Gandolfo's Deli Boys, LLC v. Holman

• Decision Date: 07 June 2007
• Docket Number: Civil Action File Number 1:07-cv-634-TCB.
• Citation: 490 F.Supp.2d 1353
• Parties: GANDOLFO'S DELI BOYS, LLC, Plaintiff, v. Terry HOLMAN and B & H Deli, LLC, Defendants.
• Court: U.S. District Court — Northern District of Georgia

490 F.Supp.2d 1353

GANDOLFO'S DELI BOYS, LLC, Plaintiff, v. Terry HOLMAN and B & H Deli, LLC, Defendants.

Civil Action File Number 1:07-cv-634-TCB.

United States District Court, N.D. Georgia, Atlanta Division.

June 7, 2007.

COPYRIGHT MATERIAL OMITTED

Michael D. Grider, William K. Whitner, Paul Hastings Janofsky & Walker LLP, Atlanta, GA, for Plaintiff.

Ronnie L. Quigley, Vincent Justin Arpey, Davis Matthews & Quigley, Atlanta, GA, for Defendants.

ORDER

BATTEN, District Judge.

This matter is before the Court on Plaintiff Gandolfo's Deli Boys, LLC's motion for a preliminary injunction against its former franchisee, Defendant B & H Deli, LLC, and B & H's principal owner and guarantor, Defendant Terry Holman. For the reasons that follow, the Court denies Plaintiff's motion.

I. Facts¹

Gandolfo's has developed a restaurant franchise system for preparing, selling, and marketing hot and cold deli sandwiches and related food and beverage products. Since Gandolfo's inception in 1989, it has expanded to approximately fifty-three locations. Gandolfo's is the owner of the trade name GANDOLFO'S NEW YORK DELICATESSEN and a design incorporating that name.

The Gandolfo's franchise at issue here was located in Duluth, Georgia and was operated by Defendants. On September 12, 2003, Defendant B & H entered into a franchise agreement with Gandolfo's in which it agreed, inter alia, to: (1) use Gandolfo's trademarks and system solely for the purpose of operating the franchise; (2) pay a royalty to Gandolfo's for the use of its trademarks and system; and (3) comply with the operation and system standards adopted by Gandolfo's.

Additionally, the agreement gave Gandolfo's the right to terminate the agreement if, inter alia, B & H abandoned the franchise, failed to make payments, or failed to comply with any provision of the franchise agreement. Also, in the event that the agreement was terminated, B & H was required to pay all sums owed to Gandolfo's and cease using its trademarks or colorable imitations of the trademarks.

Of particular importance to the present dispute, section 17.4 of the agreement contains a noncompetition covenant that provides in pertinent part:

(a) [B & H] agree that, for a period of 2 years commencing on the effective date of termination or expiration or the date on which a person restricted by this Section begins to comply with this Section, whichever is later, neither you nor any of your owners will have any direct or indirect interest (e.g., through a spouse or child) as a disclosed or beneficial owner, investor, partner, director, officer, employee, consultant, representative or agent or in any other capacity in any Competitive Business operating:

(i) at the Site;

(ii) within 10 miles of the Site; or

(iii) within 10 miles of any other GANDOLFO's DELI Restaurants in operation or under construction on the later of the effective date of the termination or expiration or the date on which a person restricted by this Section complies with this Section.

If any person restricted by this Section refuses voluntarily to comply with the foregoing obligations, the 2-year period will commence with the entry of an order of an arbitrator or court if necessary, enforcing this provision.

Section 9 of the agreement defines the term "competitive business" as "any business or facility owning, operating or managing, or granting franchises or licenses to others to do so, any Restaurant or food service facility that offers casual dining and take-out sandwiches, salads or any type of deli foods and beverages (other than a GANDOLFO'S DELI Restaurant operated under a franchise agreement with us)."

On or about September 2, 2004, subject to the terms of the franchise agreement described above, Defendants opened a Gandolfo's franchise in Duluth, Georgia. Around the same time, Defendants executed a conditional assignment and assumption of lease that provides, inter alia, in the event of a breach, Gandolfo's may take possession of the Duluth store and its contents. Additionally, Defendant Holman executed a principal owner's guaranty in which he agreed to be held personally liable for any breaches of the franchise agreement or other claims asserted by Gandolfo's.

Beginning in or about September 2006, Defendants stopped paying the full amount of royalties to Gandolfo's. In late October 2006, Defendants shut down the store and changed the store's name, signage, color of the menus, items on the menu, and recipes, and removed all Gandolfo's logos and insignias.

Defendants later reopened the store under the name "G's Deli." According to Defendants, the usage of the letter "G" in the name G's Deli is short for Giovanni Preteroti, the individual who manages and operates the restaurant. Like Gandolfo's, G's Deli sells a variety of deli sandwiches. However, G's Deli also sells items that are not offered by Gandolfo's, including pizza, pasta, specialty coffees, smoothies, grilled sandwiches, fresh-baked bread, and breakfast items, including omelets and hash browns. Unlike Gandolfo's, G's Deli also allows customers to rent out space and provides catering services.

Plaintiff contends that Defendants' continued operation of G's Deli constitutes a breach of the franchise agreement's noncompetition covenant and violates federal trademark law. Accordingly, Plaintiff moves for a preliminary injunction.

In response, Defendants argue that Plaintiff has failed to demonstrate a substantial likelihood of success on its claims. Defendants also counterclaim for breach of contract, contending that Gandolfo's failed to inspect the Duluth store and provide them with advice and marketing to assist in the operation of the store as required under the franchise agreement.

II. Analysis

A district court may grant injunctive relief if the movant shows the following: "(1) a substantial likelihood of success on the merits; (2) that irreparable injury will be suffered unless the injunction issues; (3) that the threatened injury to the movant outweighs whatever damage the proposed injunction may cause the opposing party; and (4) that if issued the injunction would not be adverse to the public interest." All Care Nursing Serv., Inc. v. Bethesda Mem'l Hosp., Inc., 887 F.2d 1535, 1537 (11th Cir.1989). A "preliminary injunction is an extraordinary and drastic remedy not to be granted unless the movant `clearly carries the burden of persuasion' as to the four prerequisites." United States v. Jefferson County, 720 F.2d 1511, 1519 (11th Cir.1983) (quoting Canal Auth. v. Callaway, 489 F.2d 567, 573 (5th Cir.1974)).

A. Alleged Breach of Noncompetition Covenant

Plaintiff argues that Defendants' operation of G's Deli at the same address where their Gandolfo's franchise was formerly located constitutes a breach of the franchise agreement's noncompetition covenant.

Given the sweeping language of the noncompetition covenant, it is clear that Defendants' operation of G's Deli would violate the provision if the covenant were found enforceable. Thus, whether Plaintiff has established a substantial likelihood of success on the merits with respect to this claim requires the Court to determine whether the covenant is enforceable.

As a preliminary matter, the Court must resolve which state's law governs the interpretation of the covenant. Plaintiff argues in a cursory fashion that Utah law should apply because the franchise agreement contains a choice of law clause providing that the agreement shall be governed by the law of the state in which Gandolfo's principal place of business is located, which is Utah.

In response, Defendants maintain that the application of Utah law would contravene Georgia public policy. Under Georgia law, courts will refuse to honor a choice of law clause if application of the chosen law would "`contravene the policy of, or would be prejudicial to the interests of'" the state of Georgia. Keener v. Convergys Corp., 342 F.3d 1264, 1267 (11th Cir.2003) (quoting Convergys Corp. v. Keener, 276 Ga. 808, 810, 582 S.E.2d 84, 85-86 (2003)).

For the reasons that follow, the Court finds that the covenant contravenes the public policy of Georgia and is otherwise invalid. And because the covenant is invalid under Georgia law, the Court is not permitted to apply the law of another state in interpreting the covenant. See Hostetler v. Answerthink, Inc., 267 Ga.App. 325, 328, 599 S.E.2d 271, 274-75 (2004); Keener, 342 F.3d at 1267-68; Enron Capital & Trade Res. Corp. v. Pokalsky, 227 Ga.App. 727, 730, 490 S.E.2d 136, 139 (1997); Nasco, Inc. v. Gimbert, 239 Ga. 675, 676, 238 S.E.2d 368, 369 (1977). Consequently, Georgia law controls the enforceability vel non of the covenant.

Georgia law "considers franchise agreements to be analogous to employment contracts, and covenants in such agreements receive strict scrutiny and are not blue-penciled." Smallbizpros, Inc. v. Court, 414 F.Supp.2d 1245, 1249 (M.D.Ga. 2006). "A noncompetition covenant entered into in connection with a franchise or employment contract is enforceable, but only where it is strictly limited in time and territorial effect and is otherwise reasonable considering the business interest of the employer sought to be protected and the effect on the franchisee." Allen v. Hub Cap Heaven, Inc., 225 Ga.App. 533, 538, 484 S.E.2d 259, 264 (1997).

As explained below, under these standards, the noncompetition covenant at issue is unenforceable.

First, the covenant is unenforceable because it broadly restricts Defendants from having "any direct or indirect interest ... as a disclosed or beneficial owner, investor, partner, director, officer, employee, consultant, representative or agent or in any other capacity in any Competitive Business." (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. See, e.g., Fields v. Rainbow Inn Carpet Dyeing & Cleaning...