MAACO FRANCHISING, INC. v. AUGUSTIN et al

Filing 58

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

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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

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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

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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

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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

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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

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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

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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

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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

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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.

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