A recent case out of the United States District Court for the Southern District of Florida illustrates the parameters of non-compete provisions in the context of franchise agreements.
Winmark Corporation operated a chain of retail sporting goods stores known as Play it Again Sports pursuant to franchising agreements. Brenoby Sports, Inc. and Marlin Geimer began operating a Play it Again Sports store in Hollywood, Florida in 1994. In 2004, they renewed the franchise agreement and relocated their store to Pembroke Pines, Florida.
Pursuant to the franchise agreement, Mr. Geimer and Brenoby Sports were required to pay 4% of all gross sales to Winmark in exchange for the right to operate the only Play it Again Sports store in an eight-mile radius. The franchise agreement also contained non-compete clauses prohibiting Mr. Geimer and Brenoby from competing with any Play it Again Sports store during the franchise agreement and for one year after its termination.
By 2013, Winmark began to suspect that Mr. Geimer had failed to pay out 4% of its gross sales. Likewise, Winmark learned that Mr. Geimer or his son had begun to operate Amazon.com and Ebay.com stores under different names that were competing with Play it Again Sports. Winmark sent a cease and desist letter to Mr. Geimer, demanding that he terminate his unlawful competitive activities and submit to an audit of his store’s finances pursuant to the franchise agreement. When Mr. Geimer refused to comply with the audit, Winmark sent another letter terminating the franchise agreement.
After the termination of the franchise agreement, Winmark’s field manager visited Mr. Geimer’s former Play it Again Sports store at the franchised location. The store continued to operate as a sporting goods retailer, but under the name Play or Trade Sport. The field manager testified that Mr. Geimer’s store was still using Winmark’s proprietary inventory software as part of its operations, as evidenced by the numbers on the price tag and receipt for a product he purchased at the store.
Mr. Geimer, although no longer working at Play or Trade Sport, had allegedly sold the store to a third party, Jorge Bocca. Pursuant to a written agreement with Mr. Bocca, Mr. Geimer would receive $55,000 plus an additional percentage of future sales of Play or Trade Sport. Mr. Geimer’s son, Jesse, continued to work as a co-manager at the store.
Winmark then brought a Motion for a Preliminary Injunction, seeking to enjoin Mr. Geimer, Brenoby Sports, and “all persons acting in concert or participation with them” from engaging in the sporting goods business. Winmark also sought a mandatory injunction requiring Mr. Geimer to submit to an audit.
The District Court began its analysis by referring to the preliminary injunction standard. The Court agreed that Winmark was likely to succeed on the merits of the case, as it had shown that Mr. Geimer continued to associate with the new sporting goods store at the franchised location, that Play or Trade Sport continued to use Winmark’s software, and that Mr. Geimer had refused to participate in the audit.
The Court went on to analyze the enforceability of the non-compete agreement. Under Florida Statute § 542.335, which governs the validity of restrictive covenants, the Court found that the franchise agreement’s one-year and eight-mile radius restrictions were reasonable in time and scope. Likewise, the Court held that the covenant was necessary to protect Winmark’s legitimate business interests. The Court also found that Mr. Geimer’s continued personal and financial interest in the business was a violation of the non-compete agreement, as he still expected to receive an undisclosed percentage of the store’s sales. Similarly, the Court held that Winmark was likely to succeed on its claim that Mr. Geimer had violated the franchise agreement by failing to return the inventory software.
However, the Court refused to issue a preliminary injunction against the non-parties involved in the case, such as Mr. Geimer’s son or Mr. Bocca. Florida law allows a court to enjoin non-parties to non-compete agreements, such as family members of the signator or alter ego corporations, but the non-party must be under the signator’s contol or is otherwise being used to aid or abet the signator in violating the non-compete clause. Here, the Court found that the evidence did not support a finding that the non-parties were aiding and abetting Mr. Geimer in violating the non-compete agreement. Moreover, Winmark had failed to provide notice to the non-parties of its request for an injunction, and those non-parties did not have an opportunity to appear before the Court.
Addressing the “irreparable harm” standard for a preliminary injunction, the Court found that Winmark suffered and would continue to suffer irreparable harm due to Mr. Geimer’s ongoing violation of the non-compete agreement. For instance, Winmark had spent significant time and money generating goodwill and brand recognition for Play it Again Sports, yet Mr. Geimer’s had established an internet website for Play or Trade Sport that resulted in brand confusion.
The Court then turned to Winmark’s request for a mandatory injunction requiring Mr. Geimer to submit to an audit. The Court found that Winmark had failed to establish that it would suffer irreparable harm if the Court did not order an audit. Under the definition of “irreparable harm,” when an injury can be compensation with money damages, it is not irreparable.
Overall, the District Court granted Winmark’s preliminary injunction in part, and denied it in part. Mr. Geimer was enjoined for a period of one year from participating in any sporting goods business at the franchise location or within an eight-mile radius thereof. Mr. Geimer was also enjoined from receiving ongoing payments as a percentage of the store’s sales, although he was still allowed to receive the sale price of the store. However, the Court denied Winmark’s request for a mandatory injunction requiring Mr. Geimer to submit to an audit. The Court also refused to enjoin any non-parties to the case.
This case is Winmark v. Brenoby, 13-62697 2014 WL 3400564 (S.D. Fla. July 10, 2014).
Jonathan Pollard is a trial lawyer and litigator based on Fort Lauderdale, Florida. He focuses his practice on defending non-compete and trade secret claims. Jonathan routinely represents doctors, corporate executives and other high level employees who are switching companies, or, who have started their own ventures. Beyond litigation, Jonathan advises employees, companies and business owners regarding restrictive covenant issues in connection with employment contracts, separation agreements, hiring decisions, the purchase or sale of business interests and the execution of commercial leases. Jonathan has been interviewed about non-compete issues by reporters from INC Magazine, the BBC, the National Federation of Independent Business and The Tampa Bay Times. In addition to his background in non-compete and trade secrets work, Jonathan has broad experience as a competition lawyer, generally, and has litigated numerous cases under both the Sherman and Lanham Acts. He is licensed in all Florida federal and state courts and routinely represents clients in Miami, Fort Lauderdale, West Palm Beach, Fort Myers, Tampa, Orlando and Jacksonville. His office can be reached at 954-332-2380. For more information, visit http://www.pollardllc.com.