Federal Court Enjoins Terminated Franchisee from Competing Against Former Franchisor
In LeTip World Franchise LLC v. Long Island Social Media Group LLC, the U.S. District of Court for the District of Arizona granted a temporary restraining order in favor of a franchisor, LeTip World Franchise LLC (“LeTip”) against the defendants, its franchisee Long Island Social Media Group LLC and owners (collectively “LISMG”).
LeTip engages in professional development and networking with its members. In 2020, the parties entered into a franchise agreement to grant LISMG the right to operate a LeTip franchise in Suffolk County, New York, for 5 years. The franchise agreement was a typical one and allowed LISMG to use certain LeTip trademarks, logos, and emblems (the “marks”) in the promotion of the LeTip business. Concurrent with the franchise agreement, the owners of LISMG executed a separate franchise owner agreement obligating them personally to the same restrictive covenants in the franchise agreement.
In April 2023, LeTip discovered that one of the owners of LISMG affixed the marks to his boat with a modification, adding the word “just” directly above LeTip and posted pictures on social media. LeTip met with the owner and demanded removal of the photo and the modified marks. The owner verbally agreed; however, LeTip later contended the owner did not comply. About a month after the meeting, LeTip sent a notice of termination of the franchise agreement.
On or around December 2023, the owner announced on LinkedIn that he would be starting a new position as the Regional Director at BxB Professionals LLC. BxB also assisted professionals with business networking. BxB scheduled a launch party on February 1, 2024, at the same venue LeTip used for its monthly meetings and, as LeTip alleged, purposefully scheduled it the day before a LeTip meeting to recruit its members.
LeTip sued LISMG on January 23, 2024, requesting a TRO to enjoin the defendants from hosting the launch party. At the hearing, the defendants described the launch party as an open networking event to discuss business ideas and concepts and for attendees to determine whether they are a good fit for BxB.
A plaintiff seeking a preliminary injunction must show that 1) it is likely to succeed on the merits, 2) it is likely to suffer irreparable harm without an injunction, 3) the balance of equities tips in its favor, and 4) an injunction is in the public interest. The court granted the TRO, finding LeTip prevailed on each factor.
First, to determine whether LeTip was likely to succeed on the merit of its claims, the underlying restrictive covenant must be valid. Under Arizona law, a post-termination restrictive covenant must be reasonable as to temporal and geographic scope. The court found both were reasonable, as two years was a sufficiently narrow window of time to protect LeTip’s goodwill, and it was restricted to Suffolk County.
Second, the defendants acknowledged in the franchise agreement that any breach of the covenants would cause irreparable harm, for which there was no adequate remedy at law. Therefore, LeTip satisfied this factor.
Third, LeTip argued the balance of equities tipped in their favor due to the limited harm the defendants would suffer if enjoined. The court recognized that while the defendants could potentially lose revenue for their new business, that same revenue would stem from a violation of a valid restrictive covenant agreement. At the same time, LeTip would suffer harm to its business and goodwill in Suffolk County if there was no injunction.
Finally, the court found the public interest was served by enforcing reasonable terms as written and agreed to by the parties. Thus, the court granted the TRO, restricting the defendants from engaging or participating in the scheduled launch party.
Although the burden of proof for a TRO or a preliminary injunction is a high bar, this case shows how courts will enforce valid restrictive covenants in franchise agreements when a franchisee is clearly violating its terms.
