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TELECOMMUNICATIONS CORP. OF AMERICA v. FRANCHISES

June 30, 1971

TELECOMMUNICATIONS CORPORATION of America, Plaintiff,
v.
FRANCHISES INTERNATIONAL, INC., Defendant


Lasker, District Judge.


The opinion of the court was delivered by: LASKER

Memorandum Opinion

LASKER, District Judge.

 Plaintiff moves for a preliminary injunction restraining defendant from selling or otherwise transferring shares of stock of Robotguard, Inc. which have heretofore been issued to defendant and shares of Telecommunications Corporation of America which are about to be distributed as a dividend on the Robotguard stock.

 I.

 Plaintiff is the successor of Robotguard, Inc., a Delaware corporation, which heretofore transferred to plaintiff all of its assets, including its rights under the contract upon which the suit is brought. That contract was entered into between Robotguard, Inc. and the defendant ("FI") in 1968. By its terms Robotguard hired FI (1) to develop a franchise marketing program for Robotguard's product, and (2) to act as Robotguard's exclusive agent for the sale of franchises for a period of three years (later extended to four). *fn1"

 As compensation, defendant was to receive (1) $25,000 in installments during the period of 90 days from the contract date, and (2) 115,840 shares of Robotguard stock "on the date that FI shall have completed and delivered to Client the material relevant to the Franchise Marketing Program required" under paragraph B of the contract (six months). The payment of these items was timely made by Robotguard.

 FI commenced fulfillment of its obligations under the contract, but its efforts had resulted in the sale of only eight franchises (from which Robotguard received only $10,000) when, on April 10, 1970, without prior warning, FI wrote to Robotguard, Inc. as follows: "It is with deep regret that I must inform you that the Board of Directors of Franchises International, Inc., at a meeting held this date, has decided to suspend active business operations of Franchises International, Inc."

 Plaintiff asserts (affidavit of David Lipschutz, president of Telecommunications, sworn to April 28, 1971, at p. 6), and it is not seriously disputed by defendant, that defendant's suspension of operations was caused by its critical financial condition. Reports in the public press on a date earlier than FI's suspension of operations support this contention. For example, the New York Times, in its column entitled "Market Place," reported on December 19, 1969 that FI was "apparently being hobbled by the parent company in its long-range plans through a lack of financial support," referring to a statement by the resigning executive vice president of FI that FI's parent, City Investing Company, had advanced money to FI "by fits and starts" and that FI had been losing "'considerable' money in the last six months," estimating the sum at more than $500,000.

 Claiming that FI had repudiated the contract after only nine months of a four-year term, and had failed to fulfill its contract obligation to use its "best efforts to establish [Robotguard's] franchise network as rapidly and efficiently as possible," Robotguard demanded that FI return to it the 115,840 shares of Robotguard stock. FI refused, and Robotguard instituted this action.

 The complaint contains two counts. The first alleges that by ceasing to do business FI breached and repudiated the agreement to use its best efforts to sell Robotguard franchises and to act as Robotguard's exclusive sales agency. The second alleges fraud and misrepresentation, asserting that FI had represented, prior to the execution of the agreement, that its parent, City Investing Company, had agreed to make available to FI the capital necessary for FI to fulfill its obligations under the agreement; that these representations were known by FI to be untrue, were made for the purpose of inducing Robotguard to enter into the agreement, and that Robotguard relied on them.

 The ultimate relief sought is the rescission of the agreement and an order to plaintiff to return the consideration of $25,000 and the Robotguard stock heretofore paid by Robotguard to FI. It is FI's position that as a matter of New York law, which governs, the plaintiff is not entitled to rescission. FI argues that the contract is divisible into two parts, the first relating to the creation of the franchise program and the second to the sales agency; that the compensation of $25,000 and Robotguard stock was intended by the parties to apply only to the creation of the franchise program (with other compensation to be made for selling activities); that since the creation of the franchise program has been completed, the defendant has performed its obligation as to that part of the contract and is entitled to retain its compensation. Incidently, defendant notes that in the course of its performance of the contract it has spent about $228,000.

 II.

 The criteria for the granting of a preliminary injunction are classically described as a showing of the probability of success and the possibility of irreparable injury. As more fully stated in a recent opinion by the Court of Appeals for this Circuit in Checker Motors Corp. v. Chrysler Corp., 405 F.2d 319, 323, cert. den. 394 U.S. 999, 89 S. Ct. 1595, 22 L. Ed. 2d 777 (1969):

 
" The purpose of a preliminary injunction is to maintain the status quo pending a final determination of the merits (citations omitted). It is an extraordinary remedy, and will not be granted except upon a clear showing of probable success and possible irreparable injury (citations omitted). However, 'the burden [of showing probable success] is less where the balance of hardships tips decidedly toward the party requesting the temporary relief.' (citation omitted). In such a case, the moving party may obtain a preliminary injunction if he has raised questions going to the merits so ...

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