Fantastic Sams Salons Corp. v. Maxie Enters. Inc.
| Decision Date | 24 January 2012 |
| Docket Number | CASE NO. 3:11-CV-22 (CDL) |
| Parties | FANTASTIC SAMS SALONS CORPORATION, Plaintiff, v. MAXIE ENTERPRISES, INC. and PAUL RUBIN, Defendants. |
| Court | U.S. District Court — Middle District of Georgia |
Plaintiff Fantastic Sams Salon Corporation ("Fantastic Sams") brought this action against its former hair salon franchisees, Defendants Maxie Enterprises, Inc. and Paul Rubin (collectively, "Defendants"), alleging trade dress infringement and breach of contract. The breach of contract claim is based in part on Defendants' continued operation of a hair salon at the location of the Fantastic Sams franchise, in violation of the franchise agreement's restrictive covenants. Defendants contend that the restrictive covenants are invalid, and they seek partial summary judgment on that basis. Defendants also seek an order compelling Fantastic Sams to respond to certain discovery requests. For the reasons set forth below,
Defendants' Motion for Partial Summary Judgment (ECF No. 22) is granted, and Defendants' Motion to Compel (ECF No. 23) is deniedas moot. The Court will permit Defendants to engage in additional discovery for sixty days from the date of this Order and will award Defendants the attorney's fees they incurred in connection with their motion to compel unless Fantastic Sams shows cause why the Court should not do so.
Summary judgment may be granted only "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). In determining whether a genuine dispute of material fact exists to defeat a motion for summary judgment, the evidence is viewed in the light most favorable to the party opposing summary judgment, drawing all justifiable inferences in the opposing party's favor. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). A fact is material if it is relevant or necessary to the outcome of the suit. Id. at 248. A factual dispute is genuine if the evidence would allow a reasonable jury to return a verdict for the nonmoving party. Id.
The following facts are undisputed for purposes of summary judgment. On November 24, 2008, Fantastic Sams and Maxie Enterprises entered into a franchise agreement ("Agreement"). Under that Agreement, Fantastic Sams granted Maxie Enterprisesthe right to operate a Fantastic Sams salon. Under the Agreement, unless the Agreement was terminated, the Agreement was to continue in full force and effect for either ten years from the date on which the salon opened for business or eleven
years from the date of the Agreement, whichever was earlier. Defendants opened their Fantastic Sams salon at 1431 Capital
Avenue in Watkinsville, Georgia in January 2009, so the Agreement was to be in effect until January 2019.
The Agreement contains a two-part restrictive covenant, under which Defendants agreed:
[hereinafter Salon License Agreement]. The Agreement also contains the following severability clause:
If any article, section, part, term, sentence or provision of this Agreement (including, without limitation, each of the separate parts of Section 12(d)) is determined to be invalid for whatever reason, all of the remaining articles, sections, parts, terms, sentences and provisions of this Agreement will remain in full force and effect as if the invalid item were deemed not to be a part of this Agreement.
Id. at 23 ¶ 17(a), ECF No. 30 at 44 of 49.
Maxie Enterprises operated the Fantastic Sams salon in Watkinsville until November 2010. On November 2, 2010, Maxie Enterprises notified Fantastic Sams that it was no longer operating the salon as a Fantastic Sams salon, and Fantastic Sams deemed the Agreement to be terminated as of that date.
Defendants filed a counterclaim asking that the Court declare the restrictive covenant in the Agreement to be invalid. Answer & Countercl. 12 ¶¶ 7-9, ECF No. 9. Defendants now seek summary judgment on their counterclaim, contending that the restrictive covenant is unreasonable as to time, territory and scope and is therefore unenforceable under Georgia law.
As discussed above, the covenants in the Agreement generally provide that Defendants are prohibited from (1) competing within five miles of the franchise location for two years and (2) competing within 2.5 miles of any Fantastic SamsSalon until January 2019. Fantastic Sams appears to concede that the second part of the restrictive covenant—Paragraph 12(d)(10)—is unenforceable under Georgia law. Fantastic Sams asserts that the first part of the restrictive covenant— Paragraph 12(d)(9) —is enforceable and that it can be separated from Paragraph 12(d)(10) under the Agreement's severability clause.
The Court need not determine whether Paragraph 12(d)(10) can be severed from Paragraph 12(d)(9) because even if it were severable, the restrictions contained in Paragraph 12(d)(9) would still be unenforceable. Under Georgia law applicable to the Agreement at issue here, restrictive covenants in franchise agreements are subject to strict scrutiny, and they "must be reasonable as to time, territory and scope."1 Atlanta Bread Co. Int'l v. Lupton-Smith, 285 Ga. 587, 589-90, 679 S.E.2d 722, 723 (2009). Even though the time (two years) and territory (five mile radius) restrictions are likely reasonable, see Watson v.Waffle House, Inc., 253 Ga. 671, 672, 324 S.E.2d 175, 178 (1985), the scope restriction is not.
The restrictive covenant in the Agreement broadly restricts Defendants, including Paul Rubin himself, from "directly or indirectly participating as an owner, partner, member, director, officer, employee, consultant, lender or agent, or serve any other capacity in any business engaged in the sale or rental of products or services the same as or similar to those of the Fantastic Sams System." Salon License Agreement 19 ¶ 12(d)(9), ECF 40 of 49 (emphasis added). "The Georgia Supreme Court has made clear that a covenant that restricts a former franchisee from employment in a competing business 'in any capacity' is overbroad and will not be enforced." Gandolfo's Deli Boys, LLC v. Holman, 490 F. Supp. 2d 1353, 1359 (N.D. Ga. 2007); accord Fields v. Rainbow Int'l Carpet Dyeing & Cleaning Co., 259 Ga. 375, 375, 380 S.E.2d 693, 693 (1989) (); see also Howard Schultz & Assocs. of the Se., Inc. v. Broniec, 239 Ga. 181, 184, 236 S.E.2d 265, 268 (1977) (). The Georgia Supreme Court has also disapproved of restrictive covenants "where the nature of the business activities in whichthe employee is forbidden to engage is not specified with particularity" and instead simply states that the employee shall "not engage in or be employed by any 'business similar to employer's business.'"2 Howard Schultz & Assocs., 239 Ga. at 184-85, 236 S.E.2d at 268.
Fantastic Sams points out that the Georgia Supreme Court has upheld a restrictive covenant providing that the franchisees could not compete with the franchisor restaurant company "by engaging in the restaurant or fast food business within a five-mile radius for a period of two years." Watson, 253 Ga. at 671, 324 S.E.2d at 176. In Watson, there was evidence that the business of the franchisor was "such that the [franchisees] were its heart and soul" and "[t]heir participation involved every facet of the business and they gained knowledge which the [franchisor] has a reasonable stake in protecting." Id. at 672, 324 S.E.2d at 178. For these reasons, the court found that "a prohibition against engaging in the restaurant or fast food business in such a narrow area for so short a time" was not unreasonable. Id. In this case, Fantastic Sams has not presented evidence that Rubin was the "heart and soul" of the business or that his participation involved "every facet of the business." Therefore, the Court cannot find that Watson iscontrolling here; under the rules articulated by the Georgia Supreme Court in Fields and Howard Schultz & Associates, the Court concludes that the restrictive covenant at issue here is unenforceable due to its unreasonable scope restriction. Fields, 259 Ga. at 375, 380 S.E.2d at 693; Howard Schultz & Assocs., 239 Ga. at 184-85, 236 S.E.2d at 268. Defendants' motion for partial summary judgment is therefore granted.
Defendants filed a motion to compel Fantastic Sams to respond to certain discovery requests. Defendants also ask that they...
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