Novus Franchising, Inc. v. Superior Entrance Systems, Inc. et al

Filing 120

ORDER denying as moot defendants' two motions in limine; finding no material breach of the Franchise Agreement on the part of plaintiff; awarding damages for royalties; and providing other declaratory relief. Deadlines set for filing and briefing of attorney fees. Signed by District Judge William M. Conley on 12/27/2012. (llj)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF WISCONSIN

NOVUS FRANCHISING, INC.,
Plaintiff,

OPINION AND ORDER

v.
12-cv-204-wmc
SUPERIOR ENTRANCE SYSTEMS, INC.,
SUPERIOR GLASS, INC., and KNUTE
PEDERSEN,
Defendants.

Shorty after the court issued its decision on summary judgment in this case, the
parties entered into a conditional settlement agreement, stipulating to the remaining
unresolved questions of fact and obviating the need for a bench trial. The only issue
remaining for disposition on the merits is the equitable relief plaintiff seeks under the
Franchise Agreement‟s post-term covenant not to compete. Following additional briefing
by the parties, the court now addresses the scope and proper implementation of that
covenant, which the court previously construed and upheld as reasonable on summary
judgment.
Defendant Superior Enterprise Systems has consistently been in compliance with
the covenant‟s two-year prohibition on competition, which began on February 29, 2012
(the date the Franchise Agreement terminated). Defendant Knute Pedersen, on the other
hand, has not been and is not in compliance.

To be in compliance he must (1)

completely divest all financial interest in and connection with Superior Glass, Inc.; or (2)

arrange for Superior Glass to cease performing auto glass repair. Once in compliance, the
clock will start ticking on Pedersen‟s two-year non-competition period.

OPINION
I.

Scope of the Covenant Not to Compete
The parties disagree over the proper interpretation of the court‟s summary

judgment opinion, which held that Franchise Agreement‟s post-term covenant not to
compete is enforceable with blue-penciled modifications. (Dkt. #105, at p 26.) The
original covenant not to compete is found at § 22.3 of the Franchise Agreement and
reads as follows:
22.3 Post-Term Covenant Not-to-Compete
You agree that you, your Owners, [and] the Personal
Guarantors, and the members of your and their Immediate
Families will not, for a period of two years after the
termination or expiration of this Agreement, for your or their
own account or as an employee, agent, consultant, partner,
officer, director, member, or owner of any other person, firm,
entity, partnership, company, or corporation (a) seek to
employ any person who is at that time employed by us or by
any Novus® Franchisees without the prior consent of their
employer, (b) own, operate, lease, franchise, conduct, engage
in, consult with, be connected with, have any interest in, or
assist any person or entity engaged in any or other business
that is in any way competitive with or similar to the Business
System or your Business which is located within (i) your
APR, (ii) any area of primary responsibility we grant to any
other Novus® franchise or business, or (iii) within ten miles
of any business location of any Novus® franchise or business
in the United States and its possessions. You, your Owners,
and the Personal Guarantors expressly agree that the time
and geographical limitations set forth in this provision are
reasonable and necessary to protect us and our Franchisee if
this Agreement expires or is terminated by either party for
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any reason, and that this covenant not to compete is
necessary to permit us the opportunity to resell and/or
develop a new Novus® business within your APR. You also
agree that if you, your Owners, [or] the Personal Guarantors,
or the members of your or their Immediate Families violate
this covenant not to compete, the term of the non-compete
will be extended for any person engaged in violating this
covenant not to compete, until two years after the violation
has ceased.
(Dkt. #1, ex. 1, § 22.3.)
After analyzing this covenant under Minnesota law and exercising a “blue pencil,”
the court held
with respect to the reasonableness of the time and geographic
restrictions imposed, the covenant is so far reaching that it
prohibits a guarantor‟s relatives from being “connected with”
or having “any interest in” a business in any way competitive
with or similar to a Novus franchise, within ten miles of any
Novus franchise anywhere in the United States, for two years.
(Dkt. #1, ex. 1, § 22.3.) Needless to say, on its face this part
of the covenant appears overbroad and unreasonable. But
applying the so-called “blue pencil” rule, this court can choose
to enforce only the reasonable portions of a covenant,
Hilligoss v. Cargill, Inc., 649 N.W.2d 142, 147 (Minn. 2002),
and the restrictions are quite reasonable as applied in this
case.
(Dkt. #105, at p 27-28.)
Plaintiff argues that the first sentence of this paragraph represents the court‟s
description of the blue-penciling that is necessary to make the covenant enforceable and,
therefore, that the only thing that must be penciled out of the covenant is reference to
the guarantor‟s relatives and family. That is an unreasonably narrow reading and, in any
event, not what the court intended. The first sentence was only as an illustration of the

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extent to which the covenant over-reaches as to whom, where and when the covenant might
apply. The court‟s holding can be found in the two paragraphs that follow:
Although Pedersen may not, himself, constitute a competitive
threat in the auto glass repair marketplace, the noncompetition provision must apply to him if Novus is to have
any sort of relief, because SGI – a non-party to the Franchise
Agreement – cannot be directly restrained. SGI has been
operating a Novus franchise from the same location for the
past two decades. Even if SGI ceases to advertise itself under
the Novus name and logo, it will still retain some residual
community goodwill (and, arguably, technical expertise) as a
result of its long association with Novus.
Although the parties disagree about the extent to which the
presence of an ex-franchisee makes it more difficult for Novus
to re-franchise an area, it seems very likely that SGI‟s
presence in the auto glass repair market will to some extent
hinder Novus‟s efforts to refranchise in and around Superior,
Wisconsin. . . .
(Dkt. #105, at p 28.)
Consistent with this quoted language, the covenant not to compete is only valid to
the extent that it limits competition by Superior Glass, Inc., the de facto franchisee.
Accordingly, the appropriate geographic limit on competition is exactly the same size and
shape as the customer base serviced by Superior Glass in and around Superior,
Wisconsin.1

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This is an atypical case because the franchisee is not a party to the Franchise Agreement
and the contract guarantor has very little direct involvement with auto glass repair. In a
case with more conventional facts, the court would have adhered more closely to the
language of the covenant, rather than fashioning this unique relief by exercise of a blue
pencil. Under the current circumstances, it seems plain that Mr. Pedersen has gained no
competitive advantage whatsoever except to the extent he acts through Superior Glass
and, therefore, it is only reasonable to restrict his participation within the geographical
territory occupied by Superior Glass.
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So much for the appropriate geographical scope. As for the covenant‟s reasonable
temporal scope, there is no need to shorten the restriction provided for in the Franchise
Agreement: two years from the date the Agreement terminated, or from the last violation
of the covenant. Defendants argue that a two-year restriction is excessive, pointing out
that “[u]nder Minnesota law, noncompete provisions in connection with the sale of a
business can be enforced only to the extent necessary to protect the „goodwill
purchased.‟” Hypred S.A. v. Pochard, No. Civ.04–2773(JNE/JGL), 2004 WL 1386149, at
*3 (D. Minn. June 18, 2004) (quoting Bess v. Bothman, 257 N.W.2d 791, 795 (Minn.
1977)). They further argue that the goodwill attached to the Novus brand in Superior,
Wisconsin, was minimal and that the name was “tarnished” when Superior Glass took
over the franchise.
While this may have been a fairly persuasive argument, the time to make it was at
summary judgment, when the enforceability of the covenant was at issue. As plaintiff
correctly points out, in making this argument now, defendants are effectively seeking
reconsideration of the court‟s summary judgment decision, which ruled that the noncompetition provision was “quite reasonable as applied in this case.”

(Summary

Judgment Opinion, dkt. #105, at p 27-28.) The court declines the implicit invitation to
reconsider its earlier opinion based on an argument effectively waived.
As an alternative to a shorter prohibition on competition, defendants also suggest
several possible “start dates” in the past from which the court might choose in deciding
when the two-year, post-term prohibition on competition began. The defendants argue
that because Superior Glass substantially ceased using the Novus trademark in
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November, 2010, it came into substantial compliance with the covenant at that time. In
the alternative, defendants offer May 25, 2012, as the date that Superior Glass
advertised it was no longer a Novus franchisee pursuant to this court‟s preliminary
injunction order. Neither of these dates is proper, however, because non-competition
with Novus does not just mean disassociating from the Novus brand, it means not having
any interest in an auto glass repair business at all. Moreover, there is simply no getting
around the plain language of the Franchise Agreement: Pedersen is bound from
competing “for a period of two years after the termination or expiration of this Agreement.”
(Franchise Agreement, dkt. #1, ex. 1, § 22.3 (emphasis added).) By the plain language of
the Agreement then, the restrictive covenant expires two years from February 29, 2012,
the date that the parties stipulate the Agreement terminated.
While the application of that start date to defendant Superior Entrance Systems is
straightforward enough since it never competed in the auto glass repair market, the issue
is a bit more complicated with respect to Knute Pedersen. According to the Franchise
Agreement “the term of the non-compete will be extended for any person engaged in
violating this covenant not to compete, until two years after the violation has ceased.”
(Dkt. #1, ex. 1, § 22.3.) Defendants essentially admit that Superior Glass has been
performing auto glass repair from February 29, 2102, until the present.

Therefore,

Pedersen has been in breach of the covenant all this time (through his continued
association with Superior Glass), delaying the start date of his two-year non-compete.
Mr. Pedersen will only be in compliance with the covenant not to compete when either
(1) he completely divests all financial interest in and connection with Superior Glass,
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Inc.; or (2) when Superior Glass ceases to perform auto glass repair. At that date, the
countdown clock on the two-year prohibition will begin.

II.

Miscellaneous Additional Matters
At the final pretrial conference on September 6, 2012, defendants raised

objections to certain findings in the summary judgment opinion unrelated to the
substantive merits of the opinion.

Some of those arguments were convincing.

Accordingly, the court will issue a corrected version of the summary judgment motion
with minor edits related to the time at which defendants substantially ceased use of the
Novus mark, and the court‟s footnote #12. Finally, because the court trial scheduled for
September 10, 2012, was cancelled shortly after the final pretrial conference, the court
never had a chance to rule on defendants‟ two motions in limine (dkt. #93). Given the
court‟s other rulings, those motions will now be denied as moot.

ORDER

IT IS ORDERED that:
1. Defendants‟ motions in limine #1 and #2 (dkt. #93) are DENIED as moot in
light of the parties‟ conditional settlement agreement.
2. The court finds that there was no material breach of the Franchise Agreement
on the part of plaintiff Novus Franchising, Inc..
3. The Franchise Agreement terminated on February 29, 2012.

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4. Plaintiff Novus Franchising, Inc. is awarded damages in the amount of
$12,600.00 for royalties due and owing under the Franchise Agreement,
equipment lease obligations, and loss of equipment.
5. Novus Franchising, Inc. retains the right to audit defendants‟ business records
in accordance with the terms of the Franchise Agreement for additional
royalties determined to be due pursuant to the audit, and audit fees pursuant
to the provisions of the Franchise Agreement. Such amounts will be deposited
with the existing escrow agent in keeping with the terms of the court‟s Order
for Preliminary Injunction (dkt. #55).
6. The above Paragraphs 2 through 5 are expressly conditional on the court‟s
Opinion and Order, dated September 5, 2012 (dkt. #105), being upheld on
appeal pursuant to the rationale set forth in Bash v. Firstmark Standard Life Ins.
Co., 861 F.2d 159, 160 (7th Cir. 1988).
7. The post-termination covenant not to compete, set forth in Article 22.3 of
the Franchise Agreement is blue penciled as follows:
22.3 Post-Term Covenant Not-to-Compete
You agree that you, your Owners, [and] the Personal
Guarantors, and the members of your and their Immediate
Families will not, for a period of two years after the
termination or expiration of this Agreement, for your or their
own account or as an employee, agent, consultant, partner,
officer, director, member, or owner of any other person, firm,
entity, partnership, company, or corporation (a) seek to
employ any person who is at that time employed by us or by
any Novus® Franchisees without the prior consent of their
employer, (b) own, operate, lease, franchise, conduct, engage
in, consult with, be connected with, have any interest in, or
assist [Superior Glass, Inc. or] any person or entity [legally
connected with or in effective successorship to Superior
Glass, Inc.] engaged in any or other business that is in any
way competitive with or similar to the Business System or
your Business which is located within (i) your APR, (ii) any
area of primary responsibility we grant to any other Novus®
franchise or business, or (iii) within ten miles of any business
location of any Novus® franchise or business in the United
States and its possessions. You, your Owners, and the
Personal Guarantors expressly agree that the time and
geographical limitations set forth in this provision are
reasonable and necessary to protect us and our Franchisee if
this Agreement expires or is terminated by either party for
8

any reason, and that this covenant not to compete is
necessary to permit us the opportunity to resell and/or
develop a new Novus® business within your APR. You also
agree that if you, your Owners, [or] the Personal Guarantors,
or the members of your or their Immediate Families violate
this covenant not to compete, the term of the non-compete
will be extended for any person engaged in violating this
covenant not to compete, until two years after the violation
has ceased.
Defendants shall abide by the terms of the post-termination covenant not to
compete for a two year period commencing (a) for defendant Superior
Enterprises Inc., on February 29, 2012, and (b) for defendant Knute Pedersen,
on the date he comes into compliance with the covenant.
8. Plaintiff Novus Franchising, Inc. shall file its motion for attorneys‟ fees and
costs no later than fourteen (14) days after entry of this judgment pursuant to
Fed. R. Civ. P. 54. Defendants shall file any opposition to that motion no later
than fourteen (14) days after plaintiff‟s motion is filed. In the event that a
dispute arises as to the hours or hourly rate sought, counsel for both parties
shall promptly exchange with each other and provide to this court a copy of
the actual legal invoices issued to their client and underlying time and cost
records for this matter.

Entered this 27th day of December, 2012.
BY THE COURT:
/s/
________________________________________
WILLIAM M. CONLEY
District Judge

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