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Rita's Water Ice Franchise Company, LLC v. S.A. Smith Enterprises

January 10, 2011

RITA'S WATER ICE FRANCHISE COMPANY, LLC
PLAINTIFF,
v.
S.A. SMITH ENTERPRISES, LLC, ET. AL. DEFENDANTS.



The opinion of the court was delivered by: Slomsky, J.

OPINION

I. INTRODUCTION

Before the Court are Plaintiff Rita's Water Ice Franchise Company, LLC's Motion for a Preliminary Injunction (Doc. No. 2), Plaintiff's Memorandum of Law and Supplemental Memorandum of Law in Support of its Motion (Doc. Nos. 21 and 7), and Defendants S.A. Smith Enterprises, LLC, Shirley A. Smith, and Jeffrey B. Smith's Memorandum in Opposition to Plaintiff's Motion (Doc. No. 22).

The dispute here concerns Defendants alleged breach of a franchise agreement entered into with Plaintiff. Specifically, Plaintiff alleges that Defendants breached the terms of the Franchise Agreement by prematurely ceasing operation of their Rita's Franchise and then opening a competing business at the same location where the Franchise did business. In its Motion for a Preliminary Injunction, Plaintiff seeks to enjoin Defendants from continuing to operate their competing business and to compel Defendants to return certain machine parts as provided under the Franchise Agreement.

For the reasons that follow, the Court will grant Plaintiff's Motion for a Preliminary Injunction (Doc. No. 2).

II. PROCEDURAL HISTORY

On August 24, 2010, Plaintiff initiated this lawsuit by filing the Complaint (Doc. No. 1). That same day Plaintiff filed its Motion for a Temporary Restraining Order and for a Preliminary Injunction (Doc. No. 2). On August 25, 2010, after a hearing held that day, the Court denied Plaintiff's Motion for a Temporary Restraining Order (Doc. No. 4) and issued an Order scheduling a hearing on Plaintiff's outstanding Motion for a Preliminary Injunction (Doc. No. 3). On September 3, 2010, Plaintiff filed its Supplemental Memorandum of Law in Support of its Motion for a Preliminary Injunction (Doc. No. 7).

On September 8 and 10, 2010, the Court held a hearing on Plaintiff's Motion for a Preliminary Injunction.*fn1 On December 14, 2010, Plaintiff filed a Memorandum of Law in Support of its Motion for a Preliminary Injunction. (Doc. No. 21.) That same day, Defendant filed its Memorandum in Opposition to the Motion for a Preliminary Injunction (Doc. No. 22) and its Answer to the Complaint (Doc. No. 23.)

III. FACTUAL BACKGROUND

On July 19, 2007, Plaintiff Rita's Water Ice Franchise Company, LLC and Defendants Shirley and Jeffrey Smith entered into a franchise agreement, titled "Rita's Water Ice Franchise LLC Franchise Agreement" (the "Franchise Agreement" or the "Agreement"). (Plaintiff Exhibit 2 ("Ex. P-2"); September 8, 2010 Hearing Transcript ("Sept. 8 Hr'g Tr.") at 23-24.) On July 29, 2010, pursuant to the terms of the Franchise Agreement, Defendants Shirley and Jeffrey Smith transferred their interest in the Franchise Agreement to Defendants S.A. Smith Enterprises, LLC in another written agreement (the "Transfer Agreement"). (Plaintiff Exhibit 3 ("Ex. P-3 "); Sept. 8 Hr'g Tr. 24-25.) Defendant Shirley Smith is a ninety-percent shareholder and Defendant Jeffrey Smith is a ten-percent shareholder in Defendant S.A. Smith Enterprises. (Sept. 8 Hr'g Tr. 25.) Although Defendants Shirley and Jeffrey Smith transferred their interest in the Franchise Agreement, the Transfer Agreement provides that they remain personally liable under the Franchise Agreement. (Ex. P-3.)

A. Terms of the Franchise Agreement

Pursuant to the Franchise Agreement, Defendants paid Plaintiff $35,000 and agreed to pay Plaintiff a royalty fee of six-and-a-half percent of estimated gross sales. (Ex. P-2 ¶¶ 4.1, 4.2; September 10, 2010 Hearing Transcript ("Sept. 10 Hr'g Tr.") at 29.) In addition, Defendants agreed to operate a Rita's Franchise for ten (10) years in accordance with Plaintiff's Standards of Operation, which required, among other things, that Defendants adhere to product and service quality standards, comply with operation and preparation methods, maintain, refurbish and modify store premises and equipment as needed and/or directed by Plaintiff, and allow Plaintiff to enter the Franchise premises to ensure Defendants' compliance with these standards. (Ex. P-2 ¶¶ 7.1-7.21.) Defendants also agreed to purchase and install certain fixtures and equipment including Plaintiff's "proprietary batch machine."*fn2 (Id. ¶ 7.4.)

In exchange, Plaintiff granted Defendants the right to operate a Rita's Franchise as well as the right to use confidential and proprietary information regarding the establishment and operation of a Rita's store (the "System"). (Ex. P-2 ¶¶ 1, 8-10.) The confidential and proprietary information that comprises the System includes Rita's recipes, food preparation, and business and management practices. (Id. ¶ 10.)

In signing the Franchise Agreement Defendants made several promises regarding the confidential information that forms the System. Specifically, Defendants agreed to "(1) not use the Confidential Information in any other business or capacity during and after the term of [the Franchise] Agreement; (2) to maintain the absolute confidentiality of the Confidential Information during and after the term of [the Franchise] Agreement; (3) to not make unauthorized copies of any portion of the Confidential Information and maintain restrictions on disclosure thereof to their employees by reasonable methods; and (4) to not disclose or permit access to any Confidential Information by any person, except for employees requiring access in order for the defendants to fulfill their obligations under [the Franchise] Agreement." (Id.)

The Franchise Agreement provides for a term of ten (10) years, with an option for Plaintiff to terminate it unilaterally under certain conditions. (Ex. P-2 ¶ 2.1.) The Franchise Agreement provides that Plaintiff may: (1) terminate the Agreement at any time without affording Defendants the opportunity to cure if Defendants cease operations of their Rita's Franchise; or (2) terminate the Agreement if, after failing to comply with the terms of the Agreement and being given an opportunity to cure, Defendants fail to comply with its terms. (Id. ¶¶ 15.2-15.3.)

The Franchise Agreement provides that, upon termination, Defendants will cease their use of any confidential methods, procedures and techniques associated with the System and will return all materials relating to the operation of the System. (Id. ¶¶ 16.1-16.7.) It also provides that, upon termination, Plaintiff may purchase from Defendants "the "dasher" and "door" of each batch machine used in, or intended for use in, the operation of the Franchised Business for a price of One-Hundred Dollars ($100) per machine."*fn3 (Id. ¶ 16.8.)

Finally, the Franchise Agreement provides that, upon its termination, Defendants will adhere to the restrictions of a "non-compete clause." (Id. ¶¶ 16.10, 17.3.) The relevant portion of the Franchise Agreement states:

17.3 Post Term Covenants. Franchisee covenants that, except as otherwise approved in writing by the Company, Franchisee shall not, for a continuous uninterrupted period commencing upon the expiration or termination of this Agreement, regardless of the cause for termination, and continuing for two (2) years thereafter, either directly or indirectly, for itself, or through, on behalf of, or in conjunction with any person, persons, partnership, corporation or limited liability company, own, maintain, operate, engage in, act as a consultant for, perform services for, or have any interest in any retail business which: (a)(i) is the same as, or substantially similar to, a Rita's shop; (ii) offers to sell or sells any product or products which are the same as, or substantially similar to, any of the Proprietary Products; or (iii) offers to sell or sells any product or products which are the same as, or substantially similar to, any of the products offered by a Rita's shop where the sale of such products constitutes or is intended to constitute twenty percent (20%) or more of the gross sales of the business operated or intended to be operated; and (b) is, or is intended to be, located at or within:

17.3.1 Franchisee's Territory;

17.3.2 Three (3) miles of Franchisee's ...


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