Opinion
Civil File No. 08-4905 (MJD/JJK).
September 12, 2008
Cynthia M. Klaus and James M. Susag, Larkin Hoffman Daly Lindgren Ltd., Counsel for Plaintiff.
Stephen M. Harris, Meyer Njus, Counsel for Defendants.
PRELIMINARY INJUNCTION
I. INTRODUCTION
This matter is before the Court on Plaintiff's Motion for Preliminary Injunction. [Docket No. 3] The Court heard oral argument on September 11, 2008.
II. FACTUAL BACKGROUND
A. The Parties
Plaintiff Anytime Fitness, Inc. ("AFI") is a Minnesota corporation with its principal place of business in Minnesota. AFI owns and licenses a system of operating 24-hour fitness facilities under the registered service mark "Anytime Fitness." It currently has more than 800 operating locations, although AFI has only 5 currently operating Anytime Fitness centers in New Jersey. When customers become members of an Anytime Fitness location, they receive reciprocal memberships at the entire network of Anytime Fitness locations.
Defendant Reserve Holdings, LLC ("Reserve") is a New Jersey limited liability company with its principal place of business in New Jersey. Defendant Joseph J. Nordquist is a resident of New Jersey. Nordquist is the owner and operator of Reserve.
B. The Franchise Agreement
On December 30, 2003, AFI entered into a Franchise Agreement with Reserve for Reserve to operate one Anytime Fitness franchise in Mount Olive, New Jersey. Nordquist executed a Personal Guaranty, agreeing, among other things, to be personally bound by each condition and term of the Franchise Agreement. The Franchise Agreement was for a term of 5 years, with an option to renew.
Under the Agreement, AFI could terminate the franchise, upon sixty days' notice, if Defendants "fail, refuse, or neglect to promptly pay any monies owing to [AFI] . . . when due." (Franchise Agreement § 14(B)(2).) The Franchise Agreement provides a list of Defendants' obligations upon termination of the Agreement. For instance, Reserve could not own or operate a fitness center for two years within a five-mile radius of the franchised location or within another franchisee's protected territory, could not use AFI's trademarks, and would discontinue using AFI's proprietary materials and software.
The Franchise Agreement also provides a choice of law provision:
Governing Law. Except to the extent governed by the United States Trademark Act of 1946 (Lanham Act, 15 U.S.C. Section 1051 et. seq.), this Agreement and the franchise relationship will be governed by the laws of the state in which the Franchised Location is located. You waive, to the fullest extent permitted by law, the rights and protections that might be provided through the laws of any state relating to franchises or business opportunities, other than those of the state in which the Franchised Location is located.
(Franchise Agreement § 19(E).)
The Franchise Agreement contains the following forum selection clause:
Venue. Any cause of action, claim, suit or demand allegedly arising from or related to the terms of this Agreement or the relationship of the parties that is not finally resolved by mediation sought to be brought by either party shall be brought exclusively in the United States District Court for the District of Minnesota or the Hennepin County District Court, Minnesota and the parties do hereby waive all questions of personal jurisdiction or venue for the purposes of carrying out this provision.
(Id. § 19(F).)
C. The Parties' Franchise Relationship
With AFI's pre-opening assistance, Defendants opened an Anytime Fitness center in Budd Lake, New Jersey (the "Budd Lake Location") in November 2004. After four years, Defendants stopped paying the fees owed to AFI.
Defendants claim a number of disputes developed during the franchise relationship. They claim that they should not have been charged security fees because they had personnel on-site 24 hours per day and did not use the security service; that AFI's accounting surrogate kept erroneous accounting of the membership revenues owed to Reserve and the fees due to the franchisor; and that Anytime has failed to address unfair competition by another franchisee who was undercutting the membership fees charged by Reserve but then telling the members to use Reserve's gym.
On March 7, 2008, AFI sent a letter to Reserve putting it on notice of default due to its failure to pay the amounts due under the Franchise Agreement. On May 16, 2008, AFI sent Reserve a further notice of default for failure to pay, since mid-2007, monthly franchise fees, general advertising fees, web hosting fees, software license fees, and security monitoring fees, and for failure to use the approved billing and processing services. The letter also stated that AFI intended to exercise its right to terminate the Franchise Agreement if the listed defaults were not remedied within 60 days. The letter further reminded Reserve of its post-termination obligations under the Franchise Agreement, including the prohibition on operating a fitness center at the Budd Lake location or 5-mile area for 2 years following termination. Defendants did not respond in writing to either letter.
In a letter dated July 21, 2008, AFI terminated the Franchise Agreement effective July 22, 2008.
D. Post-Termination Activity
On Monday, August 11, 2008, AFI's investigator visited the Budd Lake location and the building still had two large "Anytime Fitness" signs over the main doors. The Budd Lake location still used Anytime Fitness business cards, floor mats, and schedules. On August 14, the investigator spoke with Nordquist, who sent him a membership contract, letter, and fax cover sheet, all with the Anytime Fitness name. The fax cover sheet, letter, and contract all also contained the same contact information as the former franchised business. AFI has provided proof of the foregoing in the form of the investigator's detailed affidavit and attached photographs and documentary evidence.
E. Procedural History
On August 11, 2008, AFI filed a Complaint against Defendants in this Court alleging Count I, Breach of Franchise Agreement (Violation of Covenant Not to Compete); Count II, Trademark Infringement (Lanham Act); Count III, Trademark Infringement (Common Law); Count IV, Breach of Franchise Agreement (Violation of Additional Post-termination Obligations); Count V, Violations of the Minnesota Deceptive Trade Practices Act; Count VI, Unjust Enrichment; Count VII, Unfair Competition; and Count VIII, Breach of Personal Guaranty.
On August 15, AFI filed this Motion for Preliminary Injunction. On September 5, Defendants filed a Motion to Dismiss based on lack of personal jurisdiction, lack of subject matter jurisdiction, improper venue, improper service, and failure to state a claim upon which relief can be granted. No supporting documents have yet been filed with that motion.
AFI requests that the Court issue a preliminary injunction requiring Defendants to cease all use of the AFI names and marks, prohibiting them from operating a fitness center within a five-mile radius for two years or within the protected territory of another Anytime Fitness location, requiring them to cease using the telephone number and fax number of the former franchised business, and requiring them to return all confidential and proprietary software and other materials.
III. DISCUSSION
A. Standard for Preliminary Injunction
The Eighth Circuit Court of Appeals has established the standard for considering preliminary injunctions and temporary restraining orders. Dataphase Sys. Inc. v. CL Sys., Inc., 640 F.2d 109, 113 (8th Cir. 1981) (en banc). This Court must consider (1) the threat of irreparable harm to the moving party if an injunction is not granted, (2) the harm suffered by the moving party if injunctive relief is denied as compared to the effect on the non-moving party if the relief is granted, (3) the public interest, and (4) the probability that the moving party will succeed on the merits. Id. "The very nature of the inquiry on petition for preliminary relief militates against a wooden application of the probability [of success on the merits] test." Id. at 113. A party, that party's agents, and persons acting in concert with the party are all bound by a temporary restraining order. United States v. Jenkins, 974 F.2d 32, 36 (2d Cir. 1992).
B. Likelihood of Success on the Merits
1. Choice of Law
New Jersey law applies to claims regarding the Franchise Agreement and the franchise relationship, with the exception that federal law applies to trademark claims.
2. Forum Section Clause
Defendants assert that New Jersey law applies to void the forum selection clause in the Franchise Agreement. See Kubis Perszyk Assocs., Inc. v. Sun Microsystems, Inc., 680 A.2d 618, 627 (N.J. 1996) (holding that "forum-selection clauses in franchise agreements are presumptively invalid"). Defendants further conclude that, once the clause is voided, this Court must transfer the case to the District of New Jersey.
The Eighth Circuit has not yet decided whether the enforceability of a forum selection clause in a diversity case is decided under federal or state law. Servewell Plumbing, LLC v. Fed. Ins. Co., 439 F.3d 786, 789 (8th Cir. 2006). Under federal law, "[f]orum selection clauses are prima facie valid and are enforced unless they are unjust or unreasonable or invalid." Id. at 789 (citations omitted). No evidence has been presented to the Court that would show that the forum selection clause in the Franchise Agreement is unjust, unreasonable, or otherwise invalid. The Court concludes that under federal law, the forum selection clause would be likely to be enforced.
The Court does not need to determine whether federal or state law applies, however, because it concludes that even under New Jersey law, the forum selection clause is likely to be enforced. The Court agrees with the District Court for the District of New Jersey that "Kubis only applies where, unlike in the instant case, a plaintiff asserts a valid claim under the Franchise Act."Cadapult Graphic Sys., Inc. v. Tektronix, Inc., 98 F. Supp. 2d 560, 565 (D.N.J. 2000). This Court agrees that "the Kubis court presumed such forum-selection clauses invalid only where franchisees seek swift and effective judicial relief against franchisors that violate the Act." Id. at 566 (citation omitted). In this case, Defendants have brought no Franchise Act claims before this Court.
3. Non-Compete Claim
Based on the evidence currently before it, the Court finds that AFI is likely to succeed on its claim for breach of the non-competition covenant. Defendants are operating a competing fitness center in the same location that was formerly an AFI franchise less than two years after termination of the Franchise Agreement. The covenant is reasonable and enforceable. See Jiffy Lube Int'l, Inc. v. Weiss Bros., Inc., 834 F. Supp. 683, 691-92 (D.N.J. 1993) ("A reasonably crafted restrictive covenant is a legally acceptable means of protecting these interests [of a franchisor in its good will and desire to place a new franchisee in the same location].").
4. Plaintiff's Alleged Breach Invalidating the Franchise Agreement
Defendants argue that AFI has breached the Franchise Agreement itself, as previously noted, so Defendants' performance is excused.
The Court concludes that Defendants are unlikely to show that any of the alleged actions by AFI were a material breach of the Franchise Agreement, as required by New Jersey law. Magnet Resources, Inc. v. Summit MRI, Inc., 723 A.2d 976, 981 (N.J. Ct. App. 1998). See also Dunkin' Donuts Inc. v. Gav-Stra Donuts, Inc., 139 F. Supp. 2d 147, 156 (D. Mass. 2001) ("Even if there were glitches in the provision of assistance by Dunkin' Donuts to defendants, there is no evidence they went to the heart of the contract so as to excuse defendants' contractual obligations.").
5. Trademark Infringement Claim
AFI is likely to succeed on the merits of its trademark infringement claim because it is the owner of the registered trademarks being used by Defendants for the same service — a fitness facility — in the same location as the former franchise. The likelihood of consumer confusion is high.
6. Breach of Post-Termination Obligations Claim
The evidence shows that, despite clear notice of Defendants' obligations in the Franchise Agreement and notice letters, after the termination, Defendants continued to keep and use AFI's software and other proprietary information, and the same contact information, such as the telephone number and fax number, associated with the former franchised business. AFI is likely to succeed on its claim of breach of post-termination obligations.
7. Mediation Requirement
Defendants argue that AFI has failed to abide by the mediation requirement in § 18 of the Franchise Agreement. However, the Mediation section of the Agreement also contains the following provision:
Equitable Relief: Nothing herein contained shall bar our right to seek and obtain temporary equitable relief from a court of competent jurisdiction in accordance with applicable law against any conduct or threatened conduct by you which could impair the goodwill associated with the System, including, without limitation, the Marks.
(Franchise Agreement § 18(G).)
Section 18(G) explicitly states that the agreement to mediate does not impact AFI's right to seek temporary injunctive relief in order to protect AFI's good will. Here, all of AFI's claims seek to protect its good will. The mediation does not bar AFI's motion.
The Court concludes that the likelihood of success on the merits of all three of AFI's claims weighs in favor of granting the requested injunction.
C. Irreparable Harm
1. Whether Plaintiff's Request Is Moot
Defendants argue that they have voluntarily ceased to use the name "Anytime," changed the telephone number, and returned any materials owned by Anytime so those issues are moot. The only evidence Defendants submit to support this assertion is the affidavit of Defendant Nordquist. The Court finds the detailed evidence submitted by AFI, including a detailed affidavit, photographs and documents, carries far more weight than the general averment in Nordquist's affidavit. On the evidence currently before the Court, the Court finds that AFI has shown ongoing infringing and breaching activity by Defendants. AFI's claims for injunctive relief are not moot.
2. Unclean Hands Defense
Defendants assert that AFI is not entitled to an injunction because, based on its alleged contract breaches and misleading promises to negotiate, it has unclean hands. The Court finds that, on the evidence before it, Defendants have not shown that AFI has unclean hands. Additionally, "[t]he unclean hands defense is not an automatic or absolute bar to relief." B.P.G. Autoland Jeep-Eagle, Inc. v. Chrysler Credit Corp., 785 F. Supp. 222, 230 (D. Mass. 1991). Simply because the franchisee accuses the franchisor of failing to perform under the franchise agreement, the franchisee is not excused from following the franchise agreement. See, e.g., McDonald's Corp. v. Underdown, No. 4:04 CV 2484, 2005 WL 1745654, at *3 (M.D. Pa. Jan. 21, 2005) (holding that "merely label[ing] a series of pre-termination disputes `unclean hands,' `estoppel,' or `unconscionability' defenses" does not prevent the franchisor from enforcing the franchise agreement).
3. Existence and Nature of Potential Damages
Defendants argue that there is no irreparable harm because its gym is well run so AFI's reputation would be enhanced by continued association. They claim that because there are only a few other AFI franchises in New Jersey, the AFI name has little value in New Jersey. They further claim that any damages to AFI for Defendants' non-payment of certain fees are easily ascertainable.
The record before the Court shows that AFI invested its training, good will, and resources in Defendants, which allowed Defendants to build a membership list and operate successfully. If the preliminary injunction is not granted to enforce AFI's covenant not to compete, its good will will be harmed by a competing business operating at the former Anytime Fitness location, impairing AFI's ability to establish another franchise in that area. See Jiffy Lube Int'l, 834 F. Supp. at 692-93 ("Irreparable injury to the plaintiffs might also result if the restrictive covenants contained in the License and Franchise Agreements are not enforced. As discussed earlier, the purpose of the restrictive covenant in this setting is to protect the good will of the franchisor. Were we not to grant a preliminary injunction, the good will of the franchisor would be harmed by the existence of a competing service center at the very site of the former Jiffy Lube center. Since customers are likely to patronize businesses close to home or work, the operation of a second service center, even without the Jiffy Lube logo, would greatly impair plaintiff's ability to establish another franchise in the area.").
AFI argues that if it re-franchised in the Budd Lake area, the new franchisee would be forced to compete with someone who had the same equipment, information, and business system and who had already signed all the Anytime Fitness members to contracts. AFI has submitted evidence that it desires to re-franchise the Budd Lake, New Jersey, market and has had recent contact with a prospective Budd Lake franchisee. There is evidence that, if the Franchise Agreement's non-competition requirement is enforced, AFI will likely have a new franchisee operating in the Budd Lake area within 120 to 180 days. Without the preliminary injunction, AFI will be unable to attract new franchisees to Budd Lake and its current franchisees may think that they can violate their franchise agreements with impunity after having taken advantage of AFI's good will to build their businesses, potentially causing AFI's entire franchise system will unravel.
AFI also faces irreparable harm if Defendants continue infringing on AFI's names and trademarks and mislead the public about their relationship with the Anytime Fitness system. "Irreparable harm is presumed where there is trademark infringement." J B Wholesale Distributing, Inc. v. Redux Beverages, LLC, Civil No. 07-4570 (MJD/SRN), 2007 WL 4563457, at *8 (D. Minn. Dec. 20, 2007) (citing West Publ'g Co. v. Mead Data Cent., Inc., 799 F.2d 1219, 1229 (8th Cir. 1986)).
AFI is also likely to suffer irreparable harm from Defendants' continued use of its proprietary materials, such as its proprietary software, and of the franchisee's former contact information, such as its former phone number. Use of the former contact information will lead to customer confusion and use of AFI's propriety information will lead to unfair competition and loss of good will.
Finally, the Court rejects Defendants' argument that AFI's only potential damages are the ascertainable fees that Defendants owe to AFI. As recounted above, without the injunction, AFI will lose the chance to re-franchise in Budd Lake, its franchise system may be irreparably harmed, and its potential customers will be confused.
The threat of irreparable injury on all three of AFI's asserted claims weighs in favor of granting the requested injunction.
D. Balance of the Harms
The Court concludes that the balance of the harms weighs in favor of granting the requested injunction. Any harm to Defendants is self-inflicted, and Defendants failed to take any action to avoid termination although they had ample notice of AFI's intent to terminate the Franchise Agreement. AFI faces a number of significant potential harms, including loss of the opportunity to re-franchise, injury to its good will, and damage to its entire franchise system.
E. Public Interest
The Court concludes that the public interest weighs in favor of granting the injunction. The Budd Lake location members do face loss of their gym. However, there is no allegation that there are not other nearby gyms available, and the public has a strong interest in not being deceived as to the Anytime Fitness name and marks.
F. Bond
Neither party addresses the calculation of a reasonable bond. Based on its review of the record, the Court orders AFI to post a bond of $25,000.
Accordingly, based upon the files, records, and proceedings herein, IT IS HEREBY ORDERED that:
1. Plaintiff's Motion for Preliminary Injunction [Docket No. 3] is GRANTED.
2. Defendants Reserve Holdings, LLC and Joseph J. Nordquist, and their officers, directors, shareholders, employees, servants, agents, and all persons in active concert with them who receive notice of this Order, are hereby restrained and enjoined from:
a. Any use of the registered ANYTIME FITNESS mark and all derivations thereof;
b. Owning, operating, leasing, franchising, conducting, engaging in, being connected with, having any interest in or assisting any person or entity engaged in any fitness center, which is located within a five-mile radius of Defendants' former franchised Anytime Fitness location at 141 Route 46 East, Budd Lake, New Jersey or within the Protected Territory of any other Anytime Fitness location.
c. Retaining any manual, software, or other confidential or proprietary information provided to them under the Franchise Agreement.
3. Defendants shall:
a. Immediately cease all fitness center operations at the location of the former Anytime Fitness franchised business;
b. Return all confidential and proprietary materials of Anytime Fitness, Inc. to Anytime Fitness, Inc., including, but not limited to, all manuals and software, within five (5) days of the date of this Order;
c. Remove and return to Anytime Fitness, Inc. or destroy all signage, promotional materials, and other materials bearing the ANYTIME FITNESS mark, within five (5) days of the date of this Order;
d. Cancel all telephone and/or fax numbers and all directory listings for the former franchised business, within five (5) days of the date of this Order; and
e. Provide proof to Plaintiff's counsel of all steps taken pursuant to this Order, within five (5) days of the date of this Order.
4. This preliminary injunction shall be effective immediately.
5. Plaintiff AFI is ordered to post a bond in the amount of twenty-five thousand dollars ($25,000).