Case Law Update: New York, California; Regulatory Update: Third FTC Challenge in Early Stages, FTC Issues Policy Statement on Franchisor-Franchisee Provisions

Case Law Update

BakeMark USA LLC v. Negron, No. 23-CV-2360 (AT) (BCM) (S.D.N.Y. July 12, 2024).

Read the full report and recommendation here.

Categories: Preliminary Injunction

Tags: New York law applied; Preliminary injunction denied; No irreparable harm; Undue delay

Types of restrictions in case: Non-compete; Customer non-solicitation

Summary:

• The plaintiff (“BakeMark”) filed a complaint, request for temporary restraining order, and request for preliminary injunction against its former employees Brian Negron and Jose Negron Jr.

  • BakeMark alleged these individual defendants set up their own baking products distribution business in direct competition with BakeMark, and solicited BakeMark’s employees and customers, all while employed at BakeMark or within one year after their resignations, during which they were contractually prohibited from competing or soliciting.

• The magistrate judge recommended that the motion be denied.

  • The magistrate judge found that BakeMark must show a heightened “clear” or “substantial” likelihood of success on the merits and make a “strong showing” of irreparable harm because plaintiffs injunction would, in all likelihood, put the individual defendants out of business.

  • The magistrate judge found sufficient evidence that at least Brian Negron breached his agreements with BakeMark.

  • However, the magistrate judge found BakeMark did not satisfy the heightened irreparable harm standard.

  • First, BakeMark was in a “strong position” in a competitive market, and as to each restricted customer that defected to the defendants, BakeMark had records showing the customer’s sales history dating back to 2018. The magistrate judge concluded BakeMark was, therefore, in a relatively good position to quantify its losses.

  • Second, the magistrate judge concluded BakeMark undercut its claim of irreparable harm by delaying to bring the motion. There was a nine-month delay between the day BakeMark first heard “rumors” that three of its employee went to work with the defendants and the date of suit. The magistrate judge rejected BakeMark’s explanation that it would have been “premature” to act any earlier than it did.

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BakeMark USA LLC v. Negron, No. 23 Civ. 2360 (AT) (S.D.N.Y. July 12, 2024).

Read the full opinion here.

Categories: Preliminary Injunction

Tags: New York law applied; No irreparable harm; Undue Delay; Preliminary injunction denied

Types of restrictions in case: Non-compete.

Summary:

• In this decision, the court addressed BakeMark’s objections to the magistrate judge’s report and recommendation (described above).

  • The court first overruled BakeMark’s objection to the magistrate judge’s conclusions that BakeMark was required to meet the heightened standard of “clear” or “substantial” likelihood of success on the merits, and make a “strong showing” of irreparable harm.

    • The court agreed with the magistrate judge that the heightened standard applied to BakeMark because the proposed preliminary injunction would essentially put the defendants out of business.

  • Next, the court overruled BakeMark’s objection to the magistrate judge’s conclusion that BakeMark failed to show that Negron, Jr. took actions to breach his contract or to misappropriate trade secrets.

    • The court found that Negron, Jr.’s de minimis troubleshooting activity did not constitute competitive work in violation of the employment agreement. The record evidence did not support BakeMark’s assertion that Negron, Jr. was responsible for JB Freight LLC’s truck fleet.

    • BakeMark also did not provide evidence that Negron, Jr. hired or contacted any restricted employees of BakeMark, or that Negron, Jr. had authority to hire, supervise, or fire JB Freight LLC employees.

    • Lastly, the court determined that BakeMark’s attempt to connect Negron, Jr.’s friendship between former work colleagues and his employment in the state of Florida with an improperly downloaded comprehensive report related to BakeMark’s Tampa, Florida branch, was insufficient to satisfy BakeMark’s burden on its preliminary injunction motion.

  • Lastly, the court agreed with the magistrate judge that BakeMark did not meet the “irreparable harm” standard.

    • Where the evidence showed BakeMark is in a strong position in the market and possesses the records to quantify its damages as to goodwill, the court followed the Second Circuit’s instruction not to automatically assume irreparable injury in a covenant-not-to compete case.

    • The court also found that BakeMark delayed in seeking a preliminary injunction once it determined there was a potential infringement.

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Storz Management Company v. Carey, No. 2:18-cv-00068-DJC-DB (E.D. Cal. July 12, 2024).

Read the full opinion here.

Categories: Summary Judgment; Tortious Interference

Tags: California law applied

Types of restrictions in case: Non-disclosure

Summary:

• The plaintiffs were affiliated entities in the RV and mobile home parks industry. They alleged their former CEO and CFO (Carey and Weiner, respectively) conspired to steal confidential information, poach employees and customers, and unfairly compete through a new entity, all in violation of their contracts and various other laws.

• The court granted in part and denied in part the defendants’ motion for summary judgment.

• Fiduciary Duty to Affiliates of Employers

  • The court denied the defendants’ motion for summary judgment on the claim for breach of fiduciary duty brought by the affiliates of Casey’s and Weiner’s employer.

  • The court found it relevant that the employment agreements at issue requires Casey and Weiner to do various things to protect the employer’s affiliates, including providing general oversight, being responsible for their fiscal activities, and manage operating budgets.

  • The court held there was a genuine question of fact as to whether these agreements triggered fiduciary obligations flowing to the affiliates.

• Intentional Interference with Contractual Relations

  • The court denied summary judgment on the claim for intentional interference with contractual relations.

    • California law does not require that a defendant’s solicitation be independently wrongful, but interfering with an existing contract is a wrong in and of itself.

    • Based on deposition testimony, the court found that the “hounding” of a former client of SMC to move to Monolith Properties was sufficient to create a question of fact as to whether Defendants intentionally interfered with Plaintiffs’ contractual relations.

Legislative Update

No legislative update.

Regulatory Update

Third Challenge to FTC’s Non-Compete Ban in Early Stages

In addition to the Ryan and ATS cases, there is another lawsuit challenging the legality of the FTC’s non-compete ban. The plaintiff is Properties of the Villages, Inc. (“POV”). It sued the FTC in the Middle District of Florida, and filed its motion for a preliminary injunction on July 2. It appears that POV is only seeking to enjoin the FTC from enforcing the non-compete ban against POV itself, not a nationwide injunction. So, that case may have comparatively less bearing on employers than the Ryan and ATS cases. The FTC has until July 25, 2024 to respond to POV’s motion, and it is unclear whether we will get a ruling before the September 4 effective date. Regardless, we will continue to monitor the docket and search for any new legal challenges that may arise.

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FTC Warns Franchisors Against Contract Provisions That Chill Franchisee Complaints

The FTC issued a Policy Statement on July 12, warning franchisors against the use of contract provisions that would prevent or chill franchisees from complaining of unfair practices to the FTC.

The FTC specifically called out non-disparagement clauses (“franchisee shall not disparage the brand in any way”), confidentiality or non-disclosure clauses (“franchisee is prohibited from sharing any information about the franchise or their experience”), goodwill clauses (“franchisee shall not engage in any conduct that may tarnish the goodwill of the brand”), and similar clauses.

The FTC concluded, “Clauses prohibiting franchisees from reporting potential law violations to the government are considered unfair and unenforceable. Further, the use of implicit or explicit threats to sue or otherwise retaliate against a franchisee who reports potential law violations to the government is also an unfair practice.”

Commissioners Ferguson and Holyoak each issued dissenting statements, claiming the Policy Statement goes too far and creates confusion about what contract provisions are permissible.