Franchise 101: Under Hot Water in the Proper Court; and Kicking Injunctions to the Curb
Franchisor 101: Under Hot Water in the Proper Court
A Washington federal court denied a franchisor’s motion to dismiss for lack of personal jurisdiction, finding the court had personal jurisdiction over a franchisor’s agents who reside in Louisiana, based on their purposeful direction of activities toward Washington State in connection with soliciting and entering into a franchise agreement.
Plaintiffs agreed to open a franchise of HOTWORX, a “hot sauna” fitness studio in Washington state, but the studio never opened. The plaintiffs filed suit against the franchisor, a Wyoming limited liability company based in Louisiana, the franchisor’s CEO, the “franchise recruiter” and an employee of the franchisor, each citizens of Louisiana.
The franchisor and the individual defendants filed a motion to dismiss for lack of personal jurisdiction. The court focused its analysis on specific jurisdiction, which concerns the individuals’ contacts with the state. The court analyzed each individual defendants’ interaction with Washington State to determine whether the individuals purposefully directed their activities or consummated some transactions with the state.
The court noted the franchisor’s franchise recruiter communicated with the plaintiffs many times prior to the franchise agreement’s execution. The court also found that the franchise recruiter was a registered franchise broker in the state of Washington and the registration included consent to any action or proceeding being brought in the state of Washington. The court concluded the franchise recruiter purposefully directed her business activities in Washington by signing the franchise broker application and proceeding to conduct business in Washington.
The court also asserted personal jurisdiction over the franchisor employee named as a defendant. The employee participated in sales-related conversations with the plaintiffs and was likewise a registered franchise broker in Washington. As with the franchise recruiter, the court found the employee was subject to personal jurisdiction in Washington because she purposefully availed herself of the forum by executing the franchise broker application and then conducting franchise-sale related activities in Washington.
The franchisor’s CEO, on the other hand, was not a franchise broker registered in Washington. The court nevertheless found personal jurisdiction because the CEO held a video conference with the plaintiffs, which reinforced the communications and contact between the plaintiffs and the other agents of the franchisor.
The court acknowledged the CEO engaged in only one communication, but the quantity of correspondence is not dispositive. It is the quality of the contacts, which the court found to be sufficient contact for personal jurisdiction.
Absent a provision in a franchise agreement where the parties consent to jurisdiction in a particular forum, franchisors and their agents and employees should consult with counsel on whether sufficient contact with franchisees and prospective franchisees in different states has been made that could subject them to personal jurisdiction.
Skistimas v. Hotworx Franchising LLC, No. 3:23-cv-05975-DGE, 2024 U.S. Dist. LEXIS 191958 (W.D. Wash. Oct. 22, 2024).
Franchisee 101: Kicking Injunctions to the Curb
A Kansas district court denied a franchisor’s motion for preliminary injunction against its former franchisee who engaged in competing businesses immediately after terminating the franchise relationship.
Happy Feet – Legends International, Inc. franchises soccer clubs nationwide. Happy Feet signed a franchise agreement with an experienced soccer coach for the operation of a franchise in Wichita, Kansas.
After over 16 years of operating a Happy Feet franchise, the franchisee notified Happy Feet of his intention to shut down the franchise. After consulting counsel, the franchisee also notified Happy Feet that he was not precluded from and would continue to provide soccer services in the Wichita area. After ending his relationship with the franchisor, the former franchisee started providing coaching and soccer lessons for a nationwide competitor of Happy Feet.
Happy Feet filed suit against its former franchisee alleging trademark infringement, unfair competition, breach of contract, and conversion, among other claims. Happy Feet also sought injunctive relief enjoining its former franchisee from violating the non-compete clause in the franchise agreement and from using or misusing the Happy Feet trademarks.
The parties disagreed on whether there was a covenant not to compete in place, however, the former franchisee did not object to the injunction as to use of the trademarks because he was not using Happy Feet’s trademarks. The court granted the injunction only to prohibit the former franchisee from potential, future use of Happy Feet’s trademark.
The court denied the injunction related to the non-compete clause, finding Happy Feet failed to establish irreparable harm required for injunctive relief. Happy Feet could not prove the alleged harm could not be compensated by monetary damages and could not establish loss of customers, business reputation and goodwill because the former franchisee was not using Happy Feet’s trademarks. Further, Happy Feet failed to show irreparable harm resulting from an alleged breach of the covenant not to compete, if any, since Happy Feet had not recruited another franchisee to operate in the Wichita area.
The court also found Happy Feet did not establish it was likely to prevail on the merits of its claims. In a sworn declaration, the former franchisee stated he did not execute the standard franchise agreement or otherwise agree not to compete after termination of the franchise relationship. Happy Feet did not reply or submit evidence to contradict the declaration.
Franchisees should consult with counsel before directly competing after termination or expiration of their franchise agreement. Where, as here, a franchisee does not execute a franchise agreement with a non-compete clause, counsel should evaluate whether express anti-competition provisions exist or other provisions that would preclude competitive activity.
Happy Feet – Legends Int’l, Inc. v. Cundy, No. 24-2294-KHV, 2024 U.S. Dist. LEXIS 191695 (D. Kan. Oct. 22, 2024).