Colorado Security Consultants, LLC et al v. Signal 88 Franchise Group, Inc et al
MEMORANDUM AND ORDER - that Signal 88's motion for preliminary injunction (filing 12 ) is denied. Ordered by Judge John M. Gerrard. (KLF)
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF NEBRASKA
CONSULTANTS, LLC, a Colorado
limited liability company, et al.,
MEMORANDUM AND ORDER
SIGNAL 88 FRANCHISE GROUP,
INC., a Nebraska Corporation, et al.,
The plaintiffs in this case, Colorado Security Consultants, Timothy
Siman, and Jared Iungerich (collectively, CSC), are suing the defendants,
Signal 88 Franchise Group and two associated LLCs (collectively, Signal 88),
for several claims for relief primarily associated with Signal 88's alleged
breach of the parties' franchise agreement. See filing 32. Signal 88 has claims
of its own, alleging that CSC breached the contract and is tortiously
interfering with Signal 88's business relationships. See filing 11.
The matter is before the Court on Signal 88's motion for a preliminary
injunction (filing 12) seeking to enforce the noncompete provision of its
franchise agreement with CSC. The Court finds, however, that Signal 88 has
failed to establish the propriety of injunctive relief. See Roudachevski v. AllAmerican Care Centers, Inc., 648 F.3d 701, 705 (8th Cir. 2011); see also H&R
Block Tax Servs. LLC v. Acevedo-Lopez, 742 F.3d 1074, 1077 (8th Cir. 2014).
Accordingly, the Court will deny Signal 88's motion.
Signal 88 is in the business of franchising a "unique management and
business system for security services[.]" Filing 14-1 at 1. CSC was one of its
franchisees, located in Colorado Springs, Colorado. Filing 14-1 at 2; filing 251 at 2. The franchise agreement between the parties contained a noncompete
provision that barred a franchisee from engaging in the sale of services sold
by Signal 88 within 75 miles of the franchisee's exclusive territory for a
period of 3 years after termination of the franchise agreement. Filing 14-2 at
25. The noncompete provision also includes a no-defense clause, providing
that the noncompete provision would be construed independent of the other
provisions of the franchise agreement, and that "[t]he existence of any claim
or cause of action of [CSC] against [Signal 88] will not constitute a defense to
the enforcement by [Signal 88] of the covenants not to compete." Filing 14-2
at 25. And the noncompete provision expressly permits a court to reform its
scope if necessary to enforce it. Filing 14-2 at 25-26.
The franchise agreement also contained a provision affording CSC a
right of first refusal for any new Signal 88 franchises within a 30-mile radius
of CSC's territory. Filing 14-2 at 27. The provision required Signal 88 to
provide CSC with notice of any new proposed franchise within the 30-mile
radius, and gave CSC 72 hours to notify Signal 88 of CSC's intent to exercise
its right to purchase the proposed new franchise instead, on the same terms
offered to the prospective new franchisee. Filing 14-2 at 27.
In January 2016, Signal 88 advised CSC that a potential new
franchisee, Rebecca Resendes, was interested in getting a Signal 88 franchise
in Colorado Springs. Filing 25-1 at 3. Over the next few months, the parties
and Resendes discussed a number of different business arrangements,
including Resendes purchasing CSC's franchise, reconfiguration of CSC's
territory, or compensating CSC for the customer relationships it had
established in territory that might become Resendes'. Filing 25-1 at 3-4. In
June 2016, Resendes advised CSC that she had acquired a franchise, but
CSC says that the parties continued to discuss various buy-out and
reconfiguration arrangements. Filing 25-1 at 4. At the end of July, however,
Resendes ended those discussions, and Signal 88 told CSC to stop servicing
customers in Resendes' new territory, which was within the radius of CSC's
right of first refusal. Filing 25-1 at 4.
The franchise agreement had first been executed in 2010, effective for a
3-year term. Filing 14-2 at 5, 28. The agreement wasn't formally renewed in
2013, but the parties agreed to extend the term of the agreement, and
amended the agreement in 2015 to memorialize that extension. Filing 25-6 at
2; filing 14-6 at 1. The amendment modified the franchise term to continue
the franchise agreement on a month-to-month basis, subject to a 30-day
notice of termination, although CSC says it was assured by Signal 88 that the
parties would formally renew the franchise agreement in 2016. Filing 14-6 at
1; filing 25-1 at 2. That had not happened before the Resendes negotiations
took place, so when CSC was told to stay out of Resendes' new territory, the
franchise agreement was still being extended month-to-month.
Signal 88 notified CSC on September 30, 2016, that Signal 88 intended
to terminate the franchise agreement effective October 31. Filing 25-5. Since
then, CSC has been providing security services under the name "Guardhail."
Filing 25-6 at 5. According to Signal 88, under the Guardhail name, CSC has
"contacted Signal 88's customers, undercut Signal 88 on price, and caused a
number of customers to cancel contracts with Signal 88." Filing 14-1 at 4.
CSC does not contradict those allegations, but does contend that it has "not
used any of the names or trademarks of Signal 88," nor is it "using any of
Signal 88's manuals or other alleged confidential information or materials in
the Guardhail business." Filing 25-1 at 6; filing 25-6 at 5. Signal 88 moves
the Court to enjoin CSC from providing security services within 75 miles of
its former territory under the franchise agreement. Filing 12.
When deciding whether to issue either a temporary restraining order or
preliminary injunction, the Court weighs the four Dataphase factors: (1) the
threat of irreparable harm to the movant; (2) the state of the balance between
this harm and the injury that granting the injunction will inflict on other
parties; (3) the probability that the movant will succeed on the merits; and (4)
the public interest. Johnson v. Minneapolis Park & Recreation Bd., 729 F.3d
1094, 1098 (8th Cir. 2013) (citing Dataphase Sys., Inc. v. C L Sys., Inc., 640
F.2d 109, 114 (8th Cir. 1981) (en banc)). A preliminary injunction is an
extraordinary remedy, and the movant bears the burden of establishing its
propriety. Roudachevski, 648 F.3d at 705; see H&R Block, 742 F.3d at 1077.1
THREAT OF IRREPARABLE HARM
To show a threat of irreparable harm, the movant must show that the
harm is certain and great and of such imminence that there is a clear and
present need for equitable relief. Roudachevski, 648 F.3d at 706. Stated
differently, the harm "must be actual and not theoretical." Brady v. Nat'l
Football League, 640 F.3d 785, 794 (8th Cir. 2011). And harm is not
irreparable when a party can be fully compensated for its injuries through an
award of damages. Gen. Motors Corp. v. Harry Brown's, LLC, 563 F.3d 312,
319 (8th Cir. 2009).
The Court does not, at this point, have any reason to question that
Signal 88 faces a threat of harm. But the question is whether that harm is
truly irreparable, or whether it could be remedied after the fact with a
permanent injunction and damages. And Signal 88's evidence on the harm it
faces is not particularly compelling. Kevin Jones, Signal 88's chief
development officer, averred generally that
The noncompete agreements are included in the Franchise
Agreement for a number of reasons including, protection of the
The Court applies the federal preliminary injunction standard in a diversity case, at least
where the parties have not suggested that state law supplies meaningfully different
criteria. Lanier Prof'l Servs., Inc. v. Ricci, 192 F.3d 1, 3 (1st Cir. 1999).
[Signal 88 Security] System, to maintain customer goodwill, to
avoid franchisees from acquiring confidential information from
the Signal 88 System and then using that information to compete
with Signal 88 and/or from taking Signal 88 customers.
Filing 14-1 at 3. And, as summarized above, Jones averred that CSC has
established Guardhail, which operates within 75 miles of CSC's former
Signal 88 territory and "offers services substantially the same as those
offered by CSC when they operated as a Signal 88 franchisee within the
[Signal 88 Security] System. Guardhail has contacted Signal 88's customers,
undercut Signal 88 on price, and caused a number of customers to cancel
contracts with Signal 88." Filing 14-1 at 4.
But identifying the purpose of the noncompete provision falls far short
of explaining how CSC's present conduct is actually threatening Signal 88's
goodwill. Nor is it clear how that could be occurring, given that CSC is not
using Signal 88's marks. Factors such as price erosion, loss of goodwill,
damage to reputation, and loss of business opportunities may all be valid
grounds for finding irreparable harm. See Aria Diagnostics, Inc. v. Sequenom,
Inc., 726 F.3d 1296, 1304 (Fed. Cir. 2013). And money damages may not
provide complete relief where harm caused by a breach, even though
economic in nature, is impossible to measure accurately. Ocean Spray
Cranberries, Inc. v. PepsiCo, Inc., 160 F.3d 58, 61 (1st Cir. 1998); see, e.g.,
East St. Louis Laborers' Local 100 v. Bellon Wrecking & Salvage Co., 414
F.3d 700, 705 (7th Cir. 2005); Tom Doherty Assocs., Inc. v. Saban Entm't,
Inc., 60 F.3d 27, 38 (2d Cir. 1995). But on the other hand, it has also been
held that a loss of customers or customer goodwill is not truly "irreparable,"
in the sense that it can be addressed through money damages after a trial on
the merits. Novus Franchising, Inc. v. Dawson, 725 F.3d 885, 895 (8th Cir.
2013); see World Wide Polymers, Inc. v. Shinkong Synthetic Fibers Corp., 694
F.3d 155, 161 (2d Cir. 2012). And accurate measurement is a matter of
degree—courts have refused injunctions to enforce contracts involving
ongoing business relationships even if it would be difficult to prove the
revenues lost from the breach with perfect accuracy. Ocean Spray, 160 F.3d
at 61. When the alleged harm is the loss of customers and business, that
harm is compensable with money damages. See World Wide Polymers, 694
F.3d at 161.
The Court is unpersuaded, in this case, that Signal 88's conclusory
evidence that CSC is soliciting Signal 88 customers establishes irreparable
harm. Potential economic loss may constitute irreparable harm where the
loss is so great that it threatens the very existence of a business. Packard
Elevator v. Interstate Commerce Comm'n, 782 F.2d 112, 115 (8th Cir. 1986).
That is not at issue here. And there is no evidence that Signal 88's goodwill is
being substantially threatened. So, the Court is not convinced that the
damages in this case would be substantially more difficult to calculate than
in any other situation involving lost profits.
The thrust of Signal 88's argument in its brief is the alleged
"irreparable harm to its existing contractual relationships" and "irreparable
harm to its franchise system." Filing 13 at 4. But there is no evidence
supporting that argument. While the Court recognizes the significance of
noncompete provisions to protecting the integrity of franchise systems, the
Court sees nothing here that distinguishes this case from any other case in
which the integrity of a contract is at issue—that is, anything to suggest that
damages or injunctive relief post-judgment would be insufficient to vindicate
the parties' respective contractual obligations and protect Signal 88's system
of contractual relationships.
It is Signal 88's burden to "demonstrate that irreparable injury is likely
in the absence of an injunction." Winter v. Natural Res. Def. Council, Inc., 555
U.S. 7, 22 (2008); see Minn. Bearing Co. v. White Motor Corp., 470 F.2d 1323,
1326 (8th Cir. 1973). Signal 88 has not met that burden, and a preliminary
injunction cannot issue without a showing of irreparable harm. Dataphase,
640 F.2d at 114 n.9.
BALANCE OF HARMS
Obviously, having found little evidence to establish irreparable harm to
Signal 88, the Court's finding regarding the balance of harms also weighs in
favor of CSC. The Court sees little evidence that Signal 88 is being
irreparably harmed, but as CSC points out, the injunction sought by Signal
88 would be devastating to CSC. Because a preliminary injunction is an
extraordinary remedy never awarded as of right, the Court must balance the
competing claims of injury and must consider the effect on each party of the
granting or withholding of the requested relief. Winter, 555 U.S. at 24.
Granting an injunction would effectively close CSC's business, and have the
effect of mooting several of the parties' claims before they have been
addressed on the merits. Accordingly, the balance of harms tips toward CSC.
LIKELIHOOD OF SUCCESS ON THE MERITS
For the sake of completeness, the Court will also consider the parties'
arguments with respect to Signal 88's likelihood of success on the merits.
Signal 88 fares somewhat better on this issue, because it does not appear to
be meaningfully disputed at this point that CSC is actually engaged in
conduct that would contravene the noncompete provision. But that is not to
say that Signal 88's ultimate likelihood of success is entirely clear, or that
Signal 88 has met its burden of showing such a likelihood.
To begin with, CSC questions the enforceability of the noncompete
provision, arguing that it is unreasonable in scope. The parties disagree
about what state's law controls on that issue; Signal 88 cites Nebraska law,
while CSC relies on Colorado law. See, filing 13 at 6-7; filing 24 at 16-17. On
that point, CSC might have the better of the argument: although the
franchise agreement provides that Nebraska law governs, filing 14-2 at 26,
the Court finds it hard to distinguish the Eighth Circuit's decision in DCS
Sanitation Mgmt., Inc. v. Castillo, 435 F.3d 892, 895-97 (8th Cir. 2006).
In that case, the Eighth Circuit applied Nebraska conflict-of-law rules
(which are also applicable here) to a contract containing a noncompete
provision and found that because the agreement was to be performed entirely
in Nebraska, and the only relationship with the contractually chosen state of
Ohio was that the plaintiff's corporate headquarters was located there, then
Nebraska had a greater material interest in the contract. Id. The Eighth
Circuit further found that because there was a difference between Nebraska
and Ohio law regarding whether the noncompete provision could be reformed,
applying Ohio law would be contrary to a fundamental public policy of
Nebraska. Id. So, the Court of Appeals held that Nebraska law controlled. Id.
Although Nebraska is the contractually chosen state here, Castillo is
factually on point: Nebraska conflict of law rules suggest that Colorado has a
greater material interest in the franchise agreement. See id. And, as in
Castillo, there is a fundamental difference in the law of Nebraska and
Colorado. Under Nebraska law, if a court determines that a noncompete
agreement is unreasonable, the court will not reform the noncompete
agreement in order to make it enforceable.2 Id. at 897. Colorado law, on the
other hand, permits such reformation. See, Energex Enters., Inc. v. Anthony
Doors, Inc., 250 F. Supp. 2d 1278, 1283 (D. Colo. 2003); Nat'l Graphics Co. v.
Dilley, 681 P.2d 546, 547 (Colo. App. 1984). Pursuant to Castillo, the Court's
conclusion at this point in the case is that Colorado law is applicable when
determining the enforceability of the noncompete provision.
Under Colorado law, noncompete provisions are disfavored, and are
unenforceable except under a few narrowly construed statutory exceptions.
Signal 88 argues to the contrary, relying on the Nebraska Franchise Practices Act, Neb.
Rev. Stat. § 87-401 et seq., which does permit a noncompete agreement to be reformed. See
Neb. Rev. Stat. § 87-404(2). (CSC, for its part, relies on the Franchise Practices Act for one
of its claims for relief. See filing 32 at 28-29.) But the Franchise Practices Act applies only
to a franchise "the performance of which contemplates or requires the franchisee to
establish or maintain a place of business within the State of Nebraska," which does not
appear to be the case here. See Neb. Rev. Stat. § 87-403.
Colo. Rev. Stat. § 8-2-113; see Gold Messenger, Inc. v. McGuay, 937 P.2d 907,
910 (Colo. App. 1997). The franchise agreement could fall within one of the
statutory exceptions, for "purchase and sale of a business" or "protection of
trade secrets." See, Keller Corp. v. Kelley, 187 P.3d 1133, 1139 (Colo. App.
2008); Gold Messenger, 937 P.2d at 910; see also, Big O Tires, LLC v. JDV,
LLC, No. 08-CV-1046, 2008 WL 4787619, at *3-4 (D. Colo. Oct. 31, 2008);
Quizno's Corp. v. Kampendahl, No. 01-CV-6433, 2002 WL 1012997, at *4-6
(N.D. Ill. May 20, 2002) (applying Colorado law); I Can't Believe It's Yogurt v.
Gunn, No. Civ. A. 94-2109, 1997 WL 599391, at *21 (D. Colo. Apr. 15, 1997).
But even a noncompete provision that falls within a statutory exception must
be reasonable as to its territorial reach and duration. Keller Corp., 187 P.3d
at 1138. And whether the noncompete provision's scope is reasonable is
determined with reference to the purpose of the covenant—that is, with
reference to the statutory exception into which the provision falls. See Gold
Messenger, 937 P.2d at 910; see also Keller Corp., 187 P.3d at 1139-40.
The problem the Court has here, in attempting to assess Signal 88's
likelihood of success on the merits, is that there is no evidence before the
Court that would allow it to determine whether the scope of the noncompete
provision is reasonable. Whether a particular duration or geographic scope is
"reasonable" depends on the facts of each case. Energex Enters., 250 F. Supp.
2d at 1283. The Court must examine the circumstances of the contracting
parties to determine whether a noncompete provision is justified at all, and
then examine the specific terms of the provision to determine the
reasonableness of its effect. Id. But this is a fact-driven test, see id., and the
Court has very little to work with.
For instance, if justified as necessary to protect trade secrets, the
reasonable scope of a noncompete provision may depend on the substance of
the trade secrets, and the extent to which they are being employed. See Gold
Messenger, 937 P.2d at 911-12; see also Mgmt. Recruiters of Boulder, Inc. v.
Miller, 762 P.2d 763, 765-66 (Colo. App. 1988). Signal 88's evidence describes
its confidential information only in very general terms. See filing 14-1 at 1-2.
Other factors that may be relevant to the reasonable scope of the noncompete
provision might be the nature of the business, the size of the relevant market,
and the area in which the businesses operate. See, Zeff, Farrington & Assocs.,
Inc. v. Farrington, 449 P.2d 813, 814 (Colo. 1969); Colonial Life & Acc. Ins.
Co. v. Kappers, 488 P.2d 96, 97 (Colo. App. 1971); see also Reed Mill &
Lumber Co. v. Jensen, 165 P.3d 733, 737-38 (Colo. App. 2006). But again,
there is very little in the record that permits the Court to evaluate whether
the scope of the noncompete provision is "no wider . . . than necessary to
afford the required protection." Miller v. Kendall, 541 P.2d 126, 127 (Colo.
App. 1975); cf. Energex Enters., 250 F. Supp. 2d at 1283.
CSC also argues that although the franchise agreement deems the
relationship between the parties to be that of independent contractors, see
filing 14-2 at 23-24, the actual relationship was that of employer and
employee, see filing 24 at 18. And under Nebraska or Colorado law, that
would make a substantial difference in determining whether the noncompete
provision is reasonable. See, Unlimited Opportunity, Inc. v. Waadah, 861
N.W.2d 437, 637-38 (Neb. 2015); Reed Mill, 165 P.3d at 736-37. It is also,
under Nebraska or Colorado law, a fact-intensive inquiry. See, e.g., Omaha
World-Herald v. Dernier, 570 N.W.2d 508, 513-18 (Neb. 1997); Stampados v.
Colorado D & S Enterprises, Inc., 833 P.2d 815, 816-17 (Colo. App. 1992). And
again, it is a fact-intensive inquiry that the record provides little basis for the
Court to undertake. In fact, Signal 88 did not even address this argument in
its briefs. See, filing 13; filing 28.3
In sum, while the basic facts of the case suggest that Signal 88 has
some likelihood of success on the merits, the evidence presented does very
little to demonstrate that likelihood to the Court. The Court recognizes that a
party seeking injunctive relief need not necessarily show a greater than 50
percent likelihood that it will prevail on the merits. Planned Parenthood
Minnesota, North Dakota, South Dakota v. Rounds, 530 F.3d 724, 731 (8th
Cir. 2008). Signal 88 need only show a "fair chance of prevailing" on its
claims. See Powell v. Noble, 798 F.3d 690, 698 (8th Cir. 2015). But here,
Signal 88's chance of succeeding depends on assessing the merits of factual
questions on which very little relevant evidence has been adduced. The
Court, therefore, finds it difficult to conclude that Signal 88 has met its
burden of showing a reasonable probability of success. See id.
CSC also contends that Signal 88 breached the contract first, and that Signal 88's prior
material breach excused CSC's performance under the noncompete provision. As a general
matter, that might be the case. See Smith Baking Co. v. Behrens, 251 N.W. 826, 827-28
(Neb. 1933); see generally T.C. Williams, Annotation, Restrictive Clause in Employment or
Sales Contract to Prevent Future Competition or Performance of Services for Others as
Affected by Breach of Party Seeking to Enforce It, of His Own Obligations under the
Contract, 155 A.L.R. 652 (1945 & Supp. 2011). But, as Signal 88 points out, the noncompete
provision also contains a no-defense clause, providing that the "existence of any claim or
cause of action" of CSC against Signal 88 "will not constitute a defense to the enforcement"
of the noncompete provision. Filing 14-2 at 25. And while authority on such no-defense
clauses is relatively meager, what authority there is supports their validity. See Cent. Ind.
Podiatry, P.C. v. Krueger, 882 N.E.2d 723, 732 (Ind. 2008); see also, First Ascent Ventures,
Inc. v. DLC Dermacare, LLC, No. CV-06-1794, 2006 WL 7285609, at *5 (D. Ariz. Oct. 25,
2006); Barnes Grp., Inc. v. O'Brien, 591 F. Supp. 454, 462-63 (N.D. Ind. 1984) (applying
Ohio law); Orkin Exterminating Co. v. Harris, 164 S.E.2d 727, 728-29 (Ga. 1968) (citing
Orkin Exterminating Co. v. Gill, 152 S.E.2d 411, 413-14 (Ga. 1966)).
Signal 88 argues that the public interest is served by supporting
contractual enforcement. Filing 13 at 9. But, of course, that argument
depends on the assumption that Signal 88 is in the right on the parties'
contract claims, which is yet to be determined. And, the Court notes, there is
also a strong public interest in encouraging, rather than stifling, competition
in the marketplace. See Calvin Klein Cosmetics Corp. v. Lenox Labs., Inc., 815
F.2d 500, 505 (8th Cir. 1987). The Court does not find the public interest to
weigh in favor of granting or denying injunctive relief.
The Court finds that when the Dataphase factors are weighed, Signal
88 has not met its burden of establishing the propriety of injunctive relief. In
particular, there is little evidence of irreparable harm, nor is there evidence
that would allow the Court to meaningfully assess Signal 88's probability of
succeeding on the merits. Accordingly,
IT IS ORDERED that Signal 88's motion for preliminary injunction
(filing 12) is denied.
Dated this 17th day of March, 2017.
BY THE COURT:
John M. Gerrard
United States District Judge
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