Franchisor 101: Court Hits Brakes on Former Franchisees

Lewitt Hackman

An Ohio appellate court upheld the state trial court’s decision to grant a permanent injunction against two former franchisees of an auto body shop franchise working for a competitor in violation of the franchise agreement’s covenants not to compete and confidentiality provision.

Franchisor licenses the brand Tuffy Auto Service Centers and granted a franchise in Orlando, Florida to a franchisee consisting of multiple owners. The franchise owners got in an internal dispute resulting in two of the owners leaving the partnership. These franchisees then began work with a competitor. When Franchisor learned they were working with a competitor it filed a complaint alleging that the former franchisees were breaching the non-competition and confidentiality provisions of the franchise agreement and sought a preliminary injunction to be made permanent at trial to enjoin them from working for a competitor for two years.

The former franchisees admitted that they were signatories to the franchise agreement which prohibited them from working for a competitor within five miles of their business for two years. However, they argued that injunctive relief should not be granted because there was no irreparable harm from their working for a competitor and they denied having any confidential information or trade secrets from Franchisor, only general automotive knowledge from decades of experience in the industry. The court granted a permanent injunction in favor of Franchisor finding that the former franchisees breached the terms of the non-compete and confidentiality provision that were fair and reasonable under Ohio law.

The primary issue on appeal was whether or not Franchisor showed evidence of an actual threat of sufficient harm to prove irreparable injury, one the elements needed for a permanent injunction. Evidence showed the former franchisees received initial and continuing training from Franchisor, which included proprietary information developed by Franchisor over five decades. The court concluded this proved the former franchisees had trade secrets. In addition to providing trade secrets to a competitor, Franchisor claimed it was harmed by documented complaints from other franchisees about the former franchisees working for a competitor. Franchisor alleged this could also damage the brand by making it harder to attract new franchisees and to enforce the non-compete and confidentiality provisions against other franchisees in the system. Thus, the court found sufficient evidence to uphold the permanent injunction.

Franchisors should consult franchise counsel to ensure non-compete provisions are enforceable under applicable state law. These provisions are essential to protect the franchise system in cases where former franchisees try to compete using franchisors proprietary information, which can cause a multitude of potential harms.

Gimex Properties Corp., Inc. v. Reed, Ohio App. (Dec. 29, 2022)

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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