Proimos v. Fair Automotive Repair, Inc.

• Decision Date: 23 April 1987
• Docket Number: No. 86-1509,86-1509
• Citation: 808 F.2d 1273
• Parties: Andreas PROIMOS, et al., Plaintiffs-Appellees, v. FAIR AUTOMOTIVE REPAIR, INC., and Gayle S. Wakefield, Defendants-Appellants.
• Court: U.S. Court of Appeals — Seventh Circuit

Page 1273

808 F.2d 1273

Andreas PROIMOS, et al., Plaintiffs-Appellees, v. FAIR AUTOMOTIVE REPAIR, INC., and Gayle S. Wakefield Defendants-Appellants.

No. 86-1509.

United States Court of Appeals Seventh Circuit.

Argued Dec. 10, 1986.

Decided Jan. 12, 1987.

As Modified on Denial of Rehearing and Rehearing En Banc

April 23, 1987.

Robert V. Gildo, Robert V. Gildo, Ltd., Wheaton, Ill., for defendants-appellants.

William Van Hagey, Van Hagey & Bogan, Ltd., Mundelein, Ill., for plaintiffs-appellees.

Before COFFEY and EASTERBROOK, Circuit Judges, and GRANT, Senior District Judge. ^*

EASTERBROOK, Circuit Judge.

Fair Automotive Repair franchises muffler shops. Andreas Proimos and the other plaintiffs acquired four of the 39 franchises Fair issued. Fair supplied a method of doing business, designs of shops, and other assistance. In 1984 the owners of four franchises repudiated their contracts with Fair, changed the names of their shops, and continued to sell mufflers at the same locations in northern Illinois. They filed suit under the Racketeer Influenced and Corrupt Organization Act, 18 U.S.C. Secs. 1961-68, contending that Fair is an enterprise operated through a pattern of fraud; the complaints included three pendent claims under the law of Illinois, two based on the Illinois Franchise Disclosure Act, Ill.Rev.Stat. ch. 121 1/2 paragraphs 701-40, and the other based on common law fraud. Fair responded by invoking a clause in each franchise contract forbidding competition. Fair sought a preliminary injunction that would compel the franchisees to get out of the muffler repair business.

The district court denied Fair's motion after an evidentiary hearing at which the only witness was Gayle Wakefield, Fair's founder, controlling investor, and chief executive officer. The court concluded that some of the information in the offering circular Fair provided under the Franchise Disclosure Act was misleading. The circular stated that Wakefield founded Fair in 1976 "and has been responsible for its growth and development since its inception." The court thought this misleading because Wakefield did not turn his full-time attention to Fair until 1980. Until then he had been an officer of Car-X Systems, Inc., another franchisor of muffler shops, and an officer and investor in a corporation that operated four Car-X franchises in Florida. The circular disclosed Wakefield's affiliation with the Florida operation, but the judge thought this misleading as well. It stated that Wakefield had sold the four franchises in Florida to the chairman of Car-X's board but did not disclose that the venture had been, in Wakefield's own words a "disaster" and that the only consideration for the sale was the assumption of existing liabilities.

Two of the plaintiffs' four franchises were acquired after two of Fair's suppliers had required Fair to pay for goods on delivery. One of the four also received "projections" of profits that the district judge thought violated the rule that projections not precede the sale of the franchise. One of the four purchased the land for the shop through a real estate affiliate of Fair, and the affiliate charged a commission, which the district court thought violated a representation that there would be no collateral charges. None of the four franchisees received the comprehensive operations manual that the franchise contract promised; the court found this an unambiguous breach of contract. And the court also found that Fair had engaged in deception by placing ads in the Yellow Pages for non-existent Fair Muffler Shops.

The district court denied Fair's request for a preliminary injunction for a number of reasons. It stated that Fair would not suffer irreparable injury because Fair could recover damages at the end of the case; that the plaintiffs would suffer irreparable injury from the grant of preliminary relief because they would lose the value of their new trade names and reputations; that Fair had behaved inequitably and could not obtain relief because of "unclean hands"; that Fair had violated the Franchise Disclosure Act, allowing the plaintiffs to rescind the franchises under Ill.Rev.Stat. Ch. 121 1/2 p 721(2); and that the franchisees were using none of Fair's trade secrets.

Fair contends that the district court misstated or misunderstood the evidence. It insists, for example, that the suppliers' requirement that Fair pay in cash had nothing to do with any franchisee's ability to obtain materials on time or at a satisfactory price; that the projections of profits were provided to lenders so that they would assist the putative franchisees and were not part of the sales pitch; that the franchisee who bought land through the affiliate was told about the relationship and knew that the affiliate would receive a fee; that Fair made the information in the operations manual available at request even though it refused to furnish the manual itself; and that the ads were placed in the Yellow Pages only to ensure that shops planning to open during the next year would not be denied advertising. Perhaps some of Fair's responses are worth something, but given the deferential standard we apply when reviewing grants or denials of preliminary relief, Fair's quibbles are to no avail. See My Pie International, Inc. v. Debould, Inc., 687 F.2d 919, 922 (7th Cir.1982). The record contains enough to support the findings and inferences at this early stage of the litigation.

Whether the findings and inferences support the denial of injunctive relief is another matter. Several portions of the district court's analysis leave us uneasy despite the substantial deference that is appropriate. See Lawson Products, Inc. v. Avnet, Inc., 782 F.2d 1429 (7th Cir.1986); American Hospital Supply Corp. v. Hospital Products Ltd., 780 F.2d 589 (7th Cir.1986); Roland Machinery Co. v. Dresser Industries, Inc., 749 F.2d 380 (7th Cir.1984). For example, the district court apparently believed that any party that has behaved inequitably in any respect has forfeited its entitlement to an injunction; this is not correct as a matter of equity practice in Illinois or the federal courts. See Polk Bros., Inc. v. Forest City Enterprises, Inc., 776 F.2d 185, 193-95 (7th Cir.1985) (discussing federal and Illinois practice); Shondel v. McDermott, 775 F.2d 859, 868 (7th Cir.1985). "Equity is no longer granted or withheld according to the chancellor's sensibilities and his regard for the uprightness of the parties. The injunction, like other remedies, is designed to achieve compliance with established rules, and even the wicked have a right to treatment according to the rules." Polk Bros., 776 F.2d at 193. So although the placement of bogus ads in the Yellow Pages might be a fraud on consumers of mufflers, this would not prevent Fair from enforcing its contracts against its franchisees. The rule against bilking consumers does not have among its remedies the nullification of otherwise-valid contracts between defrauder and third parties, and this limitation carries over to equity practice.

The court's conclusion that the franchisees are not using any of Fair's trade secrets also is questionable. Fair provided a great deal of information, from names of suppliers to the appropriate methods of replacing mufflers. The franchisees promised by contract to keep all of this confidential and not to use it in competition with Fair. Information is the most valuable asset of many a business. The district court's observation that much of the information could be observed or learned in some other way does not foreclose the possibility that the information is still a trade secret. For example, suppliers of parts may be discovered by looking in a book, as the court emphasized, but the reliability of these suppliers and the terms on which they may be induced to deal may be valuable secrets. Cf. Greenberg v. FDA, 803 F.2d 1213 (D.C.Cir.1986), in which a divided court debated the question whether information about who sells to whom is a trade secret. What divided the panel is whether such information has such obvious commercial value as a secret that it may be deemed a trade secret on summary judgment (as Judge Bork urged in dissent) or instead whether a trial is necessary to determine the degree of secrecy (as the majority concluded). The district court in this case did not discuss the commercial value of the information Fair furnished to the plaintiffs, the costs they would have incurred in discovering the information without Fair's aid, or many of the other ingredients of the legal definition of trade secrets.

Then we have the court's decision that the franchisees could rescind because Fair's disclosure circular contained misleading statements (that Fair was founded in 1976) and material omissions (that Wakefield had been unsuccessful with Car-X franchises in Florida and that Fair had been denied credit by two suppliers). If the circular indeed had material false information or omissions, Illinois law entitles the franchisees to rescission. Ill.Rev.Stat. ch. 121 1/2 paragraphs 706(1)(b), 708, 721(2). Rescission would eliminate the no-competition clause that Fair is trying to enforce. But the right to rescission lasts only 90 days after the franchisee "shall have knowledge of a violation of this Act", p 721(2)(b); see also My Pie, 687 F.2d at 922-26. The district court did not determine when each of the four franchisees learned of Fair's omissions and misstatements. One of the franchisees denounced his franchise more than two years after opening his shop, and all waited more than a year after signing on. Timing may be important. So too may questions of materiality and reliance. The Supreme Court of Illinois has held that the elements of an action for common law fraud in a franchise case include materiality, intent, reliance, and damages. See Soules v. General Motors Corp., 79 Ill.2d 282, 286, 37 Ill.Dec. 597, 599, 402 N.E.2d 599, 601 (1980).

Soules did not discuss...