Allegra Network LLC et al v. Cormack et al
Filing
42
ORDER granting 13 Motion for Preliminary Injunction. Signed by District Judge Nancy G. Edmunds. (CHem)
UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF MICHIGAN
SOUTHERN DIVISION
ALLEGRA NETWORK LLC and ALLEGRA
HOLDINGS LLC,
Case No. 11-13087
Plaintiffs,
Honorable Nancy G. Edmunds
v.
J. MICHAEL CORMACK and SHERRIE L.
CORMACK,
Defendants.
/
OPINION AND ORDER GRANTING PLAINTIFFS’ MOTION FOR A PRELIMINARY
INJUNCTION
This matter comes before the Court on Plaintiffs Allegra Network LLC and Allegra
Holdings LLC’s motion for a preliminary injunction. Plaintiffs seek to enforce a noncompetition provision and other post-termination obligations contracted for in a
franchise agreement entered into between Plaintiffs and Defendants J. Michael
Cormack and Sherrie L. Cormack. For the reasons set forth below, Plaintiffs’ motion is
GRANTED.
I.
Facts
Plaintiffs develop and distribute a full range of digital and conventional offset
printing, large format printing, marketing services, copying, electronic pre-press,
bindery, and mailing services. These services are distributed throughout the United
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States through authorized franchisees, who operate their franchised businesses
pursuant to written franchise agreements with Plaintiffs. On October 4, 2006, Plaintiffs
and Defendants entered into a franchise agreement (“Agreement”) to operate an InstyPrints Center in Fayetteville, Arkansas for a term of twenty years.
The Agreement contained a covenant not to compete, where Defendants agreed
that upon termination or expiration of the Agreement, they would not have:
[A]ny direct, or indirect interest as an owner (whether of record, beneficially,
or otherwise), investor, partner, direct or, officer, employee, consultant,
representative, or agent inany Competitive Businesslocated or operating (a)
within a ten (10) mile radius of [659 Appleby Road, Fayetteville, Arkansas]
and (b) within a five (5) mile radius of any other Center in operation.
(Agreement 24.) The covenant not to compete provides that “[i]f any person restricted
by this Subsection refuses voluntarily to comply with these obligations, the two (2) year
period for that person will commence with the entry of a court order enforcing this
provision.” (Id.)
The Agreement also provides a number of obligations upon its termination or
expiration under a “De-Identification” heading. Some of these state that Defendants: (1)
May not identify themselves as a current or former Center or as one of Plaintiffs’ current
or former franchise owners or use any marks, symbols, or trade names that suggest a
connection or association with Plaintiffs; (2) must deliver, at Defendants’ expense, all
signs, marketing materials, or anything containing any mark or identifying feature
relating to Plaintiffs and allow Plaintiffs to remove those items; (3) must deliver to
Plaintiffs all customer lists; (4) must make the alterations Plaintiffs specify in the
Operations Manuals, at Defendants’ expense, to distinguish the premises from its
former appearance and from other centers in order to prevent public confusion; (5) must
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notify the telephone company of the termination of Defendants’ right to use any
numbers associated with Plaintiffs’ marks, pay any outstanding balance, and authorize
the transfer of any numbers to Plaintiffs; and (6) must give Plaintiffs evidence of their
compliance with these obligations. (Id. at 23-24.)
In the event the Agreement terminates, Defendants must also cease using any of
Plaintiffs’ confidential information and return any copies of the Operations Manuals and
any other confidential material Plaintiffs loaned to Defendants. (Id. at 24.)
Under the Agreement, Defendants agreed to pay Plaintiffs monthly royalty fees
and marketing fund contributions. At some point in 2009 or 2010, Defendants stopped
making these payments to Plaintiffs. Plaintiffs allege that Defendants have not made
these payments since January 2009 and Defendants state that they stopped making
payments in sometime in late 2010. (Pl. Ex. 102; Defs. July 9, 2012 Letter.)
On April 1, 2011, Plaintiffs sent Defendants a letter advising Defendants that they
were in default under the Agreement for failure to make royalty and advertising fund
payments, failure to report royalty figures, and failure to use only Plaintiffs’ marks as the
sole identification of their center. (Pl. Ex. 102.) Plaintiffs demanded that Defendants
cure their default and warned that failure to do so may result in the termination of the
Agreement. The letter listed the post-termination obligations with which Defendants
would be obligated to comply, in the even the Agreement terminated. (Id.) On May 18,
2011, Plaintiffs sent Defendants a letter terminating the Agreement for failure to cure the
defaults listed in the April 1, 2011 letter. (Pls. Ex. 103.) This letter also listed the posttermination obligations Defendants agreed to under the Agreement. (Id.) Defendants
state that they never received either letter from Plaintiffs. (Defs. July 9, 2012 Letter.)
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On July 15, 2011, Plaintiffs filed this action, alleging that Defendants failed to
comply with their non-competition covenant and post-termination obligations by
operating a competitive business at the exact location of their former franchised InstyPrints Center, continuing to use the Insty-Prints Marks and Plaintiffs’ goodwill,
advertising their competitive business as a former Insty-Prints franchise, and continuing
to use the same telephone number. (Compl. ¶¶ 37-40.) Defendants continue to
operate a competitive business, named “Hog Country Media,” from the location of the
previous Insty-Print franchise. Plaintiffs allege charges against Defendants for
trademark infringement, unfair competition, and breach of contract. Plaintiffs are
seeking a preliminary injunction to enforce their non-compete covenant and other posttermination obligations.
II.
Standard
The availability of injunctive relief is a procedural question that is governed by
federal law. Southern Milk Sales, Inc. v. Martin, 924 F.2d 98 (6th Cir. 1991). The Sixth
Circuit has held that a court must consider four factors in deciding whether to issue a
preliminary injunction:
1. whether the movant has shown a strong or substantial likelihood of success on
the merits;
2. whether the movant has demonstrated irreparable injury;
3. whether the issuance of a preliminary injunction would cause substantial harm
to others; and
4. whether the public interest is served by the issuance of an injunction.
Parker v. U. S. Dept. of Agric., 879 F.2d 1362, 1367 (6th Cir. 1989).
The foregoing factors should balanced. In re DeLorean Motor Co., 755 F.2d 1223,
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1229 (6th Cir. 1985). Where the three factors other than the likelihood of success all
strongly favor issuing the injunction, a district court is within its discretion in issuing a
preliminary injunction if the merits present a sufficiently serious question to justify a
further investigation. Id. at 1230. Alternatively, the court may also issue a preliminary
injunction if the movant "at least shows serious questions going to the merits and
irreparable harm which decidedly outweighs any potential harm to the defendant if an
injunction is issued." Frisch's Rest., Inc. v. Shoney's Inc., 759 F.2d 1261, 1270 (6th Cir.
1985) (citations omitted).
A plaintiff must always show irreparable harm before a preliminary injunction may
issue. Friendship Materials, Inc. v. Michigan Brick, Inc., 679 F.2d 100, 104 (6th Cir.
1982). "The basis of injunctive relief in the federal courts has always been irreparable
harm and inadequacy of legal remedies." Sampson v. Murray, 415 U.S. 61, 88 (1974)
(citations omitted). Monetary damages, however substantial, do not constitute
irreparable harm. Id. at 90.
Irreparable injury based on financial loss alone will only be found where the
potential economic loss is so great as to threaten the existence of the movant's
business or “financial ruin” will result. Performance Unlimited, Inc. v. Questar Pub., Inc.,
52 F.3d 1373, 1382-83 (6th Cir. 1995). If money damages can compensate the moving
party, a preliminary injunction is not appropriate.
III.
Analysis
A. Likelihood of Success on the Merits
Plaintiffs argue that the covenant not to compete in the Agreement is valid and
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enforceable. Defendants never filed a response. In their letters to the Court, however,
they do not seem to dispute the reasonableness of the non-compete covenant. Rather,
they claim that they are not in a financially viable position to comply with it.
A party is not required to prove its case in full at a preliminary injunction hearing.
Univ. of Texas v. Camenisch, 451 U.S. 390, 395 (1981). A plaintiff must, however,
“show more than a mere possibility of success.” Six Clinics Holding Corp. v. Cafcomp
Sys., Inc., 119 F.3d 393, 402 (6th Cir. 1997). It is sufficient that the plaintiff raise
questions going to the merits “so serious, substantial, difficult, and doubtful as to make
them a fair ground for litigation and thus for more deliberate investigation.” Id.
Michigan Law explicitly authorizes agreements not to compete as long as they
are reasonable. The statute states:
An employer may obtain from an em
ployee an agreement or covenant which
protects an employer's reasonable competitive business interests and
expressly prohibits an employee from engaging in employment or a line of
business after termination of the employment if the agreement or covenant
is reasonable as to its duration,
geographical area, and t he type of
employment or line of business. To the extent any such agreement or
covenant is found to be unreasonable in any respect, a court may limit the
agreement to render it reas onable in light of the ci rcumstances in which it
was made and specifically enforce the agreement as limited.
Mich. Comp. Laws § 445.774a(1). In addition to examining the reasonableness of the
clause's duration, geographic scope, and type of employment prohibited, courts also
consider the reasonableness of the competitive business interests justifying the clause.
St. Clair Med., P.C. v. Borgiel, 715 N.W.2d 914, 919 (Mich. Ct. App. 2006).
In terms of duration, Michigan courts have upheld non-compete agreements
covering time periods of six months to five years. Certified Restoration Dry Cleaning
Network, L.L.C. v. Tenke Corp., 511 F.3d 535, 547 (6th Cir. 2007). For geographic
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scope, the “guiding principle is that such geographic limitations “must be tailored so that
the scope of the agreement is no greater than reasonably necessary to protect the
employer's legitimate business interests.” Id.
In assessing the type of employment prohibited, the Michigan Court of Appeals
determined:
Because a prohibition on all co
mpetition is in restraint of trade, an employer's
business interest justifying a restri
ctive covenant must be greater than merely
preventing competition. To be reas onable in relation to an employer's
competitive business interest, a restrictve covenant must protect against the
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employee's gaining some unfair advantagein competition with the employer,
but not prohibit the employee from using general knowledge or skill.
St. Clair Med., 715 N.W.2d at 919 (internal citations omitted). Courts find it reasonable
to protect legitimate interests such as trade secrets, confidential information, customer
lists, good will, or cost factors and pricing. Certified Restoration, 511 F.3d at 547-48.
In this case, the covenant not to compete is limited in its duration to two years
from the date that the Agreement terminated or when Defendants begin to comply,
whichever is later. This time-period is well within the generally accepted duration for
reasonable non-compete provisions. The covenant not to compete in this case is also
limited in its geographical scope to a ten-mile radius from the premises where
Defendants’ franchise was and a five-mile radius from any other of Plaintiffs’ franchises.
The duration and geographical scope of the Agreement’s covenant not to compete are
limited to serve the legitimate goal of preventing unfair competition with Plaintiffs’ other
franchises and any potential future franchise at the location where Defendants’
franchise terminated.
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Plaintiffs submitted the declaration of Meredith Flynn, Plaintiffs’ Vice President of
Financial Services and Franchise Compliance. Flynn states:
These covenants against competition ar e necessary to allow t he public's
association of the former franchisee with [Plaintiffs’] brands to dissipate; to
prevent the former franchisee from continuing to use [Plaintiffs’] confidential
information and know-how after the franchise relationship ends; to maintain
[Plaintiffs’] goodwill in the marketplace (as [Plaintiffs] can no lo nger control
the quality of the productsand services offered by the former franchisee who
continues to be associated in the public's eye with Plaintiffs); to prevent the
former franchisee from trading off ofthe goodwill established under the InstyPrints brand, which belongs to [Plaintiffs];to protect the viability of [Plaintiffs’]
franchise system; and to allo w [Plaintiffs] to refranchise the territory if it
wishes.
(Meredith Flynn Decl. ¶ 10, Oct. 17, 2011.)
Plaintiffs have presented sufficient evidence to demonstrate a strong likelihood
that the franchise agreement's non-competition clause is enforceable. Plaintiffs have a
reasonable competitive interest in preventing Defendants from using Plaintiffs’ customer
base, goodwill, and confidential information Defendants acquired as Plaintiff's
franchisee to gain a competitive advantage. Certified Restoration, 511 F.3d at 549.
Moreover, Defendants have not offered any argument or evidence that the non-compete
clause is unreasonable. This Court finds that Plaintiffs have demonstrated a likelihood
of success on the merits.1
B.
Irreparable Harm
Plaintiffs’ motion focuses solely on Defendants’ breach of the covenant not to
compete and because this Court finds that Plaintiff has a high likelihood of success on
the merits of its breach of contract claim, this Court need not determine whether
Plaintiffs have a likelihood of success on their trademark infringement and unfair
competition claims.
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The Sixth Circuit has held that the loss of customer goodwill often amounts to
irreparable injury because the damages flowing from such losses are difficult to
compute. Certified Restoration, 511 F.3d at 550; Basicomputer Corp. v. Scott, 973 F.2d
507, 512 (6th Cir. 1992). “Similarly, the loss of fair competition that results from the
breach of a non-competition covenant is likely to irreparably harm an employer.”
Basicomputer, 973 F.2d at 512.
These are the exact injuries that Plaintiffs will suffer if Defendants are allowed to
continue to breach the Agreement’s covenant not to compete. This factor weighs in
Plaintiffs’ favor.
C.
Harm to Others
In this case, there is no indication that a preliminary injunction enforcing the
terms of the Agreement between Plaintiffs and Defendants would cause any harm to
third parties. Courts also look at the balance of hardship between the parties. Superior
Consulting, Inc. V. Walling, 851 F.Supp. 839, 848 (E.D. Mich. 1994) (Cohn, J.).
Defendants state that they do not have the financial resources to comply with the
post-termination obligations and that a preliminary injunction would cause them to file
bankruptcy. Although Defendants may encounter substantial economic hardship if this
Court issues a preliminary injunction, the Court recognizes that Defendants voluntarily
entered into the Agreement with Plaintiffs, were fully aware of the provisions they
agreed to, and intentionally breached the agreement by ceasing to make the royalty
payments and subsequently refusing to comply with the non-compete covenant and
post-termination obligations. See Kelly Services v. Eidnes, 530 F. Supp. 2d 940, 952
(E.D. Mich. 2008) (Feikens, J.) (finding that the defendant had “brought this harm upon
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herself” by breaking the agreement and risking that the plaintiff would enforce the noncompete provision).
The damage to Defendants by an injunction is limited in time and scope, as they
are free to operate a print and imaging business outside the ten-mile radius of their
former location and, in two years, can operate that business anywhere they so choose.
There is no harm to third parties and although this Court is not unsympathetic to
Defendants financial condition, the Court cannot ignore the reasonable contractual
terms the parties negotiated and the fact that Defendants have brought the economic
harm upon themselves by failing to comply with their contractual obligations.
D.
Public Interest
The Sixth Circuit has held that enforcement of contractual duties is in the public
interest. Certified Restoration, 511 F.3d at 551. This factor weighs in favor of Plaintiffs.
IV.
Conclusion
For the foregoing reasons, Plaintiffs’ motion for a preliminary injunction is
GRANTED.
IT IS HEREBY ORDERED:
1.
Defendants must immediately cease and refrain from having any direct or
indirect interest as an owner (whether of record, beneficially, or otherwise),
investor, partner, director, officer, employee, consultant, representative, or agent
in any Competitive Business (as defined in the parties’ Franchise Agreement)
within ten (10) miles of their former Insty-Prints location at 659 Appleby Road,
Fayetteville, Arkansas, or within five (5) miles of any other Allegra franchised
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center, for a period of two years from the date of this order;
2.
Defendants are prohibited from:
a.
Directly or indirectly at any time or in any manner identifying
themselves or any business as a current or former Insty-Prints
center or as one of Allegra’s current or former franchise owners;
b.
Using any Insty-Prints Mark, any colorable imitation of an InstyPrints Mark, or other indicia of an Insty-Prints center in any manner
or for any purpose;
c.
Using for any purpose any trade name, trade or service mark, or
other commercial symbol that indicates or suggests a connection or
association with Allegra;
3.
Defendants must immediately deliver to Allegra, at defendants’ expense,
all signs, sign-faces, sign-cabinets, marketing materials, forms and other
materials containing any Insty-Prints Mark or otherwise identifying or relating an
Insty-Prints center that Allegra requests and/or allow Allegra, without liability to
defendants or third parties, to remove these items from defendants’ center;
4.
Defendants must immediately deliver to Allegra all customer lists of
Defendants’ former Insty-Prints center;
5.
Defendants must immediately and at their own expense make the
alternations specified by Allegra to distinguish their former Insty-Prints center
clearly from its former appearance and from other Insty-Prints centers in order to
prevent public confusion;
6.
Defendants must immediately notify the telephone company and all
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telephone directory publishers of the termination of defendants’ right to use any
telephone, facsimile or other numbers and telephone directory listings associated
with any Mark, including telephone number (479) 443-7500; to immediately
authorize the transfer of these numbers and directory listings to Allegra or its
designee; and/or at Allegra’s direction, to immediately instruct the telephone
company to forward all calls made to the numbers to numbers specified by
Allegra;
7.
Defendants must immediately cease using any of Allegra’s Confidential
Information (including computer software or similar technology and digital
passwords and identifications that Allegra has licensed to defendants or that
otherwise are proprietary to Allegra or its franchise system) in any business or
otherwise and to immediately return to Allegra all copies of the Operations
Manual and any other confidential materials that Allegra loaned to defendants;
8.
Defendants are prohibited from:
a.
Using the Insty-Prints Marks, or any trademark, service mark, logo,
or trade name that is confusingly similar to the Insty-Prints Marks;
b.
Otherwise infringing upon the Insty-Prints Marks or using any
similar designation, alone or in combination with any other components;
c.
Passing off any products or services as those of Allegra Network,
Allegra Holdings or Allegra Network’s authorized franchisees;
d.
Causing a likelihood of confusion or misunderstanding as to the
source or sponsorship of defendants’ business, products or services;
e.
Causing a likelihood of confusion or misunderstanding as to
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defendants’ affiliation, connection or association with Allegra Network,
Allegra Holdings or Allegra Network’s franchisees, or with any of Allegra’s
products or services; and
f.
Unfairly competing with Allegra Network, Allegra Holdings or
Allegra Network’s franchises, in any manner;
9.
Plaintiffs must file with the Court and serve upon Defendants, in twenty-
one (21) days from the entry of this order, on or about September 10, 2012, a
written report setting forth in detail the manner in which Defendants have or have
not complied with this injunction order.
s/Nancy G. Edmunds
Nancy G. Edmunds
United States District Judge
Dated: August 20, 2012
I hereby certify that a copy of the foregoing document was served upon counsel of
record on August 20, 2012, by electronic and/or ordinary mail.
s/Carol A. Hemeyer
Case Manager
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