AQUA 2 ACQUISITION, INC v. Autoqual of Mid-Michigan, Inc.

Filing 27

MEMORANDUM and ORDER of Contempt Signed by District Judge Avern Cohn. (JOwe)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION

AQUA 2 ACQUISITION, INC., d/b/a
AUTOQUAL USA,
Plaintiff,
Case No. 11-10408
Hon: AVERN COHN

-vsAUTOQUAL OF MID-MICHIGAN, INC.,
Defendant.
/

MEMORANDUM AND ORDER OF CONTEMPT
I.
This is a contempt proceeding arising out of an American Arbitration Association
Award (Award) confirmed by the Court on May 26, 2011 in an Order and Judgment
(Doc. 10) (order and judgment).
On September 19, 2011, Aqua 2 Acquisition, Inc., d/b/a AutoQual USA
(Petitioner), petitioned the Court to hold James Clement (Clement) in contempt for
operating a competitive business in violation of the Award (Doc. 12).
On September 20, 2011, the Court entered an Order to Show Cause (Doc. 16)
requiring AutoQual of Mid-Michigan, Inc. (AutoQual) and James Clement (collectively
Respondents) to show cause why they should not be held in contempt for violating the
order and judgment. Clement was the owner, president and principal, if not the sole
employee of AutoQual. The Court held an evidentiary hearing on the show cause order
on November 17, 2011. Following the hearing, the parties filed supplemental briefs.

Petitioner says the proofs at the hearing support a finding of contempt. Respondents
say otherwise.
II.
In 2004 the parties entered into a franchise agreement granting AutoQual the
right to operate a franchise business for ten (10) years in certain counties in Michigan.
The business is described in the Award as “interior reconditioning services,” which is
further defined as “cleaning, repairing, deodorizing, dyeing and masking carpets in the
interior of vehicles, the sale and installation of floor mats and related products and
services,” primarily to new and pre-owned vehicles for car rental agencies, auctioneers
and automotive sales and service businesses.
The relationship between the parties soured. The franchise terminated.
AutoQual filed an arbitration demand claiming rescission on account of fraud,
misrepresentation and discrimination. Petitioner responded denying the respondent’s
claims. Petitioner also said the franchise agreement was terminated for failure to pay
franchise fees. Petitioner further asked for enforcement of the provision of the franchise
agreement which forbid AutoQual from entering into a competitive business within fifty
(50) miles of the location of the business for two (2) years after termination.
Petitioner prevailed in the arbitration. The Award states in part:
1.
Claimant AutoQual of Mid-Michigan, including
each of its officers, directors, shareholders, members and/or
partners, directly and indirectly through any of the immediate
family members of each such officer, director, shareholder,
member and/or partner, shall for a period of two (2) years
commencing on the date of issuance of this Award cease and
desist from having any interest as owner, investor, partner,
director, officer, employee, consultant, representative, or agent
or in any other capacity in any business offering Interior
2

Reconditioning Services, as defined in paragraph 3, below, or
granting franchises to others to offer Interior Reconditioning
Services, within a fifty (50) mile radius of the perimeter of
Claimant’s franchised territories with Respondent, Aqua 2
Acquisition, Inc., as defined in the parties’ Data Sheet to their
Franchise Agreement, namely:
(a)
Territory #1 consisting of Clinton, Ingham and
Eaton counties and
(b)
Territory #2 consisting of Livingston County, as
well as the following cities: New Hudson, Wixom,
Milford, Highland, White Lake, Commerce and
Clarkston.
2.
Claimant AutoQual of Mid-Michigan, including
each of its officers, directors, shareholders, members and/or
partners, directly and indirectly through any of the immediate
family members of each such officer, director, shareholder,
member and/or partner, shall for a period of one (1) year
commencing on the date of issuance of this Award cease and
refrain from having any interest as owner, investor, partner,
director, officer, employee, consultant, representative, or agent
or in any other capacity in any business offering Interior
Reconditioning Services within the territory of any other
AutoQual-branded franchisee of Respondent.
3.
Interior Reconditioning Services is as defined in
Paragraph A of the parties’ Franchise Agreement, namely:
cleaning, repairing, deodorizing, dyeing and
masking carpets in the interior of vehicles, the
sale and installation of floor mats and related
products and services primarily to new and preowned vehicle customers, automobile rental
agencies, auctioneers and automotive sales and
service businesses.
****

3

III.
A.
At the evidentiary hearing, the Court heard testimony from three witnesses. Craig
Sluiter (Sluiter), an investigator, testified about his observations of Clement’s activities.
Clement testified about his activities. Finally, David Mountz (Mountz) testified about his
relationship with Clement. Mountz is a former competitor and the nominal purchaser of
Clement’s business FrontLine Ready (Frontline) discussed below.
Exhibits in evidence at the hearing were CDs of Sluiter’s observations of
Clement, documents from the arbitration, and agreements between Clement and
Mountz.
B.
Based on the record, the testimony at the evidentiary hearing and the documents
in evidence at the hearing, the Court finds as follows:
1.

The Award prohibits AutoQual, and each of its officers, directors,

shareholders, members and/or partners, directly or indirectly, through any of the
immediate members of the same, from engaging in the activities described in paragraph
3 of the Award as stated above (Paragraph 3 Activities).
2.

Clement represented AutoQual at the arbitration.

3.

The Arbitration Award’s prohibition of activity was for two (2) years and

one (1) year, as described in the territories described in paragraph 1 of the Arbitration
Award as stated above (Paragraph 1).
4.

Prior to the time of the Award, Clement was a member, officer and

employee of AutoQual.
4

5.

While Clement was operating AutoQual, he organized FrontLine Ready

(FrontLine). He was its sole member. FrontLine was organized to engage in a more
comprehensive interior reconditioning service than AutoQual.
6.

As of the date of the Award and subsequently, Clement continued to

engage in Paragraph 3 Activities. Clement also used immediate family members, as
well as FrontLine, to engage in such activities.
7.

As of the date of the Award, FrontLine engaged in the same activities as

AutoQual, and serviced former customers of AutoQual. FrontLine used the same van
and work station that AutoQual used.
8.

About two (2) weeks after the Award, Clement assigned his interest in

AutoQual to his brother.
9.

On or about the same time, Clement sold FrontLine to Mountz for One

($1.00) Dollar out of concern that its ownership might be in violation of the Award.
Mountz was inactive in the affairs of FrontLine. As far as Mountz knows, Clement’s son
now operates FrontLine.
10.

Clement, since the date of the Award, has been engaging in Paragraph 3

Activities for basically the same customers he serviced during he period of the
franchise, and in the same geographic areas.

5

IV.
A.
The prohibitions of the Award apply to Clement as well as AutoQual, and
Clement’s activities are in violation of these prohibitions. Two (2) cases confirm this
conclusion:
In Interstate Commerce Comm’n v. Rio Grande Growers Coop., 564 F.2d 848
(9th Cir. 1977), the “defendant, it’s agents, employees, representatives, and all entities
and persons, real, fictitious or corporate, and its representatives in concert or
participation with it,” were enjoined from transporting property without authorization from
the I.C.C. Rio Grande was largely financed and operated by Stan Anderson
(Anderson). Anderson abandoned Rio Grande and incorporated a new entity to operate
in the same way. Anderson was found in contempt. The Ninth Circuit upheld the
injunction, saying:
[t]o find otherwise on the evidence would be to allow San
Joaquin to nullify the court’s decree and circumvent the
I.C.C.’s regulations by carrying out prohibited acts through
successive corporations not party to the original action. This
we cannot accept.
564 F.2d at 849.
In Broderick & Bascom Rope Co. v. Manoff, 41 F.2d 353 (6th Cir. 1930), similar
circumstances obtained. There the owner of an enjoined company changed the name
of the company and began activities similar to those enjoined. The district judge’s
failure to find contempt was reversed, stating:
to permit Manoff [principal of the enjoined company] to
continue his infringing business with merely this change in the
characterizing name is to make the decree futile and to
6

disparage the power of the court to give relief against trade
larceny.
41 F.2d at 849.
To the extent that FrontLine is run by Clement’s children, Hanna Clement and
Chase Clement, they are engaged in Paragraph 3 Activities. As such, they too are
engaged in prohibited activities. See, Gold Messenger, Inc. v. McGuay, 937 P.2d 907,
912 (Colo. Ct. App. 1997) (“[a] non-signatory to a covenant will be bound because a
covenantor will not be allowed to do through others what he or she could not do
directly.”)
B.
In sum, Clement is in contempt for violating the prohibitions of the Award, and
Chase Clement and Hannah Clement are on notice that the prohibitions of the Award
applies to each of them.
V.
A.
Petitioner’s request for an extension of the time limitation on the non-compete
clause as to AutoQual, i.e., two (2) years from the date of issuance of the Award, within
a fifty (50) mile radius of the former AutoQual territories, and one (1) year within the
territory of any other AutoQual-branded franchisee has merit. Allowing a party to
escape compliance with an award because it was necessary to institute an enforcement
action defeats the purpose of a non-competition restriction. See, Overholt Crop
Insurance Service Co. v. Travis, 941 F.2d 1361 (8th Cir. 1991). Accordingly,

7

Respondents are enjoined from competing with Petitioner as required by Paragraph 1 of
the Award from the date hereof.
B.
What remains to be decided are Petitioner’s claims for damages and attorney’s
fees. Both are in order given the Court’s finding of contempt. See, Elec. Workers
Pension Trust Fund of Local Union 58, IBEW, et al. v. Gary’s Electric Service Co., 340
F.3d 373 (6th Cir. 2003) (damages) and TWM Mfg. Co., Inc. v. Dura Corp., 722 F.2d
1261 (6th Cir. 1983) (attorney’s fees). As such, Respondents have ten (10) days in
which to respond to Petitioner’s request.
SO ORDERED.

S/Avern Cohn
AVERN COHN
UNITED STATES DISTRICT JUDGE

Dated: February 22, 2012

I hereby certify that a copy of the foregoing document was mailed to the attorneys of
record on this date, February 22, 2012, by electronic and/or ordinary mail.

S/Julie Owens
Case Manager, [phone]

8