A Michigan bankruptcy court recently granted debtor/franchisee Empower Central Michigan Inc.’s motion to reject a franchise agreement as an executory contract but found that a non-compete clause and a related confidentiality agreement remained enforceable. In re: Empower Cent. Michigan, Inc., 2024 WL 1848504 (Bankr. E.D. Mich. Apr. 26, 2024). In August 2023, Empower filed a chapter 11 bankruptcy petition under which it initially anticipated reaffirming its franchise agreement with franchisor Auto-Lab Franchising, LLC for the operation of an Auto Lab Complete Car Care Center. Empower later reversed course and attempted to rebrand from the same location, serving the same customers, under a new name, while petitioning to reject the franchise agreement on the grounds that the agreement “no longer benefitted Debtor because the monthly franchise fee was Debtor's largest expense, and the Franchise Agreement provided no tangible benefit to Debtor.”

The court analyzed the petition under Section 365(a) of the Bankruptcy Code concerning rejection of executory contracts, and concluded that the franchise agreement was an executory contract, as Auto Lab acknowledged, and thus subject to rejection. However, the court sided with Auto Lab and against Empower in concluding that an included noncompete clause and a related confidentiality agreement were not executory contracts subject to rejection under Section 365(a). Specifically, the court held that the equitable remedies contained in the franchise agreement in connection with enforcing the noncompete and the confidentiality agreement could not be reduced to a monetary claim and remained enforceable by Auto Lab. The court reasoned that the equitable remedies were “intended to protect Auto Lab's trademarks, other confidential proprietary intellectual property throughout all of its franchises, and the customer goodwill built up at the Fenton, Michigan location over the last almost 20 years.” Accordingly, the equitable claim that Auto Labs sought to protect in the bankruptcy proceeding was not “simply an alternative to a right of payment and, therefore, cannot be reduced to a monetary claim under 11 U.S.C. § 101(5)(B).” The ruling paves the way for Auto Labs to pursue injunctive relief against Empower for violations of the noncompete and confidentiality agreements, despite the bankruptcy.

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