Summary
upholding a franchise's covenant not to compete
Summary of this case from Dunkin' Donuts Franchising, LLC v. Claudi a I, LLCOpinion
Civil Action No. 00-186
February 17, 2000
FINDINGS OF FACT AND CONCLUSIONS OF LAW
February 17, 2000
After hearing on the Plaintiff's Motion for Temporary Restraining Order/Preliminary Injunction and Expedited Hearing (Document No. 2) and careful consideration of the Plaintiff's Proposed Findings of Fact and Conclusions of Law (Document No. 10), Plaintiff's Supplemental and Revised Proposed Findings of Fact and Conclusions of Law (Document No. 16), Defendant's Reply to Plaintiff's Proposed Findings and Conclusions and Defendant's Proposed Findings of Fact and Conclusions of Law (Document No. 12) and Defendant's Reply to Plaintiff's Supplemental and Revised Proposed Findings of Fact and Conclusions of Law and Defendant's Supplemental and Revised Proposed Findings of Fact and Conclusions of Law (Document No. 19), and the parties' memoranda of law in support thereof, the Court makes the following findings of fact and conclusions of law.
Findings of Fact
1. Athlete's Foot Marketing Associates, Inc. (hereinafter "AFMAI") is a Delaware corporation having its principal place of business at 1950 Vaughn Road, Kennesaw, Georgia 30144.
2. Defendant Zell Investments, Inc. (hereinafter the "Company" or "Defendant") is a Pennsylvania corporation with places of business at Waterworks Mall and Robinson Town Centre, Pittsburgh, Pennsylvania.
3. Defendant is engaged in interstate commerce.
4. For over 25 years, AFMAI has been continuously engaged in the operation of specialty retail athletic footwear stores.
5. AFMAI is also a franchisor of specialty retail athletic footwear stores.
6. AFMAI has over 400 franchisees licensed through the country and internationally.
7. AFMAI operates in 40 countries and has agreements signed with franchisees in an additional ten countries, which stores are not yet open.
8. In 1971, AFMAI adopted the mark THE ATHLETE'S FOOT® ("Mark") as a trademark and service mark for its specialty retail athletic footwear stores. Since then, it has continuously used THE ATHLETE'S FOOT® Mark as its trademark and service mark.
9. Since 1972, AFMAI has licensed its Mark to its franchisees for use in specific geographic areas for the term of their franchise agreement.
10. AFMAI franchisees are licensed to operate under the AFMAI business system, using specially designed stores, interior and exterior fixtures, identification schemes, products, management programs, standards, specifications and the proprietary Mark.
11. AFMAI invests significant time, money and resources to teach its new franchisees the AFMAI business system and to assist and support its franchisees in opening, establishing and developing their geographic markets.
12. Included among the benefits provided to franchisees such as Company are the following:
(i) A five-day new Owner Business Training Program;
(ii) Guidance and assistance with store construction and setup;
(iii) Startup assistance, which includes inventory supply until the franchisee establishes its own vendor accounts;
(iv) The assistance of an AFMAI representative during the initial days of the franchisee's store operations;
(v) Training tapes and workbooks for the Associate Training Series;
(vi) The Master Fit Technician training program;
(vii) THE ATHLETE'S FOOT franchise meetings conducted four times each year by AFMAI, with each meeting being conducted at four different regional locations for the convenience of franchisees, which focus on business operations and product issues, as well as the annual international conference held in June;
(viii) Vendor account access which allows AFMAI franchisees to purchase goods from companies like NIKE® at substantial discounts compared to what they would pay if they were not part of the franchise system; and
(ix) Weekly mailings from AFMAI headquarters which consist of product updates, information on meeting dates and other franchise activities, promotional matters, and training and operational information.
13. AFMAI's training budget, including regional meetings and conferences is approximately $600,000/year.
14. AFMAI franchisees (like Company) who participate in the Marketing Support Fund (formerly the National Advertising Fund) receive additional benefits as well. These include:
(i) The Communications Planner manual provided to participating franchisees at the inception of the fund program, which gives franchisees valuable marketing information that can be used throughout the operation of their businesses;
(ii) Franchisee access to three different television commercials created and produced annually by AFMAI, which the franchisee in turn can use to advertise in its own market (notably the themes for these commercials are developed by the franchisees themselves through the participation of the AFMAI Franchise Advisory Counsel);
(iii) New monthly videotapes with programming appropriate for use in the stores; and
(iv) A monthly point of purchase kit which includes high-quality signs and posters to be displayed in the stores, together with a Monthly Merchandiser which tells the franchisees where and when the new point of purchase material should be displayed in the store.
15. The Marketing Support Fund is about $2.5 million annually, which is spent entirely on the above-described marketing tools, which are then distributed to all participating franchisees, including defendant.
16. AFMAI also makes available to its franchisees an advertising rebate program, known as the Street Fighters Fund, allowing them to be reimbursed for local marketing, such as sponsoring a local running club or a local baseball team. The Street Fighters Fund is approximately $300,000/year and is distributed three times a year.
17. Franchisees also benefit from extensive research conducted by AFMAI. AFMAI has a research and development center located in Naperville, Illinois, where product wear testing is conducted, and the results of that research are shared with store operators so that they can put a customer into the right shoe for their foot. This is a unique feature of the AFMAI franchise system. The budget for this research and development center is approximately $450,000/year.
18. AFMAI and its franchisees have for many years spent vast sums of money marketing and promoting THE ATHLETE'S FOOT® retail stores and products and services sold using the Mark and trade dress.
19. As a result of this extensive marketing and promotion, valuable goodwill has been developed throughout the United States and internationally for the Mark and trade dress and for the retail stores and products and services sold under the Mark and trade dress, identifying AFMAI as their sponsor and source.
20. The annual sales of AFMAI and its franchisees are just over $2 million, and AFMAI and its franchisees are number four or five in terms of presence in the industry globally.
21. AFMAI first started its franchise system using the trade dress in the Pittsburgh, Pennsylvania area, which is the former place of AFMAI's corporate headquarters. As a result of the longstanding use of the trade dress in this market, AFMAI and its authorized franchisees have developed a significant amount of goodwill associated with the trade dress among consumers in the Pittsburgh area.
22. The relationship between AFMAI and its franchisees is governed by the terms and conditions of a franchise agreement called an "Operating Agreement" entered into between AFMAI and each franchisee.
23. In order to protect the goodwill and control the operational integrity of the franchise system, AFMAI has its staff members visit the stores an average of once every fourteen months and has "mystery shoppers" from an independent company visit the stores three times per year posing as customers in order to assess the level of service being provided to customers. The results are then reported to the stores.
24. The Operations Division of the Franchise Group has an annual budget of about $2 million.
25. In order to protect the goodwill and minimize the erosion of goodwill which occurs when a franchisee ceases to operate as THE ATHLETE'S FOOT®, and to facilitate establishment of a new AFMAI franchise in the same geographic territory, AFMAI includes a non-compete covenant in each of its franchise agreements. Under the standard covenant contained in each franchise agreement, a former franchisee is prohibited from continuing to operate a retail store involving the sale of athletic footwear and sporting goods for a period of one year in its former "Area of Responsibility" — i.e., the geographic territory within which the franchisee was authorized to operate it's THE ATHLETE'S FOOT® store(s) — and a five-mile radius around any other stores operated under the Mark both at the time of contracting and at the time of termination of the Operating Agreement ("Company's Area of Non-Competition").
26. On or about January 3, 1992, AFMAI (as franchisor) and Company (as franchisee) entered into a Franchise Operating Agreement.
27. At that time, Company was represented by counsel, specifically Thomas Lippard, Esquire, of the law firm of Thorp, Reed and Armstrong.
28. Thereafter, on or about July 31, 1992, AFMAI and Company entered into an Amendment to the Operating Agreement entitled First Amendment to Operating Agreement (the "First Amendment"), for the purpose of allowing Company to operate an additional store in the Pittsburgh area.
29. Subsequently, on or about July 16, 1995, AFMAI and Company entered into an Amendment to the Operating Agreement entitled National Advertising Fund Amendment to Operating Agreement (the "Advertising Fund Amendment").
30. The First Amendment, the Advertising Fund Amendment, and Trial Exhibit 15 (Memorandum dated December 18, 1997, signed by Marc Zell and pertaining to the Marketing Support Fund) were the only written amendments or modifications made to the Operating Agreement. The Operating Agreement, as amended by the First Amendment, the Advertising Fund Amendment and Exhibit 15 are hereinafter referred to as the "Operating Agreement."
31. Pursuant to the Operating Agreement, AFMAI granted Company the right to use the Mark in connection with a specialty retail athletic footwear store located in a specified territory. The Operating Agreement defines "Company's Area of Responsibility" as "the premises of the Waterworks Mall, 923 Freeport Road, Pittsburgh, Pennsylvania 15238, and the premises of Robinson Towne Centre, 1525 Park Manor Boulevard, Pittsburgh, Pennsylvania 15205."
32. Section 12.2 of the Operating Agreement provides that upon termination, Company, either directly or through any other entity directly or indirectly related to Company or its shareholders, will not conduct any business or operate any stores, involving the sale of athletic goods or sporting goods for a period of one year in the Company's Area of Non-Competition.
33. Pursuant to the Operating Agreement, AFMAI also granted Company the right to enjoy the benefits and use of the trade dress in its store(s) for the duration of the franchise.
34. With the consent of AFMAI and under the terms and conditions of the Operating Agreement, Company opened a store at the Waterworks Mall in Pittsburgh, Pennsylvania, and another store, also located in Pittsburgh, at the Robinson Towne Centre (hereinafter the "Stores").
35. AFMAI complied with its contractual obligations.
36. AFMAI provided or made available initial and ongoing training to Company, which included providing Company (for use only during the term of its franchise) with AFMAI's copyright-protected Operations Manual, AFMAI's copyright-protected Policies and Standards Manual, product information and training, periodic telephone calls and visits from franchise service representatives (seven visits over seven years), and the opportunity to attend and participate in other regularly-scheduled events AFMAI conducted for the benefit of its franchisees, as described above.
37. One of Company's principals, Marc Zelekovitz, a/k/a Marc Zell, attended the initial new owner training; both Marc Zell and Sandor Zelekovitz, a/k/a Sandy Zell, another principal of the Company, attended the annual conventions from 1992 through 1996; and Marc Zell attended the annual convention in 1997.
38. Company and its officers/shareholders had no prior experience in the operation of an athletic footwear retail store, and Company essentially learned everything it knows about this business as a result of its participation in the AFMAI franchise system and the training Company's personnel received from AFMAI. However, Zell Investments, Inc., had 40 years of relevant business, sales, and retail marketing experience at the time that the Operating Agreement was executed.
39. Company operated its Stores as part of the AFMAI franchise and enjoyed all the benefits thereof, including the training mentioned above and use of the Mark and trade dress, for a period of approximately eight years. Company benefited from its franchise relationship because of AFMAI's promotion of its Mark and product and the resulting customer goodwill and because of the support and assistance provided by AFMAI in opening and developing the Stores.
40. As a result of the training Company received and the other benefits of being part of the franchise system, including use of the Mark and trade dress, Company was successful in developing a solid customer base in the Pittsburgh market while operating its business as THE ATHLETE'S FOOT®.
41. Company's yearly gross sales as reported by Company for royalty purposes grew from approximately $400,000 the first year each store opened to approximately $1,400,000 in 1998.
42. More than one year ago, however, in December 1998, Company decided to allow its Operating Agreement to expire, as of January 2, 2000, as further described below.
43. By letter dated December 23, 1998, Company, through its counsel, gave notice to AFMAI of its termination of its franchise effective upon expiration of the Operating Agreement as of January 2, 2000.
44. By letter dated January 7, 1999, AFMAI, through counsel, responded to Company's December 23, 1998 letter and specifically called to Company's attention Section 12 of the Operating Agreement which sets forth Company's post-termination obligations, which include disassociating itself from AFMAI and discontinuing all use of the trade dress. Further, said letter called Company's attention to its covenant-not-to-compete. Said letter further indicated that AFMAI intended to monitor compliance by Company with the terms of the Operating Agreement.
45. Thereafter, by letter dated February 11, 1999, AFMAI, through counsel, reiterated and further clarified its position regarding Company's obligations under the Operating Agreement, again reminding Company of its obligation under Section 12.2 of the Operating Agreement and of the non-competition provisions.
46. Based on this exchange of correspondence, Company knew or should have known that, if it allowed the Operating Agreement to expire, AFMAI would enforce or attempt to enforce the post-termination obligations of Company, including the non-compete clause.
47. Following this exchange of correspondence as described above, the parties had further discussions about the termination and possible renewal of Company's franchise, but Company ultimately decided not to renew. Accordingly, the Operating Agreement expired by its terms as of January 2, 2000.
48. Section 12.2 of the Operating Agreement provides in pertinent part:
Company and each of its shareholders/partners agree that, upon expiration or termination of this Agreement under the provisions of Section 9.1, 10.1 or 10.2, neither Company, directly or through any other entity directly or indirectly related to Company or Company's shareholders/partners, nor any of Company's shareholders/partners, will conduct any business or operate any stores involving the sale of athletic footwear, sporting goods or any other products or services which are competitive with the products or services being offered by stores operated under the Mark for a period of one (1) year in the Company's area of Non-Competition; . . .
49. In effect, Section 12.2 of the Operating Agreement provides that, upon termination, Company, either directly or through any other entity directly or indirectly related to it, will not conduct any business, or operate any stores, involving the sale of athletic goods or sporting goods for a period of one year in the Company's Area of Non-Competition, which area encompasses the Stores, the malls in which they are located and a five-mile radius of any other stores operated under THE ATHLETE'S FOOT® trademark both now and at the time the Operating Agreement was executed.
50. Company is continuing to operate its Stores and to sell athletic footwear and sporting goods in Company's Area of Non-Competition in spite of the termination of the Operating Agreement and in violation of the covenant-not-to-compete contained therein.
51. On or about January 2, 2000, Zell Investments began to operate two Performance Footwear stores at the sites of its former AFMAI stores.
52. Architectural remodeling design plans have been researched and drafted for the two Performance Footwear stores. Moreover, Zell Investments has paid fees to a general contractor for the following work that has been or will be undertaken at its Performance Footwear stores: (i) the imminent removal of the existing running track; (ii) the replacement of the wall paper with a solid color of paint; (iii) the removal of stadium chairs, which will be replaced by wooden chairs; (iv) new carpeting; and (v) the installation of a new shoe display, which will replace the outdated gridwall.
53. Zell Investments has contracted to expend between $8,000 to $10,000 for new signs for its Performance Footwear stores.
54. On or about April 7, 1999, Zell Investments registered the "Performance Footwear" name with the Pennsylvania Corporation Bureau.
55. Zell Investments currently has approximately $500,000 in footwear inventory in its two Performance Footwear stores.
56. Zell Investments will be prohibited from selling $500,000 in footwear inventory at its two Performance Footwear stores if it is ordered to close these stores.
57. Zell Investments borrowed money from Mellon Bank to purchase inventory.
58. Sandy Zell and Marc Zell personally have guaranteed Zell Investments' lease payments for the Waterworks and Robinson Towne Centre stores.
59. Zell Investments owes approximately $280,000 in lease payments for the Waterworks store and approximately $100,000 in lease payments for the Robinson Towne Centre store.
60. At present, there are only two THE ATHLETE'S FOOT® stores operating in the Pittsburgh market, specifically a franchise store in Shadyside and a corporate store in Century III Mall. This means that almost the entire Pittsburgh region — with the narrow exceptions of defendant's two present store locations (the shopping malls in which they are located) and any other sites within a five-mile radius of the Shadyside store and the Century III Mall store — is available to defendant should it wish to continue in the athletic footwear retail business.
61. AFMAI wishes to establish another franchisee in the area of defendant's stores, but defendant's continued operation of its business in the manner described herein and at the locations of its former franchise locations, is jeopardizing that process and interfering with AFMAI's ability to establish a successful new franchisee in that area. More specifically, AFMAI has identified a suitable location for a new THE ATHLETE'S FOOT® store in a shopping center adjacent to the Robinson Towne Centre and is presently in final lease negotiations with the property owner concerning use of the site for that purpose. AFMAI, however, in all likelihood will be unable to successfully establish a new franchise store at this location since a prospective franchise understandably will be reluctant to start a new THE ATHLETE'S FOOT® store at this location if defendant, a former AFMAI franchisee, continues operating in violation of its non-compete covenant.
62. Other AFMAI franchisees whose franchise agreements are coming up for renewal in the future may be watching to see if Company is permitted to breach its non-compete covenant, which would establish a potentially catastrophic precedent and a "domino" effect whereby a series of franchisees leave the fold to establish competing business at or near the location of their THE ATHLETE'S FOOT® store(s). Indeed, this very defendant has sought to rely on AFMAI's alleged failure to enforce non-compete covenants against other franchisees as a basis for avoiding its own obligations.
63. Company is also continuing to use and advertise under the name Performance Footwear the same telephone numbers it used when Company operated its Stores pursuant to the Operating Agreement under THE ATHLETE'S FOOT® registered trademark, which telephone numbers are listed in the telephone book under the name THE ATHLETE'S FOOT®. This means that someone who uses a telephone book listing to find a THE ATHLETE'S FOOT® store is diverted to Company's new competing Stores.
64. Defendant has profited from its acts of unfair competition and violation of its covenant-not-to-compete, and plaintiff has suffered a loss of sales and profits. The exact extent of the profits and damages are presently unknown and would be difficult to ascertain.
65. Company committed to the expenses represented by Trial Exhibits I, J. K, L and M prior to the issuance of any injunction.
66. Company never followed the notice provisions of Section 15.3 of the Operating Agreement and never gave written notice to AFMAI in accordance with same of any complaints about alleged lack of support from AFMAI, alleged "abdication" of the Pittsburgh market by AFMAI, alleged lack of advertising by AFMAI or alleged breaches of the Operating Agreement by AFMAI.
67. Company's termination letter likewise did not give written notice to AFMAI of any complaints about alleged lack of support from AFMAI, alleged "abdication" of the Pittsburgh market by AFMAI, alleged lack of advertising by AFMAI or alleged breaches of the Operating Agreement by AFMAI. On the contrary, the letter expressly thanks AFMAI "for several good years."
68. In anticipation of the expiration of its Operating Agreement, Company could have stopped purchasing inventory and held a sale.
69. Company's current inventory could be sold from another location which does not violate the non-compete provisions of the Operating Agreement.
70. Company's vehicles could be used from another location which does not violate the non-compete provisions of the Operating Agreement, could be used in a line of business other than the retail sale of athletic footwear and sporting goods or could be used by the Zells as personal vehicles.
71. Future advertising which Company has committed to could be used to advertise another location which does not violate the non-compete provisions of the Operating Agreement.
72. The copy for radio advertising which Company has committed to could be changed to advertise a business other than the retail sale of athletic footwear or sporting goods.
73. Company's lease for its Waterworks Mall store was originally for eight years, co-terminus with the Operating Agreement. In recent months, betting on a renewal of the Operating Agreement, Company extended said lease for another seven years.
Conclusions of Law
1. Pennsylvania law applies to this case. See Operating Agreement at ¶ 14.7.
2. This Court has jurisdiction over the Lanham Act claims pursuant to 28 U.S.C. § 1331 and 1338(a).
3. This Court has jurisdiction over the unfair competition claim pursuant to 28 U.S.C. § 1338.(a) and 1338(b).
4. This Court has supplemental jurisdiction over the state law breach of contract claims pursuant to 28 U.S.C. § 1367(a).
5. Venue in this district is proper under 28 U.S.C. § 1391.
6. Under the standards established by the United States Court of Appeals for the Third Circuit, a party is entitled to a preliminary injunction upon the demonstration of:
[(A)] a reasonable likelihood of eventual success on the merits as well as [(B)] a probability of irreparable injury if relief is not granted. The trial court must also consider [C] the likely consequence of the decision on other parties and [D] the overall public interest.Freixenet, S.A. v. Admiral Wine Liquor Co., 731 F.2d 148, 150-151 (3d Cir. 1984) (citations omitted); Instant Air Co. v. C.F. Air Freight, Inc., 882 F.2d 797, 800 (3d Cir. 1989); Bill Blass. Ltd. v. SAZ Corp., 751 F.2d 152, 154 (3d Cir. 1984); In Re Arthur Treacher's Franchisee Litigation, 689 F.2d 1137, 1143 (3d Cir. 1982).
7. A court's interpretation of a contract is a matter of law. Roman Mosaic Tile Company v. Thomas P. Carney, Inc., 729 A.2d 73, 77 (Pa.Super. 1999). The court's duty when it interprets a contract is to "`ascertain the intent of the parties as manifested by the language of the written agreement.'" Glen-Gery Corporation v. Warfel Construction Company, 734 A.2d 926, 929 (Pa.Super.) (quoting Standard Venetian Blind Co. v. American Empire Insurance Co., 503 Pa. 300, 305, 469 A.2d 563, 566 (1983)). "`The intention of the parties is paramount and the court will adopt an interpretation which under all circumstances ascribes the most reasonable, probable, and natural conduct of the parties, bearing in mind the objects manifestly to be accomplished.'" Bethlehem Steel Corporation v. MATX, Inc., 703 A.2d 39, 42 (Pa.Super. 1997) (quoting Village Beer Beverage, Inc. v. Vernon D. Cox Co., Inc., 475 A.2d 117, 121 (Pa.Super. 1984)).
8. The Operating Agreement, including the covenant-not-to-compete (§ 12.2), is not ambiguous.
9. AFMAI has not breached the Operating Agreement.
10. There is no legal requirement that a covenant-not-to-compete be in bold, italics, large print, all capitalized, underlined or any other special type, be conspicuous, be separately negotiated, or have separately bargained-for consideration apart from that of the original agreement.
11. For a covenant-not-to-compete to be enforceable under Pennsylvania law, it must: (i) relate to a contract for the sale of goodwill or other subject property or to a contract for employment; (ii) be supported by adequate consideration; and (iii) be reasonably limited in time and territory. Ress v. Barent, 378 Pa. Super. 397, 402, 548 A.2d 1259, 1263 (1988) (citing Piercing Pagoda. Inc. v. Hoffner, 465 Pa. 500, 506-07, 351 A.2d 207, 210 (1976)).
12. A restrictive covenant contained in a franchise agreement meets these standards, and injunctive relief is appropriate for the enforcement of such a covenant. Piercing Pagoda. Inc. v. Hoffner, 465 Pa. 500, 351 A.2d 207 (1976). See also Novus Franchising. Inc. v. Taylor, 795 F. Supp. 122 (M.D. Pa. 1992).
13. The covenant at issue here is ancillary to the sale of a legitimate business interest — a franchise, is well within the gambit of reasonableness under Pennsylvania law, and is clearly supported by adequate consideration.
14. A franchisor, such as AFMAI, has a protectable interest in the sale of its franchises such that a reasonable covenant-not-to-compete effective upon the termination of the franchise is enforceable. Piercing Pagoda. Inc. v. Hoffner, 465 Pa. 500, 351 A.2d 207 (1976).
15. The existing franchise itself is a legitimate business interest protectable by a covenant-not-to-compete much like a contract of employment or contract for the sale of a business. Piercing Pagoda. Inc. v. Hoffner, 465 Pa. 500, 351 A.2d 207 (1976).
16. The fact that the covenant-not-to-compete at issue here was entered into as a condition of the franchise relationship is in and of itself adequate consideration to support the covenant.
17. Further, AFMAI's provision to the defendant of training and information, endowing the defendant with AFMAI's trademark, unique method of conducting business, trade dress, reputation and goodwill, and expenditure of great sums on marketing support to enhance the reputation and name recognition of the trademark and trade dress and, resultingly, defendant's franchise, constitutes valuable consideration in exchange for defendant's promise not to compete with AFMAI in its former AFMAI franchise territory for a period of one year following termination.
18. The covenant, therefore, relates to a contract for a legitimate business interest and is supported by adequate consideration.
19. Covenants-Not-To-Compete are enforceable if they are "within such territory and during such time as may be reasonably necessary" without imposing undue hardship. Hayes v. Altman, 424 Pa. 23, 29, 225 A.2d 670, 672 (1967) (citations omitted).
20. The time duration and geographic scope of the covenant at issue here is clearly reasonable under Pennsylvania law. It is intended to give AFMAI an opportunity to establish a new franchisee in the area while there is still customer loyalty and brand name recognition in place. See Blair Design Construction Company, Inc. v. Kalimon, 366 Pa.Super. 194, 201, 530 A.2d 1357, 1360 (1987) (Preliminary injunction held to be reasonable where it enjoins former employee from competing against former employer for three years); John G. Bryant Co., Inc. v. Sling Testing Repair. Inc, 471 Pa. 1, 13, 369 A.2d 1164, 1170 (1977) (Injunctive relief granted to enforce three-year restriction on non-competition);Piercing Pagoda. Inc. v. Hoffner, 465 Pa. 500, 510-11, 351 A.2d 207, 212 (1976) (Injunctive relief granted to enforce three-year restriction on competition); Boldt Machinery Tools. Inc. v. Wallace, 469 Pa. 504, 513, 366 A.2d 902, 907 (1976) (Supreme Court upheld a five-year restriction on competition); Gilvaer Ins. Agency, Inc. v. Kaess, 70 Pa. D. C. 2d 771, 775-76 (Phil. Co. 1974) (Former employee of insurance agency enjoined from "soliciting" for two years in Philadelphia); Strayer-Beitzel of York, Inc. v. Mehl, 82 York 133, 134 (1968) (Injunction entered restraining breach of five-year non-compete clause); and Niedland v. Shrenk, 6 Pa. D. C. 2d 176, 182-185 (Phil. Co. 1956) (Defendant enjoined from breaching two-year non-compete clause after plaintiff-employer "trained defendant as dance instructor" and "disclosed business methods" to defendant).
21. In light of the irreparable harm defendant's continued operation will bring to AFMAI, a covenant of one year is clearly reasonable under applicable Pennsylvania law.
22. The geographic scope of the covenant not-to-compete at issue here is also reasonable. See Sidco Paper Co. v. Aaron, 465 Pa. 586, 599, 351 A.2d 250, 256-57 (1976) (Affirming injunctive relief to enforce non-compete covenants with portions of three states and all of the District of Columbia); Wainwright's Travel Service, Inc. v. Schmolk, 347 Pa.Super. 199, 205, 500 A.2d 476 (1985) (Affirming injunctive relief to enforce non-compete covenants within employee's primary business area of five states); Strayer v. Beitzel of York, Inc. v. Mehl, 82 York 133, 134-135 (1968) (Injunction restraining breach of non-compete clause applicable to entire Commonwealth of Pennsylvania plus 50 miles); American Mutual Liability Inc. Co. v. Kosan, 635 F. Supp. 341, 344-45 (W.D. Pa. 1986), aff'd 817 F.2d 751 (3d Cir. 1987) (Insurance agent restricted from competing with former employer insurance firm within 50-mile radius pursuant to agreement).
23. Accordingly, this Court finds as a matter of law that the covenant is enforceable, AFMAI is likely to succeed on the merits of its claim for breach of the covenant — not-to-compete and injunctive relief is appropriate to halt the defendant's breach of the covenant.
24. Company is also violating its obligations under the Operating Agreement (§ 12.4) by continuing to use the same telephone numbers it used when Company operated its Stores pursuant to the Operating Agreement under THE ATHLETE'S FOOT®.
25. That someone who uses the current directory listing to find a THE ATHLETE'S FOOT® store is diverted to Company's new competing stores is evidence that Company is attempting to trade off of the goodwill and the name recognition associated with its Stores formerly operated pursuant to the Operating Agreement under THE ATHLETE'S FOOT® trademark.
26. Accordingly, AFMAI is likely to succeed on the merits of its unfair competition and breach claims.
27. Irreparable injury results when a former franchisee competes against a franchisor in breach of a restrictive covenant contained in the parties' franchise agreement. See e.g., Maaco Enterprises. Inc. v. Bremner, 1998 WL 669936 (E.D. Pa. Sept. 29, 1998); Rita's Water Ice Franchise Corp. v. DBI Investment Corp., 1996 WL 165518 (E.D. Pa. Apr. 8, 1996); Sparks Tune-Up, Inc. v. White, 1989 WL 41321 (E.D. Pa. April 18, 1989); Novus Franchising. Inc. v. Taylor, 795 F. Supp. 122 (M.D. Pa. 1992); Jiffy Lube Int'l. Inc. v. Weiss Bros. Inc., 834 F. Supp. 683, 690-93 (D.N.J. 1993).
28. The covenant-not-to-compete set forth in the Operating Agreement is designed to prevent not only sales that might result from the prohibited competition, but primarily to prevent a disturbance in the relationship between AFMAI and its customer base, and the goodwill developed for the stores operated by AFMAI and its authorized franchisees, specially in the Pittsburgh market. The consequences of this disturbance with customer relationships is unascertainable and not capable of being fully compensated by money damages. E.g., Rollins Protective Servs. v. Shaffer Co., 383 Pa. Super. 598, 557 A.2d 413, 415 (1989).
29. AFMAI's ability to establish a new franchise presence in the Pittsburgh market is being immeasurably impaired by Company's continued operation of its Stores.
30. Company's breach of its non-compete covenant is irreparably harming AFMAI in other, perhaps less obvious ways. Eighteen other AFMAI franchisees whose franchise agreements are coming up for renewal in the years 2000 and 2001 may be watching to see if Company is permitted to breach its non-compete covenant, which could establish a potentially catastrophic precedent and a "domino" effect whereby a series of franchisees leave the fold to establish competing businesses at or near the location of their THE ATHLETE'S FOOT® stores, thereby causing an irreparable loss of customer goodwill associated with THE ATHLETE'S FOOT® stores. Other courts have recognized this type of harm in deciding to enforce a restrictive covenant in favor of a franchisor.Rita's Water Ice, 1997 WL 165518, *5.
31. Irreparable harm will result to AFMAI unless it is granted the requested preliminary injunction and Company is enjoined from competing with AFMAI in violation of its restrictive covenant.
32. Unless the defendant is enjoined from breaching its covenant-not-to-compete, AFMAI and its franchisees are being and will continue to be irreparably harmed in the nature of:
(i) confusion of customers who intend to do business with a legitimate AFMAI franchisee;
(ii) damage to customer goodwill and the confidence and trust the customers repose in AFMAI and its franchisee;
(iii) disturbance of AFMAI's and its franchisees' relationships with customers;
(iv) damage to business reputation;
(v) loss of confidence of plaintiff s remaining franchisees who justifiably rely on AFMAI to police the franchise system.
33. AFMAI has no adequate remedy at law.
34. A balancing of the hardships is necessary to ensure that the injunction will not harm the violator of the restrictive covenant more than a denial of the injunction would harm the movant. In this case, enforcement of the requested preliminary injunctive relief will impose no undue hardship on the Company, any harm to the Company having been brought about by its own actions in continuing to operate in breach of its non-compete covenant. The defendant can hardly claim to be harmed where it brought any and all difficulties occasioned by the issuance of an injunction upon itself.
35. Any hardship which results is not "undue" because Company is merely having to live up to the terms of its Operating Agreement. See e.g., Maaco Enterprises. Inc., 1998 WL 669936, at *5 (Balancing of the hardships of the parties favors the enforcement of the restrictive covenant; "irreparable harm that Maaco will suffer if an injunction was not issued outweighs the self-inflicted harm [the former franchisee] may suffer if an injunction issues [as] [a]ny harm suffered by [former franchisee] was brought on by themselves as a result of their breach of the Franchise Agreement"); Rita's Water Ice Franchise Corp., 1996 WL 165518, *5 ("preliminary injunction will not impose hardship on defendants beyond that necessary to protect plaintiffs contractual interests").
36. The expenses represented by Trial Exhibits I, J, K, L and M, having been agreed to prior to the issuance of any injunction, do not represent harm that will be incurred by defendant if an injunction should issue.
37. That enforcement of the covenant-not-to-compete would require defendant to either move, change its line of business or go out of business is not undue hardship. If it were, no covenant-not-to-compete would ever be enforced. Moreover, Zell Investments' extensive years of relevant business, sales, retail and marketing experience would enable it to move or change its line of business rather easily.
38. The balance of hardships favors the plaintiff and the issuance of an injunction.
39. The public interest is especially served by a preliminary injunction where, as here, the defendant's status as a former licensee increases the probability of consumer confusion. Church of Scientology International v. The Elmira Mission of the Church of Scientology, 794 F.2d 38, 44 (2d Cir. 1986).
40. Company's status as a former AFMAI franchisee and continued use of AFMAI's telephone numbers, now in conjunction with its new name, greatly increase the probability of consumer confusion.
41. While competition obviously benefits the public, protecting the interests in goodwill of franchisors as embodied in non-competition clauses outweighs this interest. Novus Franchising, 795 F. Supp. at 132.Accord Maaco Enterprises, Inc., 1998 WL 669936, at *5 (enforcement of former franchisee's "restrictive covenant" is in the public interest).
42. Likewise, there is always benefit to the public when non-competition agreements, like other contracts, are enforced according to their terms. See Rita's Water Ice Franchise Corp., 1996 WL 165518, *5 ("the public interest supports contractual enforcement by preventing competition in violation of a valid restrictive covenant").
43. Accordingly, the public interest would be best served by enjoining its continued unlawful competition.
44. Based on the record and the estimated annual profits of the defendant, the Court finds that if the plaintiff is required to post an injunction bond in the amount of $100,000 in accordance with the terms of Fed.R.Civ.P. 65(c), the interests of the defendant would be protected in the event it is found the defendant has been wrongfully enjoined or restrained.
Lee, J. ORDER OF COURT
AND NOW, this 17th day of February, 2000. upon consideration of Plaintiff's Motion for Temporary Restraining Order/Preliminary Injunction and Expedited Hearing (Document No. 2), it is hereby
ORDERED that said motion (Document No. 2) is GRANTED, and a preliminary injunction is hereby issued against defendant Zell Investments, Inc. and its agents, servants, employees, consultants, attorneys, affiliates, successors, assigns, officers, directors, any other individuals or entities within its control or supervision, and all others in concert or participation with it (collectively "defendant"), unless and until further order of court, as follows:
(i) Defendant is required to take all actions as may be necessary or be required to cancel or transfer to AFMAI or its designee all rights which it has in any telephone numbers and all classified and other directory listings for its stores formerly associated with AFMAI's Mark;
(ii) Defendant is enjoined from conducting any business or operating any stores in its Area of Non-Competition, as defined in the Operating Agreement, involving the sale of athletic footwear, sporting goods or any other products or services which are competitive with the products or services being offered by stores operated under the Mark for a period of one year from the date hereof;
(iii) Defendant is required to make a verified report to this Court no later than thirty days after the date of this order setting forth all actions taken by defendant to comply with the provisions of Paragraphs (i) and (ii) above of this order and the dates such actions were taken; and
(iv) The plaintiff shall post an injunction bond with the Clerk of Court in the amount of $100,000.