A Colo. Corp.. v. Felix Bros. Inc.

• Citation: 724 F.Supp.2d 1107
• Decision Date: 12 July 2010
• Docket Number: Civil No. 10-cv-00362-PAB.
• Parties: BIG O TIRES, LLC, a Nevada limited liability company f/k/a Big O Tires, Inc., a Colorado corporation, Plaintiff, v. FELIX BROS., INC., a California corporation, Ralph Felix, an individual, Armida Felix, an individual, Angel Felix, an individual, and Maria Felix, an individual, Defendants.
• Court: U.S. District Court — District of Colorado

724 F.Supp.2d 1107

BIG O TIRES, LLC, a Nevada limited liability company f/k/a Big O Tires, Inc., a Colorado corporation, Plaintiff,

v.FELIX BROS., INC., a California corporation, Ralph Felix, an individual, Armida Felix, an individual, Angel Felix, an individual, and Maria Felix, an individual, Defendants.

Civil No. 10-cv-00362-PAB.

United States District Court,D. Colorado.

July 12, 2010.

COPYRIGHT MATERIAL OMITTED.

Harold R. Bruno, III, Zachary Paul Mugge, Robinson, Waters & O'Dorisio, P.C., Denver, CO, for Plaintiff.

Isabel Patricia Posso, Isabel P. Posso, Attorney at Law, P.C., Lakewood, CO, Carlos E. MacManus, Nicholas Walter Hornberger, Hornberger & Brewer, LLP, Los Angeles, CA, for Defendants.

ORDER

PHILIP A. BRIMMER, District Judge.

This matter is before the Court on plaintiff's motion for preliminary injunction [Docket No. 45] and defendants' motion to dismiss, to transfer venue, or, in the alternative, to stay the proceedings [Docket No. 43]. On April 1, 2010, defendants filed their motion to dismiss, transfer, or stay the action. On April 6, plaintiff filed its motion for preliminary injunction regarding the in-term covenant not to compete [Docket No. 45]. The motions are fully briefed, and the Court held a joint hearing on those motions on June 17, 2010. Thereafter, the parties filed supplemental briefs [Docket Nos. 80, 81]. The motions are ripe for disposition.

I. BACKGROUND

Plaintiff Big O Tires, LLC (“Big O”) “is a retail tire franchisor with approximately 500 independently-owned and operated locations in twenty states, each doing business as ‘Big O Tires,’ selling tires, wheels, shock absorbers, and other automotive goods and services.” O'Neil Decl. [Docket No. 45-2] at 1, ¶ 2. Plaintiff's Western Division Vice President Richard S. O'Neil declares that the “relationship between Big O and each of the franchised locations is governed by franchise agreements that allow the franchisees, for a term of years, to use Big O's marks, trade dress, and licensed methods in exchange for, among other things, payment of royalties.” O'Neil Decl. [Docket No. 45-2] at 1-2, ¶ 2.

On June 30, 1999, defendant Felix Bros., Inc. entered into a Big O franchise agreement (“Quartz Hill Agreement”) and opened a Big O franchise in Quartz Hill, California. See Docket No. 1-1 at 8. Defendants Ralph, Armida, Angel, and Maria Felix were all parties to the Quartz Hill Agreement. Ralph and Armida Felix own 70% of defendant Felix Bros., with Angel Felix owning the remaining 30%. See Docket 1-1 at 47. On April 25, 2001, Manzano, Inc. became a Big O franchise in Palmdale, California (“Palmdale Agreement”). See Docket No. 1-3 at 8. Ralph Felix owns 51% of Manzano. See Docket No. 1-3 at 43. Ralph and Armida Felix, as guarantors of Manzano, signed the Palmdale Agreement and agreed not to compete with Big O during the term of the Palmdale Agreement (“in-term covenant not to compete”). See Docket No. 1-3 at 26.

On August 23, 2001, Felix Tires, Inc., with Ralph and Armida Felix as guarantors, became a Big O franchise in Lancaster, California (“Lancaster Agreement”). See Docket No. 1-2 at 4. Pursuant to the Lancaster Agreement, Ralph and Armida Felix agreed, as guarantors of Felix Tires, agreed not to compete with Big O during the term of the Lancaster Agreement. See Docket No. 1-2 at 27. Ralph and Armida each own 50% of Felix Tires. See Docket No. 1-2 at 45.

Defendant Ralph Felix gave notice to plaintiff by letter dated December 14, 2009 that Felix Bros. did not intend to renew the Quartz Hill franchise. See Pl.'s Ex. 10 to March 1, 2010 Hearing; see Pl.'s Ex. 7 to June 17, 2010 Hearing. ¹ The last day of the Quartz Hill franchise term was December 31, 2009. See Docket No. 52-2 at 2, ¶ 4. Within the December 14 letter, Mr. Felix also requested early termination of the Palmdale and Lancaster Agreements, see Pl.'s Ex. 10 to March 1, 2010 Hearing, which would have expired on April 25 and August 23, 2011 respectively. See Ex. Pl.'s Exs. 3 and 4 to March 1, 2010 Hearing. Plaintiff responded to Mr. Felix's letter by letter dated January 15, 2010. Pl.'s Ex. 11 for March 1, 2010 Hearing. That response “accept[ed the] request not to renew the franchise agreement for Quartz Hill,” but noted that Mr. Felix “still has during-term non-compete obligations as well as post-termination obligations under the franchise agreement (e.g., turning over phone numbers and customer lists, paying all debts to Big O and local advertising group) with which we fully expect him to comply.” Id. Plaintiff also “ask[ed] that he advise [it] of his plans to dispose of the assets for this location.” Id.

In January 2010, Mr. Felix “began the process of de-identifying [his] Quartz Hill tire store from all Big O brand names and trademarks....” Docket No. 52-2 (“Felix Decl.”) at 2, ¶ 5. He registered the Quartz Hill store under the name Budget Tires and Automotive. See id. On February 19, 2010, Big O filed this lawsuit and, on February 23, 2010, filed a motion for temporary restraining order and preliminary injunction [Docket No. 9], ² seeking removal of all Big O trademarks and trade dress and return of proprietary information from the Quartz Hill store. Moreover, Big O sought enforcement of the in-term covenants not to compete in the Palmdale and Lancaster Agreements. Although they have de-identified Budget Tires and Automotive and returned proprietary information, defendants continue to engage in a tire business at the Quartz Hill location. See Docket No. 45-2 at 5.

The Quartz Hill Agreement contains a “Post Termination Covenant Not to Compete,” which provides that

[i]f Franchisee terminates this Agreement other than in a manner prescribed in Section 19.03 or if this Agreement is terminated for ‘good cause’ as defined in Section 19.01, Franchisee and its guarantors covenant that they shall not directly or indirectly, for a period of two (2) years after the Termination Date of this Agreement, engage in any business, other than as a Franchisee of the Big O System, which offers or sells tires, wheels, shock absorbers, automotive services, or other products or services which compete with Big O Products and Services within a ten (10) mile radius of the Premises or within a ten (10) mile radius of any other Big O Store which was operational or under construction on the Termination Date....

Docket No. 1-1 at 27-28, § 17.04. Big O does not contend that the Agreement was terminated in a manner that implicates Section 17.04. As a result, Big O is not trying to enforce this clause against defendants. Therefore, it would appear that defendants, having complied with their other post-termination obligations, would be free to run a competing tire business at the Quartz Hill location. Defendants, however, are operating Big O franchises under still-operative contracts at Palmdale and Lancaster. Thus, plaintiff's motion is premised on the assertion that defendants' ongoing business at the Quartz Hill location violates the in-term non-compete provisions of the Palmdale and Lancaster Agreements.

The in-term covenant not to compete in the Palmdale and Lancaster Agreements reads as follows:

Except for any businesses already operating and identified on the Summary Pages, during the term of this Agreement, Franchisee and any guarantor(s) hereof covenant, individually, not to engage in or open any business, at any location, other than as a Franchisee of the Big O System, which offers or sells tires, wheels, shock absorbers, automotive services, or other products or services which compete with Big O Products and Services. The purpose of this covenant is to encourage Franchisee and any guarantor(s) hereof to use their best efforts to promote the Big O System, its Products and Services, to protect its Information and trade secrets, and to generate a successful business at the Store.

Ex. 2 to Compl. [Docket No. 1] at 19, § 17.01; Ex. 3 at 18, § 17.01.

In addition to its argument that defendants are violating the in-term covenant not to compete simply by operating Budget Tires and Automotive at the Quartz Hill location, Big O contends that defendants are diverting customers from their Big O stores in Palmdale and Lancaster to the Quartz Hill location. Although one Big O witness testified about an affidavit from a Big O employee who made pretext calls to the Lancaster and Palmdale stores to determine whether the employees there would refer a supposed customer to Budget Tires and Automotive, that affidavit was not introduced at the hearing. The only evidence of diversion came from Mr. Edgar Aguilar, an employee at the Palmdale Big O location, who testified regarding a phone call he received from an individual claiming to be stranded with a flat tire in Quartz Hill. Mr. Aguilar estimated that the distance between the Quartz Hill location and the Palmdale Big O franchise was approximately 15 miles. ³ In light of the fact that the individual claimed to have a flat tire and therefore it would have been unsafe for the individual to try to drive to the Palmdale Big O store, Mr. Aguilar referred him to the nearby Budget Tires store.

At the June 17 hearing on Big O's motion for preliminary injunction, Mr. Ralph Felix testified telephonically that he has no incentive to reduce his efforts to sell products at the Palmdale and Lancaster stores. Mr. Felix testified that he is working seven days each week exclusively at the Palmdale and Lancaster locations and emphasized that each “store needs to meet their numbers and they need to increase sales.” ⁴ Moreover, he testified that he has instructed his Lancaster and Palmdale employees to “keep the customers” and, if they absolutely must refer a customer to another store, to make sure it is a Big O store. With that said, while still Big O franchisees, defendants will continue to have access to Big O proprietary information. See Docket No. 45-2 (“O'Neil Decl.”) at 3, ¶ 8. Big O is concerned that defendants can use that information to the...