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L.A. Insurance Agency Franchising, LLC v. Elia

United States District Court, E.D. Michigan, Southern Division

April 8, 2019




         I. Introduction

         Plaintiff L.A. Insurance[1] granted a franchise to Defendant David T. Elia. Plaintiff alleges that after the expiration of its franchising agreement, Defendant Elia continued operating an insurance agency in the same location as the franchise, but under a different name, in violation of the noncompete clause in the franchise agreement. Plaintiff seeks a preliminary injunction against Defendants Elia, L.A. Insurance Agency NV2 (“NV2”), Inc., and GO Insurance, to prevent them from violating the terms of the franchise agreement. For the reasons set out below, the Court GRANTS Plaintiff's Motion for Preliminary Injunction (ECF No. 4) with a limited scope. In addition, after oral argument on the motion, Plaintiff filed a Motion to Supplement the Record. ECF No. 11. The Court also GRANTS that motion.

         II. Background

         Plaintiff is an insurance agency franchisor and owns the “L.A. Insurance®” federal trademark. ECF No. 4 PageID.87. Plaintiff enters into franchising agreements with other businesses, allowing them to use Plaintiff's trademark. Id. at PageID.86-87. These agreements require the franchisee to pay a fee and commissions to Plaintiff. Id. at PageID.87. Franchisees must also “abide by other obligations described in the franchise agreement, ” in exchange for being able to use the LA Insurance name and related company assets. Id. The core of Plaintiff's case is that Defendant is allegedly operating an insurance agency-called GO Insurance-in Las Vegas in the same location where he had previously been operating his L.A. Insurance franchise. Id. According to Plaintiff, this violates the non-compete clause of the franchise agreement.

         Plaintiff and Defendants Elia and NV2 entered into a 10-year franchise agreement that Defendant Elia signed on October 29, 2008.[2] Id. at PageID.88. But Defendant argues that the agreement was effective as of March 5, 2008. Although this factual question was not fully developed in the parties' briefing, at oral argument, the parties explained that Plaintiff and Defendant Elia had a dispute initially over which of two franchise agreements would control the relationship between the parties, and they submitted this matter to arbitration in early 2008. March 5, 2008 was apparently the day on which Defendant Elia deposited both versions of the franchise agreement with the arbitrator and agreed to be bound the arbitrator's decision regarding which franchise agreement controlled the relationship. ECF No. 10-1. Plaintiff later filed a Motion to Supplement the Record containing a copy of judgment on the arbitration. ECF No. 11.

         As the franchise agreement was for a ten-year term, it was set to expire either on March 5, 2018 or on October 29, 2018, depending on the date used to mark its commencement. For the purposes of determining whether Plaintiff is entitled to injunctive relief, as explained below, it is not necessary at this stage of the proceedings for the Court to determine which date applies as the expiration date for the agreement.

         In late September 2018, Plaintiff “learned that Defendant NV2 had removed the L.A. Insurance name from its location and replaced it with signage identifying the agency as ‘GO Insurance.'” ECF No. 4 PageID.88. On October 5, 2018, Plaintiff sent a letter to Defendants Elia and NV2, stating that the franchise agreement would expire on October 29, 2018 and reminding Defendants of their obligations upon expiration of the franchise agreement, which include:

• Cease using Plaintiffs trademarks; . Close the insurance agency;
• Not compete with Plaintiff for two years; and
• Not divert the agency's customers elsewhere.

         Specifically, Plaintiff notified Defendants Elia and NV2 that operating “GO Insurance” violated Section 11.2 of the franchise agreement, “which prohibits the operation of competing businesses within two miles of the franchise location for a two-year term following expiration of the franchise agreement, and prohibits the diversion of business and customers to a competing business.” ECF No. 8 PageID.89. Plaintiff filed suit on November 13, 2018. ECF No. 1. Yet, according to Plaintiff, Defendants continue to operate in violation of the agreement. On December 12, 2018, Plaintiff filed its Motion for a Temporary Restraining Order and Preliminary Injunction. ECF No. 4. At issue now is only whether Plaintiff is entitled to a preliminary injunction.[3]

         In response, Defendants raise several factual disputes. First, Defendants argue that they did not receive the legally-required disclosures, notices, and proposed agreements ten business days in advance of the date the franchise agreement was executed. ECF No. 8-1 PageID.137. Defendants further claim that Plaintiff was aware of this deficiency. ECF No. 8-2 PageID.201. Defendants argue that Plaintiff's failure to comply with the statutory requirements for franchisors entitles Defendants to rescind the franchise agreement contract in its entirety. If the Defendants were correct that the contract should be rescinded, it would not be appropriate to grant a preliminary injunction to enforce the terms of that contract.

         Second, Defendants argue that because they converted the L.A. Insurance franchise into GO Insurance, they are not operating GO Insurance within two miles of an existing L.A. Insurance franchise location. Id. at PageID.137-38. As a component of this argument, Defendants maintain that the franchise agreement expired on March 5, 2018, so that converting to GO Insurance after that date also did not violate the agreement.

         III. Standard of Review

         “When deciding whether to issue a preliminary injunction, a district court should address four factors: (1) the likelihood of success on the merits; (2) the irreparable harm that could result if the injunction is not issued; (3) the impact on the public interest; and (4) the possibility of substantial harm to others.” Basicomputer Corp. v. Scott, 973 F.2d 507, 511 (6th Cir. 1992). The parties agree that this standard of review is the correct one. ECF No. 8-1 PageID.138.

         IV. Analysis

         The Court will analyze the four factors set forth in Sixth Circuit case law to determine whether a preliminary injunction is appropriate. As Defendants note, “a preliminary injunction is an extraordinary and drastic remedy, one that should not be granted unless the movant, by a clear showing, carries the burden of persuasion.” Mazurek v. Armstrong, 520 U.S. 968, 972 (1997) (emphasis in original). Plaintiff has met its burden here.

         a. Likelihood of success on the merits

         Plaintiff's Complaint alleges breach of contract. ECF No. 1. In order to prevail on a claim for breach of contract under Michigan law, a claimant must show by a preponderance of the evidence that “(1) there was a contract (2) which the other party breached (3) thereby resulting in damages to the party claiming breach.” Miller-Davis Co. v. Ahrens Constr., Inc., 848 N.W.2d 95, 104 (Mich. 2014).[4]

         i. Michigan's Franchise Investment Law

         In contending that Plaintiff cannot show a substantial likelihood of success on the breach of contract claim, Defendants first argue that the franchise agreement is subject to rescission under Michigan law because Plaintiff failed to comply with Michigan's Franchise ...

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