When a franchisor grants a franchise, it licenses, among other things, its trade name and business operating system. By doing this, the franchisor trusts its franchisees, area representatives, and sub-franchisors with its most valuable asset—the brand. A key feature of a successful franchise system is the brand consistency amongst all of the franchised and company-owned units. For this reason, it is incumbent upon franchisors to enforce the terms of their franchise agreements.
In some instances, a franchisee’s breach of the franchise agreement, if not immediately stopped, may lead to injuries with no adequate remedy. Or, in other words, irreparable harm. For example, a franchisee may sign the agreement and begin developing the unit, then decide to instead operate it as a competing business at the last minute.
Area representatives and sub-franchisors also may engage in conduct that requires immediate action. A franchisor grants its area developers substantial control over its brand; it trusts the area developer with issuing franchises and even collecting royalties. Such a grant in discretion and power may also lead to irreparable injury. For instance, an area developer may sell franchises outside of its territory, thereby infringing on another’s territory. Or, a sub-franchisor may continue to hold itself out to be the franchisor or its agent. Where a franchisee’s or an area developer’s conduct threatens immediate and irreparable harm to the franchise system, the franchisor needs to stop the bleeding. A motion for a preliminary injunction to enjoin the injurious conduct is usually the answer.
In advocating for injunctive relief, franchisors ought to emphasize two important factors that are typically inherent in litigation with franchisees. First, often times these cases implicate the franchise system generally. Second, a franchisee’s conduct may also constitute trademark infringement, especially where an ex-franchisee continues to operate its business using the franchisor’s marks. As set forth below, these two factors can play a substantial role in the adjudication of a motion for a preliminary injunction.
The Standard and How the Franchise System Fits in the AnalysisAlthough the test applied to a motion for a preliminary injunction may vary across state and federal courts, there are generally four factors. The moving party must show (i) a likelihood of success on the merits, (ii) that it will suffer irreparable injury, (iii) on balance, the moving party will suffer a greater harm if the injunction is denied, and (iv) that the public will not be harmed by the issuance of the injunction.[1] The sin quo non of injunctive relief, however, is the likelihood of irreparable injury absent the issuance of the order.
Franchising provides for a specialized analysis of this element. Given the particulars of the franchisee-franchisor relationship, franchisors must protect themselves from (i) customer or vendor diversion to competing businesses, (ii) misappropriation of trade secrets, (iii) damage to their brand, and (iv) damage to their franchise system and relationship with other franchisees.[2] The cases bellow illustrate how courts analyze irreparable injury to a franchisor.
In Jay Bharat Developers, Inc. v. Minidis (“Jay”), 167 Cal.App.4th 437 (2008), the court granted a motion for a preliminary injunction precluding a terminated sub-franchisor from representing itself as such and from using the Red Brick Pizza trademark. The franchisor, Red Brick Pizza (“Red Brick”), terminated the sub-franchisor agreement for various violations of the franchise agreements. Id. at 441. The sub-franchisor “refused to honor the termination of the [sub-franchisor agreement] and continued to receive royalties from its former franchisees and withhold them from Red Brick.” Id.
After finding that Red Brick had satisfied its burden to prove the likelihood of success, the court found that Red Brick successfully proved irreparable harm. Id. at 446. The sub-franchisor’s breaches included failure to pay royalties and advertising fees, allowing its California franchise disclosure document registration to lapse, operating franchises outside of its territory...
