A franchisor in a termination dispute with a franchisee may request a preliminary injunction to force the franchisee to immediately stop operating the franchised business and using the franchisor's trademarks and intellectual property. A court will grant a preliminary injunction when the party asking for it can show that it is likely to succeed on the claim and that, without an injunction, the party will suffer irreparable harm. Recently some franchisors have had difficulty obtaining preliminary injunctions. Courts have clarified when they will and will not grant injunctions in a franchise context.
In 7-Eleven, Inc. v. Sodhi, 7-Eleven issued termination notices to a franchisee because the net worth of five of his locations fell below amounts required by the franchise agreements. The franchisee disputed that he breached the franchise agreements, so he continued to operate despite receiving the notices. 7-Eleven sued the franchisee for trademark infringement and asked the court for a preliminary injunction.
The court found that several factors calling for an injunction were satisfied, including a likelihood that 7-Eleven would succeed in its claim. However, it also found that 7-Eleven did not prove exactly what irreparable harm it would suffer to its reputation or property from temporary continuation of the stores' operation. 7-Eleven submitted evidence of customer complaints on lack of cleanliness. But the court found those insufficient to show harm to reputation, in part because 7-Eleven received them before the franchisee's breach. The complaints did not prove the franchisee's continued operation was causing new harm to 7-Eleven's reputation that hadn't already occurred. The court declined the injunction.
In Intelligent Office System, LLC v. Virtualink Canada, Ltd., Intelligent Office System (IOS) entered into a Master License Agreement (MLA) with Virtualink Canada, Ltd. (Virtualink). The agreement granted Virtualink the exclusive right to license IOS's trademarks and business concept (for "virtual offices") to subfranchisees in Canada. In March 2013, IOS sent Virtualink a notice of defaults that Virtualink committed, including not meeting sales and opening goals and not providing reports and tax returns. IOS claimed Virtualink continued committing defaults, until IOS sent Virtualink a termination notice in October 2015. IOS filed suit in December 2015 and shortly after sought a preliminary injunction to shut Virtualink down.
The Colorado court noted that the purpose of a preliminary injunction is to maintain the positions of the parties until a trial could be held. So any preliminary injunction that would change the parties' positions would be disfavored and scrutinized carefully. The court reasoned that forcing Virtualink to stop the business it had run would change the parties' positions that existed in which Virtualink had been the "Master Licensee" for Canada. In declining to grant an injunction the court explained that IOS failed to show that it would be irreparably harmed without an injunction, since for years Virtualink had committed the defaults IOS claimed it wanted to stop, yet IOS allowed them to continue.
Both IOS and 7-Eleven show that a franchisor must act quickly and show urgency in response to franchisee defaults or courts may be unsympathetic when an injunction is requested. This can result in a franchisee receiving a notice of termination and yet continuing to operate the franchised business, possibly for years to come.
Click to read: 7-Eleven, Inc. v. Karamjeet Sodhi or Intelligent Office System, LLC v. Virtualink Canada, Ltd.
