JDS Group Ltd. v. Metal Supermarkets Franchising America Inc.

Filing 19

DECISION AND ORDER finding as moot 2 Motion to Expedite; denying 3 Motion for Preliminary Injunction. Signed by Hon. Michael A. Telesca on 06/20/2017. (CDH)

UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF NEW YORK
JDS GROUP LTD.,
Plaintiff,
-v-

17-cv-6293 (MAT)
DECISION AND ORDER

METAL SUPERMARKETS FRANCHISING
AMERICA, INC.,
Defendant.
I.

Introduction
Plaintiff JDS Group Ltd. (“JDS” or “plaintiff”) commenced the

instant action on May 9, 2017, alleging that defendant Metal
Supermarkets Franchising America, Inc. (“MSFA” or “defendant”) is
violating the Washington State Franchise Investment Protection Act,
Revised Code of Washington (“RCW”) §§ 19.100.010 et seq. (“FIPA”)
and breaching the implied covenant of good faith and fair dealing
by

seeking

to

force

JDS

to

install

new

operating

software.

Concurrently with the complaint, plaintiff filed a motion for a
temporary restraining order and preliminary injunction (Docket No.
3) and a motion for an expedited hearing of its request for
injunctive relief (Docket No. 2).

The parties subsequently agreed

to a briefing schedule, and defendant agreed to delay installation
of the software until June 23, 2017.

As a result, the Court finds

that plaintiff’s request for an expedited hearing is moot, and it
is

accordingly

plaintiff’s

denied.

request

for

For
a

the

reasons

temporary

preliminary injunction is denied.

set

forth

restraining

below,

order

and

II.

Background
The

following

facts

are

taken

from

the

briefs,

affidavits/declarations, and exhibits submitted by the parties.
JDS is a Washington corporation with its principal place of
business in Kent, Washington.

It operates two franchises licensed

by MSFA as retail vendors of metal components used in various
industries, pursuant to two franchise agreements.

MSFA is a

Canadian business entity with its principal place of business in
Mississauga, Canada.

This Court has diversity jurisdiction over

the matter, and the franchise agreements contain a forum selection
cause setting venue in this District.
JDS has been a franchisee of MSFA for approximately 10 years,
and operates two retail locations, one in Kent, Washington, and one
in Portland, Oregon.

JDS has used and continues to use a computer

software platform known as “Metal Magic,” which was provided to it
by MSFA, in its stores.

In 2012, MSFA determined that Metal Magic

was outdated, inefficient, and unable to accommodate anticipated
growth and functionality changes. As a result, MSFA undertook
development of a new, modern software system.

The development of

this new software system, which is known as MetalTech, took three
years and cost in excess of $1,000,000.
MSFA began installation of MetalTech in 2015, starting first
in stores that had not previously used Metal Magic, then in lower
volume stores, then higher volume stores, and finally multi-unit

2

franchised operations.
unreliable

and

does

Plaintiff maintains that MetalTech is

not

perform

as

required.

Specifically,

plaintiff contends that MetalTech is unable to generate accurate
and reliable financial statements, readily calculate sales tax,
“run more than a few checks at a time,” reliably generate invoices,
or effectively transfer materials between co-owned stores, and that
MetalTech makes it more time-consuming to perform simple tasks than
Metal Magic did.
other

MSFA

Plaintiff has submitted declarations from six

franchisees,

encountered

serious

all

problems

of

whom

while

report

using

that

they

have

MetalTech

that

have

negatively impacted their ability to do business.

In opposition,

defendant has produced evidence that 78 of 86 Metal Supermarket
stores are currently using MetalTech, that no store has been forced
to close as a result of the new software, and that, to the
contrary, stores that have converted to MetalTech have, on average,
seen

a

7.4%

increase

in

sales

in

the

months

following

the

conversion.
In August 2016, plaintiff’s then-counsel, purportedly acting
on behalf of the “Metal Supermarkets Franchisee Association” (a
now-inactive association of which plaintiff’s co-owner was the
registered agent), sent a letter to MSFA detailing concerns about
MetalTech.
the

claimed

As such, it is clear that plaintiff was on notice of
issues

with

MetalTech

at

least

by

August

2016.

Nevertheless, in January 2017, plaintiff executed new franchise

3

agreements, which were negotiated by the same lawyer who sent the
August 2016 letter. The new franchise agreements expressly provide
that MSFA has the right to develop or designate computer software
programs and accounting system software and require that plaintiff
use them.

Plaintiff maintains that it had “no choice” but to renew

the franchise agreements, and that it expected that MSFA would not
attempt to install MetalTech until it was functional.
MSFA

is

seeking

to

install

MetalTech

in

JDS’

stores.

Installation was originally scheduled to occur on May 14, 2017, but
has been postponed and is now scheduled to begin on June 23, 2017.
Plaintiff seeks a preliminary injunction preventing MSFA from
installing MetalTech in its stores.
III. Discussion
“A preliminary injunction is an extraordinary remedy never
awarded as of right.”

Winter v. Nat. Res. Def. Council, Inc., 555

U.S. 7, 24(2008); see also Hanson Trust PLC v. ML SCM Acquisition,
Inc., 781 F.2d 264, 273 (2d Cir. 1986)(a preliminary injunction is
“one

of

the

remedies”).

most

drastic

tools

in

the

arsenal

of

judicial

“In order to obtain a preliminary injunction, a party

must demonstrate: 1) that it is subject to irreparable harm; and 2)
either a) that it will likely succeed on the merits or b) that
there are sufficiently serious questions going to the merits of the
case to make them a fair ground for litigation, and that a
balancing of the hardships tips ‘decidedly’ in favor of the moving
4

party.”

Genesee Brewing Co. v. Stroh Brewing Co., 124 F.3d 137,

142 (2d Cir. 1997).
Here, JDS contends that it is likely to succeed on the merits
of its claims for violation of the FIPA and

that it will suffer

irreparable harm to its business interests if forced to install
MetalTech.
A.

For the reasons discussed below, the Court disagrees.
Likelihood of Success on the Merits

In arguing that it is likely to succeed on the merits of its
claims,

JDS

specifically,

contends

that

MSFA’s

actions

violated

RCW §§ 19.100.180 (1), (2)(B), and (2)(H).

FIPA1

-

Section

19.100.180(1) provides that the parties to a franchise agreement
shall

“deal

with

each

other

in

good

faith.”

Section

19.100.180(2)(B) provides that “it shall be an unfair or deceptive
act or practice or an unfair method of competition and therefore
unlawful” for a franchisor to “[r]equire a franchisee to purchase
or lease goods or services of the franchisor or from approved
sources of supply unless and to the extent that the franchisor
satisfies the burden of proving that such restrictive purchasing
agreements are reasonably necessary for a lawful purpose justified
on business grounds, and do not substantially affect competition.”

1

The parties’ franchise agreements contain a New York choice-of-law
provision. However, FIPA provides that “[a]ny agreement, condition, stipulation
or provision, including a choice of law provision, purporting to bind any person
to waive compliance with any provision of this chapter or any rule or order
hereunder is void.” RCW § 19.100.220(2). Accordingly, and because neither party
argues otherwise, the Court assumes FIPA governs the parties’ relationship.

5

Section 19.100.180(2)(H) provides that “it shall be an unfair or
deceptive act or practice or an unfair method of competition and
therefore unlawful” for a franchisor to “[i]mpose on a franchisee
by contract, rule, or regulation, whether written or oral, any
standard of conduct unless the person so doing can sustain the
burden of proving such to be reasonable and necessary.”
With respect to 19.100.180(1), “Washington courts have . . .
recognized that the duty of good faith [set forth in FIPA] does not
operate to create rights not contracted for, nor does it override
the express terms of a contract.”

Fleetwood v. Stanley Steemer

Int’l, Inc., 725 F. Supp. 2d 1258, 1276 (E.D. Wash. 2010) (internal
quotation omitted).

Additionally, Washington courts have held

that, with respect to good faith requirements generally, “[l]ack of
good faith . . . is the equivalent of bad faith and bad faith
embraces more than bad judgment or negligence and imports dishonest
purpose, moral obliquity, conscious wrongdoing, breach of known
duty through some ulterior motive or ill will partaking of the
nature of fraud, and embraces actual intent to mislead or deceive
another.”

Hamilton v. State Farm Mut. Auto. Ins. Co., 9 Wash. App.

180, 189, 511 P.2d 1020, 1025 (Wash. Ct. of Appeals Div. 1 1973).
Here, the express terms of the franchise agreements permit
MSFA

to

develop

accounting
Plaintiff

system
has

or

designate

software

identified

no

computer

and

require

evidence

6

software

programs

that

use

JDS

whatsoever

that

and

them.
MSFA’s

development or implementation of MetalTech were undertaken in bad
faith or that MSFA had any improper purpose or motivation.

To the

contrary, the evidence (including the declarations submitted by
plaintiff)

shows

that

MSFA

has

devoted

significant

time

and

resources to MetalTech, including efforts to resolve the flaws
identified by its franchisees.
for

MSFA

to

deliberately

Indeed, it would make little sense

sabotage

its

franchisees’

operations, thereby injuring its own revenue stream.
circumstances,

the

Court

does

not

believe

business

Under these

plaintiff

has

demonstrated that it is likely to succeed on the merits of this
claim (or even that there are serious questions in this regard).
See Doyle v. Nutrilawn U.S., Inc., 2010 WL 1980280, at *8 (W.D.
Wash. May

17,

2010)

(granting

summary

judgment

on

claim

for

violation of § 19.100.180(1) where plaintiff failed to show that
franchisor failed to act in good faith in connection with the terms
of the franchise agreement).

Moreover, these same considerations

dictate the conclusion that plaintiff is unlikely to succeed on its
claim for breach of the implied covenant of good faith and fair
dealing.

See id. (evaluating FIPA good faith claim and implied

covenant of good faith and fair dealing claim under same standard).
Turning to § 19.100.180(2)(B), both parties acknowledge that
no

case law

exists interpreting

this

provision

of

the

FIPA.

However, the statute itself provides that “[i]n determining whether
a requirement to purchase or lease goods or services constitutes an

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unfair

or

deceptive

act

or

practice

or

an

unfair

method

of

competition the courts shall be guided by the decisions of the
courts

of

the

United

States

interpreting

and

applying

the

anti-trust laws of the United States.” In other words, it is clear
that

§

19.100.180(2)(B)

purchasing

agreements

is

that

aimed

at

improperly

preventing
restrain

restrictive
competition.

Plaintiff has identified no authority for the proposition that a
franchisor requiring the use of specific computer software violates
the anti-trust laws.

Indeed, plaintiff has apparently used Metal

Magic, which is also a proprietary program provided by MSFA, for
approximately ten years without complaint or claim of a FIPA
violation.

Moreover, federal courts have repeatedly held that it

is permissible for a franchisor to require use of its proprietary
computer

systems.

See,

e.g.,

La

Quinta

Corp.

v.

Heartland

Properties LLC, 603 F.3d 327, 336 (6th Cir. 2010); Bores v.
Domino's Pizza, LLC, 530 F.3d 671, 676 (8th Cir. 2008).

Again, the

Court finds that plaintiff has not met its burden of demonstrating
either that it is likely to succeed on the merits of its claim or
that serious questions exist in this regard.
Finally, with respect to § 19.100.180(2)(H), again, there is
no case law interpreting this provision of the FIPA.

However,

commentators have noted that the franchise system relies in large
part on a franchisor’s ability to ensure uniformity and limit
franchisee discretion and that § 19.100.180(2)(H) should therefore

8

not be interpreted “to undercut a franchisor’s business judgment in
establishing standards for its franchise system.” Douglas C. Berry
et. al., State Regulation of Franchising: The Washington Experience
Revisited, 32 Seattle U. L. Rev. 811, 890 (2009).
agrees.

The Court

The Supreme Court of Washington has explained that while

“FIPA is designed to protect franchisees from franchisors,” it
remains the case that “[a] franchise relationship is a business
rather than a fiduciary relationship” and “courts generally give
considerable deference to franchisors’ efforts to restructure,
retrench, or wind down their franchise systems.”

Corp v. Atl.

Richfield Co., 122 Wash. 2d 574, 585-87 (1993). The interpretation
of

§ 19.100.180(2)(H) urged by plaintiff would essentially place

the Court in a supervisory role over the franchisor, responsible
for

deciding

in

each

instance

decision was truly necessary.
overly

broad

and

whether

a

particular

business

The Court finds this interpretation

inconsistent

with

the

clear

intent

of

§

19.100.180.
In sum, the Court finds it unlikely that plaintiff will
succeed

on

the

merits

of

its

claims

against

defendant,

and

determines that plaintiff has failed to raise sufficiently serious
questions in this regard to merit entry of a temporary restraining
order or preliminary injunction.
B.

Irreparable Harm

Assuming arguendo that the Court believed plaintiff was likely
9

to succeed on the merits of its claims, entry of a preliminary
injunction would still not be warranted, because plaintiff has
failed to show that it is likely to suffer irreparable harm.
A showing of irreparable harm is considered the “single most
important

prerequisite

injunction.”

for

the

issuance

of

a

preliminary

Reuters Ltd. v. United Press Int’l, Inc., 903 F.2d

904, 907 (2d Cir. 1990).

“A moving party must show that the injury

it will suffer is likely and imminent, not remote or speculative,
and that such injury is not capable of being fully remedied by
money damages.” NAACP v. Town of East Haven, 70 F.3d 219, 224 (2d
Cir. 1995).
Here, plaintiff argues that it is likely to suffer irreparable
harm if it is required to install MetalTech, because MetalTech is
so flawed that it will substantially impair plaintiff’s ability to
do business, thereby damaging its reputation and goodwill, driving
away customers, causing employee morale issues, and resulting in
lost sales.

The Court finds that plaintiff has failed to show that

these potential harms rise above the speculative level.
Plaintiff’s

motion

relies

primarily

on

the

anecdotal

experiences of other MSFA franchisees who have installed MetalTech.
However, the record shows that MSFA began the installation of
MetalTech in 2015 and that 78 out of 86 Metal Supermarket stores
are now using MetalTech.
forth

in

plaintiff’s

Contrary to the dire predictions set

papers,

stores

10

that

have

converted

to

MetalTech have, on average, seen their sales increase in the months
after the conversion. In short, while it is true that “[t]he total
loss of a business clearly constitutes irreparable injury,” Galvin
v. N.Y. Racing Ass’n, 70 F. Supp. 2d 163, 170 (E.D.N.Y. 1998), and
“the loss of business need not be total, so long as it is so great
as to seriously compromise the company’s ability to continue in its
current form,” plaintiff has fallen short of demonstrating that
this is such a case.

It appears to be true that MetalTech has

glitches and flaws that cause frustration and lost time to MSFA’s
franchisees.

On the record before it, however, this Court cannot

conclude that any impediment imposed by MetalTech is so great as to
impair plaintiff’s ability to continue operating its business.

As

a result, the extraordinary remedy of a preliminary injunction is
inappropriate.
IV.

Conclusion
For the reasons set forth above, plaintiff’s motion for an

expedited hearing (Docket No. 2) is denied as moot and plaintiff’s
motion

for

a

temporary

restraining

order

and

a

preliminary

injunction (Docket No. 3) is denied.
ALL OF THE ABOVE IS SO ORDERED.
S/Michael A. Telesca
MICHAEL A. TELESCA
United States District Judge
Dated:

June 20, 2017
Rochester, New York

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