A Colorado federal court denied a franchisor’s request for preliminary injunction that would enforce a non-compete provision against a former franchisee.
The franchisor of spice and tea shops known as Spice & Tea Merchants filed suit against a franchisee after a dispute arose over the amount of payment due by the franchisee for the purchase of inventory and furnishings. Additional disputes arose over tenancy of the franchise premises, as the franchisor was the master tenant with a sublease to the franchisee.
After a year without payment from the franchisee, the franchisor notified the franchisee that it would start withdrawing money from the franchisee’s bank account via ACH withdrawals. While the franchisee had authorized ACH withdrawals to satisfy monthly payments owed to the franchisor, the franchisee had not authorized automatic collections by the franchisor for other claimed amounts due. The franchisee withdrew authorization for ACH withdrawals.
The dispute culminated in the franchisor’s issuance of notices of default of the franchise agreement to the franchisee. The franchisee ceased operations and shortly thereafter reopened a tea and spice shop under a new brand and covered “Spice & Tea Merchants” logos on remaining inventory. The franchisor sued the franchisee and others, seeking to enforce the franchise agreement’s non-compete provision, among other relief.
The franchisor sought a preliminary injunction enforcing the non-compete provisions which would effectively close the newly branded tea and spice shop. The franchisee denied any wrongdoing and pointed to the franchisor for its alleged wrongful conduct necessitating the franchisee’s subsequent actions. The franchisee also questioned the validity of the franchisor’s trademarks, calling into question the franchise agreement itself.
The court concluded there are “enough questions” over the validity of the “Spice & Tea Merchants” trademark to preclude enforcing a non-compete provision against the franchisee since a significant consideration of entering into the franchise agreement was the validity of the trademark. Further, the franchisor’s requested preliminary injunction would disrupt the status quo rather than preserve it.
Franchisees who find themselves in disputes with their franchisors should first consult with legal counsel before engaging in self-help and other conduct that may in turn breach the parties’ franchise agreement. Franchisees should also engage in equitable conduct when disputing a franchisor’s claimed defaults, particularly in smaller systems where the franchise relationship may be more intimate or relaxed until disputes surface. The court here found that the franchisor had not acted in the most equitable way over the dispute when denying the preliminary injunction and recited the age-old legal maxim, “One who seeks equity must do equity.”
Spice Merchs. Entities Corp. v. Pretty Colo., Ltd. Liab. Co., No. 24-cv-00371-RMR-NRN, 2024 U.S. Dist. LEXIS 172719, at *14 (D. Colo. Sep. 24, 2024)
