UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF NEW YORK
June 20, 2006
RESCUECOM CORPORATION, PLAINTIFF,
MICHAEL MATHEWS, DEFENDANT.
The opinion of the court was delivered by: Scullin, Senior Judge
MEMORANDUM-DECISION AND ORDER
Currently before the Court are Plaintiff's motion for a preliminary injunction enforcing the non-compete provisions of its Franchise Agreements with Defendant and its motion to hold Defendant in contempt of Court for violating a state court temporary restraining order. In addition, Defendant has filed a motion for a preliminary injunction restraining Plaintiff from enforcing those same non-compete provisions against him.*fn1, *fn2
Plaintiff, a New York corporation, is exclusively engaged in the offering and selling of franchised computer sales and services businesses nationwide and has more than ninety such franchises throughout the country. Defendant, a resident of New Jersey, is a former corporate franchisee of Plaintiff, who purchased two separately-issued franchises, one on April 25, 2004, and one on or about January 25, 2005, for sales territories in southern New Jersey and southeastern Pennsylvania.
Although the parties dispute the circumstances under which their relationship deteriorated and ended, there is no question that Plaintiff terminated Defendant's Franchise Agreements under a "Notice of Default Under Franchise Agreement" dated July 29, 2005, and a "Notice of Termination" dated August 31, 2005.
Originally Plaintiff filed this action in state court on September 9, 2005, and sought an ex parte temporary restraining order, which the state court granted on October 11, 2005. Before the state court could hold a hearing regarding Plaintiff's motion, Defendant removed the action to this Court on October 21, 2005. Subsequently, both parties moved for a preliminary injunction related to the non-compete provisions of the Franchise Agreements.
The Court held a hearing regarding the parties' preliminary injunction motions on May 23, 2006, and May 26, 2006, at which time David Milman, the Chief Executive Officer of RESCUECOM Corp.; Sabreen Kabeen, Director of Franchise Support for RESCUECOM Corp.; Thomas Dachelle, a RESCUECOM Corp. franchisee in the Philadelphia and Southern New Jersey areas; and John Walsh, a technician who worked for Defendant from September 2004 through August 2005, testified in support of Plaintiff's position; and Defendant testified on his own behalf. At the close of the testimony, the Court reserved decision on the motions but instructed Defendant that he was not to provide services to any of Plaintiff's former or current customers until the Court issued its written determination regarding the pending motions. The Court further instructed Defendant to provide Plaintiff with a copy of his customer list and provided Plaintiff with an opportunity to respond to that list.
The following constitutes the Court's written determination of the pending motions.
A. Preliminary Injunction Standard
A party that seeks a preliminary injunction must demonstrate "(1) that it is likely to suffer possible irreparable injury if the injunction is not granted and (2) either (a) a likelihood of success on the merits of the case or (b) sufficiently serious questions going to the merits to make them a fair ground for litigation and a balance of hardships tipping decidedly in its favor." Dunkin' Donuts Inc. v. Dowco, Inc., No. CIV. 5:98-CV-166, 1998 WL 160823, *2 (N.D.N.Y. Mar. 31, 1998) (citation and footnote omitted).
The "irreparable harm" prong of the preliminary injunction requirement is the "'single most important prerequisite' for the issuance of injunctive relief and must be satisfied before the other issues in the preliminary injunction are addressed." Id. (quotation and other citation omitted). The party seeking the injunctive bears the burden to "show that the irreparable harm is imminent rather than remote or speculative, and it must demonstrate that the injury is 'one incapable of being fully remedied by monetary damages.'" Id. (quotation omitted). The second prong of this requirement, "concerning likelihood of success on the merits, requires examination of the parties' underlying dispute." Id. (citation omitted).
B. Irreparable Injury
Plaintiff contends that, since the termination of the Franchise Agreements, Defendant, in contravention of the non-compete provisions of these Agreements, has solicited Plaintiff's customers and has diverted some of them to his new business, which he operates from the same location in direct competition with Plaintiff's franchisees. At the hearing, Mr. Milman testified that, once Plaintiff loses a customer, that customer may never return and that this loss of a customer as well as the concomitant loss of good will irreparably harms Plaintiff and its franchisees in the geographic area where Defendant has established his new business. In addition, Mr. Milman, as well as Mr. Walsh, testified that Defendant had sent out a flyer to Plaintiff's customers stating, in effect, that Plaintiff was out of business and that Defendant's business was taking its place in the market.
"Generally, when a party violates a non-compete clause, the resulting loss of client relationships and customer good will built up over the years constitutes irreparable harm." Johnson Controls, Inc. v. A.P.T. Critical Sys., Inc., 323 F. Supp. 2d 525, 532 (S.D.N.Y. 2004). Moreover, as the Second Circuit has noted, it is "very difficult to calculate monetary damages that would successfully redress the loss of a relationship with a client that would produce an indeterminate amount of business in years to come." Ticor Title Ins. Co. v. Cohen, 173 F.3d 63, 69-70 (2d Cir. 1999). Finally, if a franchisee is permitted to avoid its reasonable non-compete obligations, not only the franchisor's good will but the franchise system itself is endangered. See Jiffy Lube Int'l, Inc. v. Weiss Bros., Inc, 834 F. Supp. 683, 693 (D.N.J. 1993).
In this case, the evidence demonstrates that Defendant has successfully diverted at least five of Plaintiff's former customers to his new business and has attempted to divert others; such actions undeniably threaten to cause Plaintiff irreparable harm. These customers had a business relationship with Plaintiff which Defendant's actions have irreparably damaged. Moreover, at least to the extent that his actions have been successful, Defendant has prevented Plaintiff from transferring the customer relationship that Defendant had developed with Plaintiff's assistance while he was a franchisee to one or more of Plaintiff's other franchisees, such as Mr. Dachelle, who operate their franchises in the same geographic area. Finally, because Defendant's customer list makes clear that he has successfully solicited and provided services to some of Plaintiff's former customers, Plaintiff has demonstrated that it has already suffered irreparable harm and will continue to suffer such harm, absent injunctive relief.
C. Likelihood of Success
"It is well established under New York law that 'negative covenants restricting competition are enforceable only to the extent that they satisfy the overriding requirement of reasonableness.'" Johnson Controls, Inc., 323 F. Supp. 2d at 533 (quotation and other citation omitted). Thus, "New York . . . courts will enforce a non-compete clause between business entities only where it protects a legitimate business interest and where its terms are reasonable both in time and geographic scope." Servicemaster Residential/Commercial Servs., L.P. v. Westchester Cleaning Servs., Inc., No. 01 Civ. 2229, 2001 WL 396520, *3 (S.D.N.Y. Apr. 19, 2001). Moreover, in the context of a franchisor/franchisee relationship, "[t]here is a recognized danger that former franchisees will use the knowledge that they have gained from the franchisor to serve its former customers, and that continued operation under a different name may confuse customers and thereby damage the good will of the franchisor." Id. (citing Jiffy Lube Int'l, Inc. v. Weiss Bros., Inc., 834 F. Supp. 683, 691-92 (D.N.J. 1993) (upholding ten-month, five-mile restriction on rapid lube operation); Economou v. Physicians Weight Loss Ctrs., 756 F. Supp. 1024, 1032 (N.D. Ohio 1991) (upholding one-year, fifty-mile restriction on diet center)).
Plaintiff claims that it is likely to succeed on the merits of its claim that Defendant has violated the non-compete provisions of the Franchise Agreements and that these provisions are reasonable.*fn3 Moreover, Plaintiff asserts that it provided Defendant with specialized training about how to run a successful computer sales and services business based upon methods that it had developed over a number of years. Finally, Plaintiff argues that, if the Court does not enforce these non-compete provisions, it will be more difficult for Plaintiff to attract new franchisees and to keep its current franchisees because of the increased competition in the area.
On the other hand, Defendant contends that Plaintiff did not provide him with any special training and that he had many years of experience in the computer repair and consulting business prior to becoming a franchisee of Plaintiff.*fn4 Plaintiff acknowledges, however, the he had no experience running a small business prior to that time. Moreover, he asserts that not only does Plaintiff have other franchisees in the same geographic area but that there are also a number of competing businesses that already exist in the same area. Thus, he argues that Plaintiff's interest in protecting its business system and its ability to have other franchisees operate in the same area is outweighed by the harm to him if he is unable to establish a computer service business within the same geographic area for two years.
Although, under certain circumstances, Defendant's arguments might have some merit, Defendant cannot reasonably dispute that, when Plaintiff provided him with training and manuals pertaining to the best methods for operating a successful computer sales and services business -- skills which, as noted, he acknowledges he did not have prior to becoming one of Plaintiff's franchisees -- Plaintiff extended to Defendant the knowledge and ability to launch and successfully operate a computer sales and services business, which Plaintiff is now using to establish his own business. Nor does Defendant dispute that Plaintiff developed these business tools over a number of years through trial and error.
In addition, the testimony at the hearing, as well as Defendant's customer list, demonstrates that Defendant has violated at least some of the non-compete provisions: (1) after Plaintiff terminated the Franchise Agreements, Defendant started his own business, Genietech Computer, at the same location, in direct competition with Plaintiff's franchisees; (2) Defendant approached John Walsh, who had worked for him when he was one of Plaintiff's franchisees and for Thomas Dachille, another of Plaintiff's franchisees, about working as a technician for him in his new business; and (3) Defendant diverted at least five of Plaintiff's former customers*fn5 and may have attempted to divert others to his new business.
For all these reasons, the Court concludes that Plaintiff has established a likelihood of success on the merits of its claims. However, because at this stage of the litigation, the Court cannot determine whether all of the non-compete provisions are reasonable, the Court limits the injunction to the following terms: "during the pendency of this action, Defendant is enjoined from soliciting business from or providing computer-related sales and services to any of Plaintiff's current or former customers."
After reviewing the entire file in this matter, the testimony of the witnesses at the preliminary injunction hearing, and the parties' submissions and oral arguments, as well as the applicable law, and for the reasons stated herein and at the hearing, the Court hereby ORDERS that Plaintiff's motion to hold Defendant in contempt of Court for violating the state court temporary restraining order is DENIED; and the Court further ORDERS that Defendant's motion to disqualify Plaintiff's attorney is DENIED WITHOUT PREJUDICE; and the Court further ORDERS that Plaintiff's motion for a preliminary injunction is GRANTED with the following conditions: "during the pendency of this action, Defendant is enjoined from soliciting business from or providing computer-related sales and services to any of Plaintiff's current or former customers;" and such preliminary injunction shall be entered upon Plaintiff's posting of a security bond in the amount of $25,000 with the Clerk of the Court pursuant to Rule 65(c) of the Federal Rules of Civil Procedure; and the Court further ORDERS that Defendant's motion for a preliminary injunction is DENIED AS MOOT.
IT IS SO ORDERED.