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Tes Franchising, LLC v. Dombach

October 7, 2010

TES FRANCHISING, LLC, ET AL., PLAINTIFFS,
v.
J. ERIC DOMBACH, ET AL., DEFENDANTS,
v.
TERRY POWELL, ET AL., ADDITIONAL DEFENDANTS.



The opinion of the court was delivered by: Henry S. Perkin United States Magistrate Judge

MEMORANDUM

Presently before the Court is Plaintiffs' Motion for Preliminary Injunction. For the reasons that follow, the Motion will be denied.

I. BACKGROUND, PROCEDURAL HISTORY AND FINDINGS OF FACT*fn1

The Plaintiffs in this class action brought on behalf of 370 business coaching franchisees and four franchisors are TES Franchising, LLC, AdviCoach Franchising, LLC, Business Partners Franchising, LLC, ERC Franchising, LLC ("Franchisor Plaintiffs" or "FSBI") and Steven Schick. FSBI is a fictitious business name for the Franchisor Plaintiffs which are each wholly owned by Mr. Terry Powell and operate from the same location in Southbury, Connecticut. The 370 business coaching franchisees are Regional Developer and Single Unit franchisees under one or more of the following FSBI brands: The Entrepreneur's Source(r) ("TES"), AdviCoach(r), Business Partner One-Stop Marketing(r) and Expense Reduction Consulting(r) ("ERC"). Each Franchisee Plaintiff has made a monetary investment between $68,000 and $272,000 or more to purchase a franchise system, including trade secrets, confidential and proprietary information, methods, procedures, standards and specifications for the operation of a franchised business.

Defendants are J. Eric Dombach ("Eric Dombach"), his wife Deborah M. Dombach, C. Michael Cody ("Michael Cody"), Coach Success Center, LLC ("CSC"), Good Life Marketing, LLC ("GLM"), Business Action, Inc. d/b/a My Coaches Coach ("BAI" or "MCC") and Team Synergy, LLC ("Synergy") (collectively "Defendants"). From 2001 to 2005, Eric Dombach was a business coaching franchisee with Action International. He later sold this franchise to Lancaster Coaching Practice, LLC. On August 29, 2003, Eric Dombach founded The Coach Success Center ("CSC"), a telemarketing marketing company. At the time CSC was formed, Donald Schin was company President. On November 2, 2006, Eric Dombach purchased 34% of the company stock from Donald Schin and became 83% owner and President of CSC. On February 24, 2008, Eric Dombach purchased the remaining 17% and became 100% owner of CSC.

The parties disagree as to the genesis of the relationship between Terry Powell as FSBI and Eric Dombach. According to Powell, Dombach approached him in January 2008 to promote the services of CSC and Dombach was required to execute a Non-Disclosure Agreement ("NDA") agreeing to keep all confidential and proprietary information and trade secrets received from FSBI in trust. Pls.' Ex. 9, p. 3 ¶¶ 9-10. Eric Dombach, as President of CSC, executed the NDA with FSBI on February 6, 2008. Pls.' Ex. 17. According to Powell, Eric Dombach was aware at the time he executed the NDA that FSBI was a fictitious business name representing the collective Franchisor Plaintiffs and that services provided by CSC would be for all four Franchisor Plaintiffs. Pls.' Ex. 9, p. 4 ¶¶ 23, 24. Eric Dombach became an employee, specifically an Executive Strategist for FSBI, on the payroll of TES Franchising, LLC on April 7, 2008. Id. at 5 ¶¶ 34, 38. In his capacity as Executive Strategist, Dombach obtained access to all trade secrets, confidential and proprietary information and policies and procedures of FSBI including but not limited to training methods, business coaching techniques, franchise communications systems, databases, address lists, customer contact procedures, franchisee revenue, service sales techniques, and all other information in the franchise systems including FSBI's Discovery Process. Id., ¶ 38.

Prior to his employment, Eric Dombach informed Terry Powell that he was servicing three to four existing business coach clients and he wished to continue serving those clients while he was an employee of FSBI, but he would not add more private clients. Id., ¶ 35. Powell agreed that Dombach could continue servicing the clients with whom he was then engaged, but not add more to his private practice. Id., ¶ 36.

On March 1, 2009, Dombach approached Powell and sought to terminate his employment with TES in order to avoid losing payments made to him by Lancaster Coaching Practice, LLC, the company to which he had sold his Action International coaching franchise and with which Dombach had a non-compete agreement which prevented Dombach from placing franchisees in the Commonwealth of Pennsylvania. Id. at 6, ¶¶ 39-41. On April 2, 2009, Dombach asked that his position change and sought consideration as an independent contractor to FSBI because he represented that this arrangement would not violated his non-compete agreement with Lancaster Coaching Practice, LLC. Id., ¶¶ 42-43. Dombach informed Powell that he intended to continue to provide coaching to individuals engaged in the practice of business coaching, and Powell agreed on May 4, 2009 to allow Dombach to become an independent contractor for FSBI and to continue coaching existing business coaches. Id. at 6, ¶ 49; 9 at ¶ 62. Powell advised Dombach that as consideration for his continued engagement with FSBI, it would be necessary for Dombach to continue to abide by the confidentiality provisions in the NDA he executed as President of CSC on February 6, 2008 and the confidentiality and work-product provisions contained in the Employee Handbook he received on April 10, 2008 as if he were an FSBI franchisee. Id., ¶ 48.

On November 30, 2009, FSBI issued an Employee Warning Notice to Eric Dombach because it was aware that Dombach was using AdviCoach tools and materials, had established a website, www.thecoachescoach.com and was marketing his services as a "coaches' coach." Id., ¶¶ 56-58. In the November 30 warning, Powell instructed Dombach to cease his competitive activities and close down his website, www.thecoachescoach.com. Dombach did as requested with respect to the website. Id. at 9, ¶ 60. On December 3, 2009, Dombach resigned his position as Executive Strategist for FSBI and sent a blast email to numerous Regional Developer and Single Unit franchisees announcing his resignation and stating that he had been expanding his private coaching practice during his tenure at FSBI. Id., ¶¶ 64-65. On December 17, 2009, Terry Powell was notified by Mark Elson of a telephone conversation he had with Eric Dombach in which Dombach stated he was opening a competing business that would provide the same support and services to individuals seeking to become business coaching franchisees that FSBI provides to those individuals. Id., ¶ 66.

On December 29, 2009, an internet search for www.mycoachescoach.com resulted in a webpage for My Coaches' Coach which identified Eric Dombach and Michael Cody as co-founders of My Coaches' Coach and Eric Dombach as a former AdviCoach employee. The website was shut down later in the day on December 29, 2009. Id. at 10, ¶¶ 67-70. A search for the same site resulted in a web page for My Coaches' Coach on January 5, 2010. Id., ¶ 71. The website offers franchisor-like services to individuals interested in becoming business coaches similar to the services provided by FSBI to its franchisees and offers services in three packages, basic, middle and premium packages that offer different levels of services which appear identical to the types of services provided by FSBI to its franchisee candidates. Id., ¶¶ 72, 73. The website also contains videos of Eric Dombach who makes statements about his work for FSBI and the ability of a user to purchase an online e-book entitled The 2010 Business Coaches Franchise Buyers Guide ("2010 Buyer's Guide") for $97.00. Id., ¶¶ 74, 75.

Plaintiffs purchased the book and contend that it contains confidential internal communications and a description of the FSBI Discovery Process and numerous inaccurate, misleading and false statements regarding the FSBI franchise system. Id., ¶ 77. In December 2009 and early February 2010, the website also contained a biographical sketch of Eric Dombach in which he refers to FSBI's AdviCoach(r) brand and an audio recording on the website also referenced AdviCoach(r) and Dombach's employment by FSBI. Id. at 11 ¶¶ 81, 82.

No one from FSBI was aware of Eric Dombach's transfer of CSC to Good Life Marketing, LLC, a company owned by Deborah M. Dombach, until February 2010. Id. at 5 ¶ 33.

On January 4, 2010, Plaintiffs filed a ten count complaint asserting claims for (1) breach of non-disclosure agreement against Eric Dombach; (2) breach of confidentiality agreement against Eric Dombach; (3) breach of duty of loyalty against Eric Dombach; (4) breach of covenant not to compete against Eric Dombach; (5) common law unfair competition against all Defendants; (6) tortious interference with business relations against Deborah Dombach and Michael Cody; (7) civil conspiracy against all Defendants; (8) trademark infringement under the Lanham Act against all Defendants; (9) misappropriation of trade secrets under Pennsylvania Uniform Trade Secrets Act against all Defendants; and (10) preliminary and permanent injunction against all Defendants.

Plaintiffs' motion for preliminary injunction, also filed on January 4, 2010, seeks injunctive relief against Defendants based on Plaintiffs' claims of: (1) alleged misappropriation of trade secrets; (2) alleged breaches of non-disclosure and confidentiality agreements; and (3) alleged breach of Defendant Eric Dombach's duty of loyalty. (Pls.' Mem. Law in Supp. Mot. Prelim. Inj., pp. 11-20.) This case was assigned to the Honorable James Knoll Gardner. On January 19, 2010, Defendants filed a memorandum of law in opposition to the motion for preliminary injunction and a motion to dismiss Plaintiffs' Complaint.

On January 25, 2010, Judge Gardner issued an order referring this case for disposition subsequent to the parties' consent to exercise of jurisdiction by a Magistrate Judge. On January 26, 2010, I entered an order scheduling a telephonic scheduling conference for February 2, 2010. Telephone conferences were held with counsel on February 2 and 3, 2010 and I issued an order on February 4, 2010 scheduling a preliminary injunction hearing for March 1, 2010.

On February 16, 2010, Plaintiffs filed an Amended Complaint asserting the following causes of action against the Defendants: (1) breach of non-disclosure agreement against Eric Dombach, Deborah Dombach, CSC and GLM; (2) breach of confidentiality agreement against Eric Dombach; (3) breach of duty of loyalty against Eric Dombach; (4) breach of contract against Eric Dombach; (5) common law defamation against all Defendants; (6) common law unfair competition against all Defendants; (7) tortious interference with prospective business relations Michael Cody; and (8) civil conspiracy against all Defendants. The Amended Complaint did not include claims for trademark infringement under the Lanham Act or a misappropriation of trade secrets under the Pennsylvania Uniform Trade Secrets Act.

Plaintiffs filed an Amended Motion for Preliminary Injunction along with their Amended Complaint on February 16, 2010. In the Amended Preliminary Injunction Motion, Plaintiffs seek preliminary injunctive relief for the following claims: (1) breach of a non-disclosure agreement; (2) breach of a duty of loyalty; (3) defamation; and (4) breach of an alleged oral non-compete agreement. (Pls.' Mem. Law in Supp. Am. Mot. Prelim. Inj., pp. 20-29.) On February 25, 2010, Defendants' response in opposition to Plaintiffs' motion for preliminary injunction was filed along with Defendants' proposed findings of fact and conclusions of law. On March 1, 2010, Plaintiffs' proposed findings of fact and conclusions of law were filed and the first day of the preliminary injunction hearing was held. The hearing resumed on March 2, 2010 and was scheduled to be continued on March 15, 2010, but on March 10, 2010, the hearing was continued until May 24, 2010 with the consent of counsel. On May 19, 2010, I held a telephone conference with counsel. On May 24, 2010, the third day of testimony regarding the preliminary injunction hearing was taken. Final proposed findings of fact and conclusions of law were submitted by Plaintiffs on June 23, 2010 and by Defendants on July 7, 2010. On September 30, 2010, an Order was entered for Plaintiffs to file their Memorandum of Law in Support of the Amended Motion for Preliminary Injunction, which had been omitted from the February 16, 2010 filing of the Amended Motion. Plaintiffs filed the Memorandum of Law on September 30, 2010.

II. PRELIMINARY INJUNCTION STANDARD.

The United States Court of Appeals for the Third Circuit has recognized that "the grant of injunctive relief is an 'extraordinary remedy, which should be granted only in limited circumstances.'" Instant Air Freight Co. v. C.F. Air Freight, Inc., 882 F.2d 797, 800 (3d Cir. 1989). A party seeking a preliminary injunction must show: "(1) a likelihood of success on the merits; (2) that it will suffer irreparable harm if the preliminary injunction is denied; (3) that granting preliminary relief will not result in even greater harm to the non-moving party; and (4) the public interest favors such relief."granting of the injunction would be in the public interest. Kos Pharm., Inc. v. Andrx Corp.,369 F.3d 700, 708 (3d Cir. 2004). The Third Circuit has insisted that "the preliminary injunction device should not be exercised unless the moving party shows that it specifically and personally risks irreparable harm." Adams v. Freedom Forge Corp., 204 F.3d 475, 487 (3d Cir. 2000). The Court has also stressed that "[b]efore granting a preliminary injunction, a district court must consider the extent to which the moving party will suffer irreparable harm without injunctive relief." Liberty Lincoln-Mercury, Inc. v. Ford Motor Co., 562 F.3d 553, 557 (3d Cir. 2009)(quoting Novartis Consumer Health, Inc. v. Johnson & Johnson-Merck Consumer Pharm. Co., 290 F.3d 578, 595 (3d Cir. 2002)(emphasis added.).

This Court has jurisdiction to grant a preliminary injunction pursuant to Federal Rule of Civil Procedure 65. The purpose of the preliminary injunction is to preserve the status quo until the rights of the parties can be fairly and fully investigated and determined by strictly legal proofs and according to the principles of equity. Wetzel v. Edwards, 635 F.2d 283, 286 (4th Cir. 1980). Status quo refers to the "last, peaceable, noncontested status of the parties." Kos Pharm., 369 F.3d at 708.

As indicated above, irreparable injury must be present for an injunction to issue. "[A] failure to show a likelihood of success or a failure to demonstrate irreparable injury must necessarily result in the denial of a temporary restraining order or preliminary injunction." Instant Air Freight Co., 822 F.2d at 800 (citations omitted). In order to demonstrate irreparable harm, Plaintiffs must demonstrate potential harm which cannot be redressed by a legal or an equitable remedy following a trial. Id. at 801. The availability of adequate monetary damages belies a claim of irreparable injury. Frank's GMC Truck Center, Inc. v. General Motors Corp., 847 F.2d 100, 102 (3d Cir. 1988). The temporary restraining order or preliminary injunction must be the only way of protecting Plaintiffs from harm. Id.

III. DISCUSSION

Plaintiffs request the following injunctive relief:

1. Defendants shall return all documents reflecting Plaintiffs' confidential and proprietary information and trade secrets.

2. Defendants shall be prohibited from using Plaintiffs' confidential and proprietary information and trade secrets.

3. Defendants shall be prohibited from competing with Plaintiffs in any way, including the employment of Eric Dombach.

4. Defendants shall be prohibited from marketing or soliciting any products or services using Plaintiffs' confidential and proprietary information and trade secrets.

5. Defendants shall be prohibited from claiming any relationship to any franchisor Plaintiff, multibrand business coaching franchisor, or in any way associating themselves with any FSBI brand.

6. Defendants shall be prohibited from contacting any existing FSBI franchisee, employee, associate, agent, or representative.

7. Defendants shall be prohibited from defaming and disparaging any FSBI brand, franchisee, employee, associate, agent or representative.

8. Defendants shall transfer title to all work product to Plaintiffs, including the 2010 Buyer's Guide and various URL domain names.

A. Whether the Plaintiffs Lack Capacity to Bring Suit Under Pennsylvania Law

In Defendants' Memorandum of Law in Opposition to the Motion for Preliminary Injunction, they note that Pennsylvania statutory law requires a foreign business corporation to obtain a certificate of authority from the Pennsylvania Department of State before doing business in Pennsylvania. See Mem. Law in Opp'n. Mot., p. 14 (citing 15 Pa. C.S.A. § 4121(a)). Under 15 Pa. C.S.A. § 4141, a nonqualified foreign business corporation or a foreign business corporation that has not obtained the necessary certificate of authority to conduct business in the Commonwealth of Pennsylvania but that conducts business in the Commonwealth anyway is not permitted to maintain any action or proceeding in any court in the Commonwealth until the corporation has obtained a certificate of authority. 15 Pa. C.S.A. § 4141(a). This provision precludes a nonqualified foreign business corporation from maintaining an action in federal as well as state court. Aberle Hosiery Co. v. Am. Arbitration Ass'n., 337 F. Supp. 90, 92 (E.D. Pa. 1972).

Defendants have checked the Pennsylvania Department of State's website, which indicates that Plaintiff TES Franchising LLC has registered with the Pennsylvania Department of State and properly obtained a certificate of authority to operate within the Commonwealth. According to Defendants, except for TES Franchising, the Franchisor Plaintiffs are nonqualified foreign business corporations and are not permitted to maintain an action before this Court and not entitled to injunctive relief until they effect correct compliance with Pennsylvania's corporate registration statutes. Mem. Law in Opp'n Mot., pp. 14-15.

Defendants did not develop this argument at the three-day preliminary injunction hearing, and the record is devoid of information that would enable the Court to rule on this issue at this time. In addition, Plaintiffs can easily remedy this issue by complying with Pennsylvania's corporate registration statutes during the pendency of the litigation. See Dague v. Huddler, No. 07-5539, 2008 WL 4444266, at *6 (E.D. Pa. Oct. 2, 2008)(quoting Typh, Inc. v. Typhoon Fence Co. of Pa., Inc., 461 F. Supp. 994, 996-97 (D.C. Pa. 1978)(examining effect of failure to comply with 15 Pa. C.S.A. § 2104(A), predecessor statute to 15 Pa. C.S.A. § 4141(a) and stating compliance during pendency of litigation is sufficient)). Accord Salom Enterp., LLC v. TS ...


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