Northern District of Georgia Judge Allows Franchisor’s Complaint Against Franchisees to Proceed

Posted by Neal F. Weinrich on

Astral Health & Beauty, Inc. v. Aloette of Mid-Mississippi, Inc., Civil Action No: 1:12-CV-1904-WBH, 2012 WL 4714890 (N.D. Ga. Oct. 1, 2012), involves a somewhat unusual set of facts.

The plaintiff was a franchisor which supplies skin care and beauty products to its franchisees who sell the products.  The plaintiff had franchise agreements with two of the defendants.  Both of the franchise agreements had covenants not to compete.  Both of the franchise agreements had expired prior to the events at issue in the lawsuit.  Despite the fact that the agreements had expired, the parties continued to do business together, allegedly as if they were operating under the expired franchise agreements.

After the parties’ relations soured, the plaintiff filed suit, asserting that the defendants breached the terms of the franchise agreements, including by competing with the plaintiff in breach of the non-compete and by using the plaintiff’s confidential information.  The defendants moved for judgment on the pleadings.  In ruling on the defendants’ motion, the Court found that at the pleadings stage it was possible based on the plaintiff’s allegations that “the parties’ actions could create an implied contract under which ‘their rights and obligations should continue to be measured as provided in the old contract.’” Id. (quoting Town of Webster v. Village of Webster, 280 A.D.2d 931, 934 (N.Y. S. Ct. 2001).

The Court thus found it would be premature to dismiss the plaintiff’s claim at the pleadings stage: “While this Court recognizes that its role does not include rescuing Plaintiff from its failure to renew its franchise agreements, it would appear to be equally offensive to permit Defendants to continue to reap the benefits of a franchise agreement after its expiration and be relieved of the burdens of the same agreement.  Only with a fully developed factual record can this Court determine which of these paths is appropriate.  In summary, this Court concludes that the pleadings alone do not resolve the question of whether a contract existed and what the terms of that contract would be.”

Judge Hunt’s reasoning appears sound given the facts alleged.  That said, it is unclear whether his reasoning would apply in other contexts, particularly the employer-employee context.  Nevertheless, employers who have employees under term agreements containing restrictive covenants should be sure that their agreements state that the restrictive covenant obligations survive the expiration of the agreement.