MAACO FRANCHISING, INC. v. AUGUSTIN et al
MEMORANDUM. ( SIGNED BY HONORABLE LOUIS H. POLLAK ON 4/20/10. ) 4/21/10 ENTERED AND COPIES MAILED TO UNREPS, E-MAILED.(gn, ) Modified on 4/21/2010 (gn, ).
IN THE UNITED STATES DISTRICT COURT F O R THE EASTERN DISTRICT OF PENNSYLVANIA
M A A C O FRANCHISING, INC., P la in tif f , v. P IE R R E PHILIPPE AUGUSTIN, et al., D e f e n d a n ts.
C iv il Action No. 09-4548
M EM ORANDUM A p ril 20, 2010 Pollak, J.
M a a c o Franchising, Inc. (Maaco) brought suit for claims arising under the Lanham A c t, 15 U.S.C § 1051, et seq.,1 and state law against Pierre Philippe Augustin and his wife V irg in ie Augustin, and against their company Phil's Auto Body, Inc. (in the aggregate, th e Augustin Defendants), for breach of a franchise agreement between the parties. Maaco has moved for a preliminary injunction to enforce the franchise agreement's c o v e n a n t not to compete and to enjoin alleged misappropriation of its purported trade s e c re ts (docket no. 4). After expedited discovery, the Augustin defendants have re s p o n d e d to Maaco's motion for a preliminary injunction (docket no. 18). Maaco then
The present preliminary injunction motion raises issues only under state law regarding a covenant not to compete and under the Pennsylvania Uniform Trade Secrets Act, 12 Pa. C .S .A . § 5301 et seq. 1
replied (docket no. 45). A two-day hearing was held to take testimony. The motion is n o w ripe for disposition. As explained herein, I will grant the motion in part and deny the m o tio n in part. I. F a c ts and Procedural History P la in tif f , Maaco Franchising, licenses and trains franchisees to use the Maaco n a m e and methods for auto body repair and painting. In October of 2002, defendants P ie rre and Virginie Augustin entered into a franchise agreement with Maaco's p re d e c e s s o r in interest, Maaco Enterprises, Inc, to last fifteen years. Under the franchise a g re e m e n t, the Augustins were required to i) pay a weekly royalty fee equal to a p e rc e n ta g e of their gross receipts, ii) submit weekly reports of their gross receipts to M a a c o , and iii) contribute to a joint advertising fund. Franchise Agreement ¶¶ 4-5, 11. As part of the franchise agreement, the Augustins agreed not to disclose Maaco's trade s e c re ts . Franchise Agreement ¶¶ 10, 17.C. In addition, the franchise agreement contained a covenant not to compete, which s ta te s : for a period of one (1) year after the expiration or termination of this [ F ra n c h is e ] Agreement, regardless of the cause of termination, or the date u p o n which Franchisee cease to operate the business franchised hereunder f o llo w in g termination or expiration of this [Franchise] Agreement, w h ic h e v e r is later, Franchisee shall not either directly or indirectly, for h im s e lf or through, on behalf of, or in conjunction with any other person, p e rs o n s , partnership, or corporation: (1 ) Divert or attempt to divert any business or customer of the b u s in e ss franchised hereunder to any competitor, by direct or indirect 2
inducement or otherwise, to do or perform, directly or indirectly, any o th e r act injurious or prejudicial to the goodwill associated with the P ro p rie ta ry Marks and the System[;] (2 ) Employ or seek to employ any person who is that time employed b y Maaco or any other franchisee of Maaco, or otherwise directly or in d ire c tly to induct such person to leave his or her employment th e re a t[ ;] (3 ) Own, maintain, engage in, be employed by, lease real estate to, f in a n c e , or have any interest in any business specializing in whole or in part in providing automobile painting or body repair services or p ro d u c ts at the premises of the Center or within a ten (10) mile ra d iu s of any existing or proposed Maaco location.
Franchise Agreement, at ¶ 17.B(1)-(2), 17.C. The Augustin defendants failed to make payments to Maaco under the franchise a g re e m e n t, report their weekly gross receipts, or make their advertising contributions, w h ic h resulted in Maaco terminating the franchise agreement after notice and an o p p o rtu n ity to cure on April 9, 2009. The Augustins continued to operate the center until J u n e 30, 2009. Maaco then took control of the Maaco franchise formerly run by the A u g u s tin s and refranchised it to David Stefan. D e f e n d a n t Pierre Augustin testified at the hearing that Maaco failed to fulfill s e v e ra l promises made to him. He testified that Maaco failed to pay for his relocation f ro m Boston to Florida as promised, that Maaco failed to provide him a lighted sign, and th a t Maaco did not sufficiently aid him in renegotiating his rent or selling his franchise. P ie rre Augustin, after vacating the premises of the Augustins' former Maaco
franchise, started a competing auto body shop one half-mile from their former Maaco f ra n c h is e . Maaco alleges this operation entails use of the "Maaco System" (its purported tra d e secrets) and has been advertised as "Palm Beach Auto formerly Maaco Auto P a in [ t]in g ." Am. Compl. ¶¶ 45, 49. O n October 2, 2009, Maaco filed suit against the defendants for violation of the f ra n c h is e agreement and for preliminary and permanent injunctions to enforce the nonc o m p e te clause and to protect Maaco's trade secrets. Maaco has also sued for trademark in f rin g e m e n t and unfair competition, breach of the covenant of confidentiality, breach of th e covenant of good faith and fair dealing, conspiracy, tortious interference, and unjust e n ric h m e n t. Am. Compl. ¶ 50-51. II. A n a ly sis T h e test for an injunction requires meeting the traditional four factors of: 1) the lik e lih o o d that the plaintiff will prevail on the merits, 2) the extent to which the plaintiff is irreparably harmed by the conduct complained of, 3) the extent to which the defendant w ill suffer irreparable harm if the injunction is issued, and 4) the public interest. Pappan E n te r s ., Inc. v. Hardee's Food Sys., Inc., 143 F.3d 800, 803 (3d Cir. 1998). A. L ik e lih o o d of Success on the Merits
N e ith e r party challenges the Agreement's choice-of-law clause, which requires the a p p lic a tio n of Pennsylvania law. See Franchise Agreement ¶ 24.A. Thus, determining th e plaintiff's likelihood of success on the merits, I must examine whether Maaco is likely
to establish that the covenant not to compete is reasonable and that the defendants m isa p p ro p ria te d trade secrets under Pennsylvania state law. As state law governs, I will b rie f ly state the principles I must apply when interpreting state law. A federal court must, o f course, follow controlling decisions of the Pennsylvania Supreme Court, but if no such d e c is io n is controlling the court must predict how the Pennsylvania Supreme Court would d e c id e if that court were to have occasion to address the issues. Berrier v. Simplicity M fg ., Inc., 563 F.3d 38, 45-46 (3d Cir. 2009). "In making such a prediction, [the court m u s t] consider relevant state precedents, analogous decisions, considered dicta, scholarly w o rk s, and any other reliable data tending convincingly to show how the highest court in th e state would resolve the issue at hand." Id. For a covenant not to compete to be valid under Pennsylvania law three re q u ire m e n ts must be met: "(1) the covenant must relate to either a contract for the sale of g o o d w ill or other subject property or to a contract for employment; (2) the covenant must b e supported by adequate consideration; and (3) the application of the covenant must be re a s o n a b ly limited in both time and territory." Piercing Pagoda, Inc. v. Hoffner, 351 A .2 d 207, 210 (Pa. 1976). None of the parties disputes that the first two requirements are p re s e n t, since the covenant not to compete was incident to a franchise agreement with v a lu a b le consideration on both sides. However, defendants contend that the covenant is u n re a s o n a b le in both time and territory. B a se d on controlling Pennsylvania precedent, I find the covenant not to compete to
be reasonable as to both time and territory. The covenant, by its terms, lasts from one ye a r from the later of "the expiration or termination of this [Franchise] Agreement, . . . or th e date upon which Franchisee cease to operate the business franchised." The P e n n sylv a n ia Supreme Court has found covenants lasting three years in similar contracts to be reasonable. Piercing Pagoda, 351 A.2d at 213. Given the time needed to bring a re p la c e m e n t franchise up to speed and to protect the franchisor's interests, I find the oneye a r term to be reasonable. I also find the scope of the covenant reasonable. As argued in Maaco's proposed c o n c lu s io n s of law, "the covenant only restricts the Augustin Defendants from operating a b u s in e s s substantially similar to their Maaco franchise within a ten mile radius of their C e n te r." Pl's. Proposed Findings of Fact and Conclusions of Law , at 26.2 Employees of M a a c o testified that research has shown that a Maaco franchise can draw customers from u p to ten miles from the franchise. Thus, the ten-mile radius is reasonable in its g e o g ra p h ic scope. A lth o u g h the one-year period is reasonable, the parties dispute whether the one ye a r has commenced, and if it did so, when. The terms of the covenant not to compete lis t two possible dates for the commencement of the covenant"the expiration or te rm in a tio n of this [Franchise] Agreement," which would be April 9, 2009, or "the date
As Maaco has asked for enforcement of the covenant within a ten-mile radius of the Lake Park Center, I need not address whether enforcement of the ten mile radius from all other Maaco franchisees would be reasonable. 6
upon which Franchisee cease[d] to operate the business franchised," which would be June 3 0 , 2009, the date Pierre Augustin vacated the Augustins' former Maaco site. As the c o v e n a n t calls for the later date to be used, I conclude that the one-year period began to ru n on June 30, 2009 and will expire on June 30, 2010. Maaco argues that the covenant should not begin to run until Pierre Augustin c e a s e s to operate any auto painting and body repair shop or one-year from this court's o rd e r. Maaco argues that the failure to abide by the covenant and alleged misconduct d u rin g litigation require an equitable extension of the covenant. Under Pennsylvania law c o v e n a n ts not to compete are to be strictly construed since they are "a partial restraint u p o n the free exercise of trade." Hayes v. Altman, 266 A.2d 269, 271 (Pa. 1970). The P e n n sylv a n ia courts have disapproved of any extension of a covenant not to compete e x c e p t by the covenant's own terms. See Davis v. Buckham, 421 A.2d 427, 431 (Pa. S u p e r. Ct. 1980) ("Since covenants not to compete must be strictly construed . . . it is q u e s tio n a b le whether in any case a chancellor would be justified in extending the period o f restriction."). The Pennsylvania Supreme Court, when faced with the issue, indicated it might allow for an extension if misconduct directly prevents the covenant from being e n f o rc e d . Hayes, 266 A.2d at 272. However, the court declined to authorize extension of the covenant when "the record indicates that there has been no fraud or unnecessary delay c a u s e d by the appellant which unjustly permitted the . . . restraint to expire." Id. Here, M a a c o has not established that any of the alleged misconduct of Pierre Augustin during
the litigation directly caused delay in enforcement of the injunction. S im ila rly, violation of a covenant not to compete does not extend the period of a c o v e n a n t. See Hayes, 266 A.2d at 271-71. If Maaco wanted such protection, it could h a v e included language extending the covenant in the event it was violated. The P e n n sylv a n ia Supreme Court has found a provision extending the covenant not to c o m p e te if it were violated to be reasonable. Worldwide Auditing Services, Inc. v. R ic h te r , 587 A.2d 772, 776-77 (Pa. 1991). B. R e m a in in g Elements
E n f o rc e m e n t of the covenant not to compete would also satisfy the remaining e le m e n ts required for a preliminary injunctionirreparable harm, balancing of the e q u itie s , and the public interest. Calculating damages from the loss of business or loss of re p u ta tio n is at best difficult, if not impossible, and thus Maaco would be irreparably h a rm e d by a failure to grant injunctive relief. See Quaker Chemical Corp. v. Varga, 509 F . Supp. 2d 469, 478-79 (E.D. Pa. 2007) (finding that the departure of a representative of th e plaintiff company to join a competitor threatened irreparable harm since the re p re se n ta tiv e carried with him the company's goodwill and knowledge of its operation). T h e defendants do not argue that the harm to them, if an injunction is granted, w o u ld outweigh the harm to the plaintiff, if the injunction is not granted, or that e n f o rc e m e n t of the covenant is not in the public interest. I find that the harm to Maaco o u tw e ig h s the harm to the Augustins. The Augustins were aware of the potential harm
when they 1) signed the franchise agreement and 2) opened a competing shop following th e termination of the franchise agreement. Additionally, the public interest is served by f u lf illin g the contractual interests of the parties and maintaining the viability of franchise s ys te m s . Thus, I will grant a preliminary injunction enforcing the covenant not to c o m p e te , which will expire on June 30, 2010. C. T r a d e Secrets
T h e parties dispute whether Maaco is entitled to an injunction to protect itself from th e defendants' misappropriation of trade secrets under Pennsylvania's Uniform Trade S e c re ts Act (PUTSA), 12 Pa. C.S.A. § 5301 et seq. PUTSA defines a trade secret as: In f o rm a tio n , including a formula, drawing, pattern, compilation including a c u s to m e r list, program, device, method, technique or process that: (1 ) Derives independent economic value, actual or potential, from not being g e n e ra lly known to, and not being readily ascertainable by proper means by, o th e r persons who can obtain economic value from its disclosure or use. (2) Is the subject of efforts that are reasonable under the circumstances to m a in ta in its secrecy. 12 Pa. C.S.A. § 5202. The "crucial indicia for determining whether certain information c o n s titu te s a trade secret are substantial secrecy and competitive value to the owner." O .D . Anderson, Inc. v. Cricks, 815 A.2d 1063, 1070 (Pa. Super. Ct. 2003). Some a d d itio n a l factors for a court to consider in determining whether given information is a tra d e secret are: (1) the extent to which the information is known outside of the owner's b u s in e s s ; (2) the extent to which it is known by employees and others involved in the o w n e r's business; (3) the extent of measures taken by the owner to guard the secrecy of
the information; (4) the value of the information to the owner and to his competitors; (5) th e amount of effort or money expended by the owner in developing the information; and (6 ) the ease or difficulty with which the information could be properly acquired or d u p lic a te d by others. SI Handling Sys., Inc. v. Heisley, 753 F.2d 1244, 1255-56 (3d Cir. 1 9 8 5 ). Tom Monaghan, Maaco's Vice President of Operations, testified that Maaco b e lie v e d its process of starting and running a franchise to be a trade secret. However, M o n a g h a n and Maaco have not identified any aspect of the Maaco System that meets the re q u ire m e n t of substantial secrecy, since information was available to customers of M a a c o and the public at large about the aspects of the Maaco System that Maaco claims to be proprietary. Thus, I cannot find Maaco proved a sufficient likelihood of success on th e merits to entitle it to an injunction against misappropriation of its purported trade s e c r e ts . D. U n c le a n Hands
T h e defendants argue that Maaco is barred from seeking equitable relief by the d o c trin e of unclean hands. "To prevail on an unclean hands defense, the defendant must s h o w fraud, unconscionability, or bad faith on the part of the plaintiff." S&R Corp. v. J iffy Lube Int'l., 968 F.2d 371, n.7 (3d Cir. 1992) (citing Castle v. Cohen, 676 F. Supp. 6 2 0 , 627 (E.D. Pa.1987)). "The doctrine only applies where the wrongdoing directly a f f e c ts the relationship subsisting between the parties and is directly connected with the
matter in controversy." In re Estate of Pedrick, 482 A.2d 215, 223 (Pa. 1984). Even if I w e re to find that Maaco promised and failed to provide assistance with moving expenses, s ig n a g e , renegotiating the rent, and selling the franchise, I would conclude that the f a ilu re s alleged do not rise to the level of the fraud, unconscionability, or bad faith that w o u ld bar enforcement of the covenant not to compete. III. C o n c lu s io n F o r the reasons stated above, I conclude that the plaintiff's motion for preliminary in ju n c tio n should be granted in part and denied in part. Maaco's request for a preliminary in ju n c tio n enforcing its covenant not compete is granted with respect to a ten-mile radius a ro u n d the Augustins' former Maaco franchise; the requirement not to compete will e x p ire on June 30, 2010. The request for a preliminary injunction barring m isa p p ro p ria tio n of Maaco's trade secrets is denied. An appropriate order accompanies th is memorandum.
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?