It currently has 8 locations, none of which are in California.

Defendants Patrick and Cynthia Porter are residents of North Carolina. They are members of defendant East Bay Health, LLC, a limited liability company organized under the laws of California and having its principal place of business in California. The Porters are also members ofdefendant PorterVision, LLC, a California limited liability company with its principal place of business in North Carolina.

Patrick Porter founded Positive Changes in 1987 and was its sole owner until 2003, when he sold the business to Lifestyle. Porter's involvement in the business became "marginalized" after the transaction and he left the company in 2006. P. Porter Decl., ¶ 4. The Porters and Lifestyle entered into copyright licensing agreements in 2004 and 2006 in which Lifestyle acquired the right to use certain copyrighted works owned by the Porters.

The current dispute concerns a former franchise location in Pleasanton, California. In 2009 Lifestyle entered into a franchise agreement with KC Partners to operate a Positive Changes franchise in Pleasanton. The franchise agreement contained a non-compete clause under which the franchisee agreed that "for a period of two (2) years after the termination or non-renewal of this franchise" it would not directly or indirectly "own, maintain, engage in, or participate in the operation of any other competitive business" within 50 miles of the franchised location or any other Positive Changes location. Franchise Agr., § XIII(D). The agreement also contained a choice-of-law provision selecting Ohio law. Id., § XXIV(A).

In 2011, Lifestyle and the Porters initiated discussions concerning the prospect of the Porters taking over the struggling Pleasanton franchise. At the time, the Porters were California residents. On September 28, 2011, two Lifestyle executives travelled to Pleasanton to meet with the Porters. These Lifestyle executives were Sandra Gould, president and chief operating officer, and David Kriegel, chief executive officer. The Porters had an interest in acquiring the Pleasanton location, and they exchanged a memo with Gould on October 4, 2011 outlining their plans and ideas for turning the Pleasanton location around. See Pl.'s Hearing Ex. 4.

On December 30, 2011, an Assumption and Assignment Agreement was entered into among Lifestyle, KC Partners (whose president was Sandra Gould), the Porters, and East Bay. In that agreement, the Porters and East Bay agreed to assume, perform, and be "liable for all of [KC Partners'] covenants, obligations, liabilities and responsibilities under the Franchise Agreement." Assumption and Assignment Agr., § 1(d).

On the same day, Lifestyle and East Bay entered into a separate Non-Competition Agreement, entitled the "Non-Disclosure, Confidentiality, Non-Competition and Non-Solicitation Agreement." This agreement contained a provision in which East Bay agreed, for 2 years after terminating the relationship, to refrain from "owning, managing and/or operating, directly or indirectly, a business using a [Lifestyle] type system of hypnosis services (defined as: a hypnosispractice . . . for behavior modification, including, but not limited to, weight loss, stress management, stop smoking and golf improvement)" within 50 miles of a Lifestyle franchise location. Non-Competition Agr., § 1(i).

According to the Porters, their franchise received little support from Lifestyle and they came to a conclusion by November 2012 that the franchise could not be turned around. See P. Porter Decl., ¶¶ 17-20. On November 7, 2012, the Porters sent a letter to Gould in which they provided their evaluation of the situation, announced their intention to wind down the Pleasanton location, and, because they viewed the chances of finding a new buyer to be unlikely, stated their intention to cease operations in a 6-month span. See Pl.'s Hearing Ex. 10. Gould and Kriegel responded with a November 20, 2012 letter that expressed disappointment with the situation but concluded that "We [Lifestyle] certainly appreciate and support your decision to wind down and cease operations in Pleasanton responsibly . . . . [W]e fully anticipate working together amicably as Franchisor-Franchisee during this period in order to wind down [] the operations of the Pleasanton Center." P. Porter Decl., Ex. E., p. 8.

The Porters moved from California to North Carolina in March 2013. In their view, they took all of the steps necessary to wind down the Positive Changes location in Pleasanton. See P. Porter Decl., ¶¶ 24-25, 28-29. They sent an email to Gould on March 27, 2013 stating that "things are winding down in Pleasanton" and that they had found a chiropractor to take over the lease of the office. Pl.'s Hearing Ex. 13.

In April and May 2013, Gould sent emails to the Porters informing them that toll-free phone number for Positive Changes continued to receive calls from individuals seeking services from the Pleasanton location. See Pl.'s Hearing Ex. 14. Gould inquired whether the Porters could confirm if all advertising for the Pleasanton location had ceased. Cynthia Porter confirmed that all advertising should have ceased, but that a television station had delayed in ceasing to run a commercial. In June 2013, Gould sent several more emails informing the Porters that a handful of calls for the Pleasanton location continued to be received on the toll free number. See Pl.'s Hearing Exs. 17-19.

In this time frame, the Porters had converted the Pleasanton location into a "Smart Body Institute," operated by their business East Bay Health. The Smart Body Institute offers liposuction-type treatments, "detoxifying cleanses," "Self-Mastery Technology" provided by defendant PorterVision, and chiropractic services. Id., ¶ 26. The Porters began placing television and newspaper advertisements for the Smart Body Institute in the Bay Area market about April 30, 2013.The advertisements offer hypnosis and electromagnetic treatments for the purpose of weight loss. See Pl.'s Hearing Exs. 21-23, 25-26.

Lifestyle filed this action in the Franklin County Court of Common Pleas on July 3, 2013. The complaint brings three causes of action. In the first two, Lifestyle alleges that defendants have breached the non-compete provisions of both the Franchise Agreement and the Non-Competition Agreement. In the third cause of action, Lifestyle alleges that defendants breached an "anti-abandonment" provision of the Franchise Agreement.

The action was removed to this court on the basis of diversity jurisdiction on July 25, 2013. On July 30, Lifestyle moved for an extension of a temporary restraining order that the state court had issued on July 16, 2013. The TRO ordered that defendants comply with the non-compete agreements they had entered into and cease advertising using the Positive Changes toll-free number or name.

The court held an evidentiary hearing on August 13, 2013 on the motion to extend the TRO and Lifestyle's request for a preliminary injunction. The court ordered additional briefing concerning whether Ohio or California law should apply, and the parties' briefing has now been received. The court also gave the parties an opportunity to submit additional evidence in view of the possibility that the court would consolidate the hearing on the preliminary injunction with the trial on the merits under Rule 65(a)(2), which provides that "[b]efore or after beginning the hearing on a motion for a preliminary injunction, the court may advance the trial on the merits and consolidate it with the hearing." The parties did not submit any new evidence, nor did either party raise an objection to consolidation.

II. Discussion

The court must evaluate four factors in considering a plaintiff's request for injunctive relief: (1) the plaintiff's likelihood of success on the merits; (2) whether the plaintiff will suffer irreparable injury without a preliminary injunction; (3) whether issuance of a preliminary injunction would cause substantial harm to others; and (4) whether the public interest would be served by issuance of a preliminary injunction. McNeilly v. Land, 684 F.3d 611, 615 (6th Cir. 2012). "The party seeking the preliminary...