When a franchisor learned that its franchisee was building a competing app and planning to launch a new business in direct competition with it, it sued, seeking an injunction to prevent the launch of the app and business during the litigation. The district court granted the injunction, and the appellate court affirmed in part, with regards to the injunction’s limits on competition. The appellate panel did, however, remand for the district court to consider imposing a higher security bond, given the sweeping nature of the terms of the injunction.
Auto Driveway Franchise Systems, LLC is a franchisor for commercial vehicle transportation services. Jeffrey Corbett was one of Auto Driveway’s franchisees. Through his company, Auto Driveway Richmond, LLC, Corbett ran Auto Driveway franchises in Richmond, Virginia, Nashville, and Cleveland. Corbett’s three businesses were governed by separate, but substantively identical franchise agreements with Auto Driveway. Each agreement included a non-compete clause, a non-disclosure clause, and a five-year term set to expire in 2016. The expiration dates came and went, and both parties continued dealing as though the contracts were still in place.
At some point in 2017, Auto Driveway learned that Corbett had been taking actions in apparent violation of the franchise agreements. Corbett was building an app to complete against the app Auto Driveway had hired Corbett to build for itself, using Auto Driveway’s proprietary work product as a starting point. Corbett was set to launch his new app through a new company, InnovAuto, that also provided auto transportation services in direct competition with Auto Driveway. Auto Driveway sued, seeking an injunction to prevent Corbett from selling or using the app.The district court granted Auto Driveway a preliminary injunction, finding that Corbett was harming consumer goodwill and was taking Auto Driveway customers through his competing business. Corbett then appealed.
The appellate panel began by resolving several procedural challenges to the claims. It then turned to the question of whether the district court abused its discretion when it entered the preliminary injunction. The panel stated that while the district court did state that Auto Driveway was likely to succeed on the merits based on the enforceability of the restrictive covenants in the agreement; the existence of an implied-in-fact contract; and the breach of that contract and that he court had found that the harm to consumer goodwill and loss of customer relationships were irreparable harms to Auto Driveway, it had failed to elaborate on two other pieces of the required factual findings to justify an injunction.
The panel stated that the district court should have explained why a remedy at law — an award of damages at the conclusion of the lawsuit — was inadequate relief necessitating an injunction. Further, the panel found that the district court should have explained why it required Auto Driveway to put up only the modest amount of $10,000 to pay to protect Corbett against the harm he will incur during the pendency of the litigation, should he prevail in the end. Citing Mead Johnson & Co. v. Abbott Labs, the panel stated that district courts should err on the high side when setting the amount of security for an injunction. The panel stated that the low-security amount was not in step with the sweeping nature of the injunction, which prevented Corbett from operating any of his businesses during the pendency of the litigation, or until September 2020. The panel then affirmed the order of the district court insofar as it enjoined Corbett and AD Richmond from operating as a franchisee or de facto franchisee of Auto Driveway, and insofar as it prohibited Corbett’s businesses from using any of the contested technology, apps, or trademarks. The panel then remanded the case for the district court to consider increasing the security bond imposed on Auto Driveway.
You can review the full opinion here.
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