Smallbizpros, Inc. v. Court

• Decision Date: 02 February 2006
• Docket Number: No. 3:05-CV-98 (CDL).,3:05-CV-98 (CDL).
• Citation: 414 F.Supp.2d 1245
• Parties: SMALLBIZPROS, INC., d/b/a Padgett Business Services, Plaintiff, v. James R. COURT and Vivian Court, Defendants
• Court: U.S. District Court — Middle District of Georgia

Page 1245

414 F.Supp.2d 1245

SMALLBIZPROS, INC., d/b/a Padgett Business Services, Plaintiff, v. James R. COURT and Vivian Court, Defendants

No. 3:05-CV-98 (CDL).

United States District Court, M.D. Georgia, Athens Division.

February 2, 2006.

John G. Parker, Keith Kodosky, Michael D. Grider, Atlanta, GA, for Plaintiff.

Jeffrey W. Meicher, Roxann S. Smithers, Atlanta, GA, for Defendants.

ORDER

LAND, District Judge.

Presently pending before the Court is Plaintiffs Motion for Preliminary Injunction (Doc. 2). Plaintiff, a franchisor, seeks to enjoin Defendants, its former franchisees, from engaging in certain activities. For the reasons set forth below, this motion is granted.

BACKGROUND

Plaintiff has a franchise system, the Padgett Business Services System, for providing services to small business owners. Plaintiff markets and offers these services, which include a variety of accounting and business counseling services, through a network of locally owned and operated offices. These local offices are known to the public as "Padgett Business Services" and operated pursuant to a franchise agreement that includes a license to use Plaintiff's trademarks and trade names, as well as the Padgett Business Services System.

Defendants entered into a Franchise Agreement ("Agreement") with Plaintiff on February 14, 1994. The Agreement granted Defendants a non-exclusive license to operate a Padgett Business Services franchise in a defined area of Northern Michigan. Defendants began operating the franchise from an office located at 380 S. Main Street, Freeland, Michigan. Under the Agreement, Defendants were responsible for paying an initial franchise fee, as well as monthly royalty and fee payments. In return, Plaintiff agreed to provide marketing, training, and operational resources to Defendants.

Defendants contend that, beginning in 2000, Plaintiff breached the Agreement by markedly decreasing the quality and quantity of the support services available to Defendants. Defendants assert that although they made attempts to contact Plaintiff about the problems and to request support services, their calls went unanswered or their messages were not returned in a timely manner. Defendants continued to operate their Padgett Business Services franchise, but they argue that this operation was without the assistance and benefit of the Padgett name and resources. Plaintiff disputes Defendants' characterization of the resources and services made available to Defendants and contends that Defendants never voiced any material complaint regarding the services and support they received.

Beginning in July 2005, Defendants refused to pay Plaintiff the royalties due under the Agreement. On August 25, 2005, Defendants contacted Plaintiff and advised Plaintiff that they considered the Agreement to be "fully and finally terminated." In response to Defendants' letter, Plaintiff sent Defendants a Notice of Default and Demand, demanding that Defendants pay all royalties owed under the Agreement or immediately fulfill the post-termination obligations contained in the Agreement.¹ Defendants responded on October 6, 2005 that they did not intend to cure the alleged default and that they considered the Agreement to be terminated. On October 12, 2005, Plaintiff sent a letter to Defendants stating that the Agreement was terminated and proposing a scenario under which Plaintiff would not commence a lawsuit against Defendants for breach of the Agreement. On October 21, 2005, Defendants rejected Plaintiff's proposal, and the instant lawsuit ensued.

After their August 25, 2005 letter purporting to terminate the Agreement, Defendants continued operating a business which offered certain small business services from their office in Freeland, Michigan.² Defendants contend, however, that they immediately began to disassociate their business from Padgett Business Services. Although they continued operating from the same location, Defendants adopted a new corporate name, Tri-City Business Services, and gathered their Padgett materials in anticipation of returning them to Plaintiff. Although Plaintiff alleges that Defendants continued using the Padgett name and materials after termination of the Agreement, Plaintiff stated at the hearing on this motion that based on the best information available to it, Defendants have discontinued use of the Padgett name and have given the Padgett materials to their attorney, who intended to return them to Plaintiff.

Plaintiff brings claims for, inter alia, trademark infringement, unfair competition, and trademark dilution under the Lanham Act, see 15 U.S.C. §§ 1114, 1125(a), 1125(c), and for breach of contract. Plaintiff seeks permanent and preliminary injunctive relief, see Fed.R.Civ.P. 65, enjoining Defendants from 1) operating a competing small business services office in violation of the Agreement for a period of one year from the date of the injunction and 2) diverting or attempting to divert any customers from Plaintiff. Plaintiff further requests that the Court order Defendants to cooperate, in accordance with the Agreement's post-termination provision, in the "orderly transfer of [Plaintiff's] clients and customers, and relinquish any and all rights and interests [they] may have in such clients and customers to [Plaintiff] or its designee." ³

DISCUSSION

To obtain preliminary injunctive relief in this case, Plaintiff has the burden to establish the following: (1) Plaintiff has a substantial likelihood of success on the merits; (2) Plaintiff will suffer irreparable injury without the injunction; (3) The threatened injury to Plaintiff if the injunction is not granted outweighs the threatened injury to Defendants if the injunction is granted; and (4) The injunction would not be adverse to the public interest. Alabama v. U.S. Army Corps of Eng'rs, 424 F.3d 1117, 1128 (11th Cir.2005) (noting that preliminary injunction is only available if there is no adequate legal remedy and if it is necessary to prevent irreparable harm and preserve the court's power to render a meaningful decision on the merits); Cafe 207, Inc. v. St. Johns County, 989 F.2d 1136, 1137 (11th Cir.1993).

As discussed supra, Plaintiff conceded that Defendants have discontinued use of the Padgett name and was in the process of returning the Padgett Business Services materials. Therefore, the key remaining question is whether Defendants' continued operation of a business providing small business services at the same location as the former Padgett Business Services franchise constitutes an impermissible violation of the Agreement's covenant not to compete or unfair competition under the Lanham Act.⁴ At the hearing on Plaintiff's motion, the parties agreed that the motion could be decided on the affidavits submitted by the parties in support of their positions.

To prevail on its claim based on Defendants' alleged breach of the covenant not to compete, Plaintiff must show that Defendants are violating an enforceable covenant not to compete. The covenant not to compete in the Agreement provides that Defendants will not, for one year after the termination of the Agreement, engage-as an owner or manager-in the operation of any business within the franchise territory providing bookkeeping or income tax preparation services; divert or attempt to divert any customers located within the franchise territory; or employ or seek to employ any person employed by Plaintiff or another Padgett franchisee. It is undisputed that Defendants are operating, within the franchise territory, a small business services company which provides bookkeeping and tax preparation services. Defendants argue, however, that this operation should continue because 1) the covenant not to compete is not enforceable and 2) even if the covenant not to compete is generally enforceable, Plaintiff should not be able to enforce it because of unclean hands.⁵

The Agreement provides that the covenant not to compete shall be governed by and construed under the law of the state where it is to apply-in this case, the State of Michigan. Defendants contend that Michigan law contravenes Georgia public policy and that Georgia law thus applies to render the covenant not to compete unenforceable.⁶ Under Georgia law, the courts will refuse to honor a choice of law clause if two requirements are met: 1) there are significant contacts with the State of Georgia such that the choice of Georgia law is not constitutionally impermissible or arbitrary and 2) 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)). Pretermitting the question whether there are significant contacts with the State of Georgia to justify applying Georgia law to a restrictive covenant which would be enforced in the State of Michigan, the Court finds that application of Michigan law would not contravene the policy of or be prejudicial to the interests of the State of Georgia because the Agreement would be enforceable even under Georgia law.

For purposes of analyzing a covenant not to compete, Georgia considers franchise agreements to be analogous to employment contracts, and covenants in such agreements receive strict scrutiny and are not blue-penciled. See Advance Tech. Consultants, Inc., 250 Ga.App. at 320, 551 S.E.2d at 737; Watson v. Waffle House, Inc., 253 Ga. 671, 672, 324 S.E.2d 175, 177 (1985); Rita Personnel Services v. Kot, 229 Ga. 314, 315-17, 191 S.E.2d 79, 80-81 (1972). A restrictive covenant subject to strict scrutiny will be upheld if it is reasonable, and courts generally examine the covenant's duration, territorial coverage, and scope of activity to determine whether the restrictions are reasonable. See Habif Arogeti & Wynne, P.C. v. Baggett, 231 Ga.App. 289, 292, 498 S.E.2d 346, 350-51 (1998).

In this...