A federal district court in Tennessee granted a motion for a default judgment in the franchisor’s favor against its former franchisee requiring the franchisee to pay damages and comply with the post-termination obligations under the parties’ franchise agreement.
Fantastic Sams, a franchisor of hair salons, and DonMarcos LLC, as a franchisee, entered into a renewal franchise agreement, requiring the franchisee to pay the franchisor weekly royalty and marketing fees and to abide by non-compete covenants both during and after the term of the franchise agreement.
During the term of the franchise agreement, the franchisee stopped fulfilling its monthly payment obligations to the franchisor, including non-payment of the required weekly royalty fee, national advertising fund fee, and required contributions to the regional advertising fund. The franchisor then terminated the franchise agreement and initiated arbitration proceedings.
Although the franchisee did not appear at the arbitration hearing, the franchisee continued to operate as a Fantastic Sams throughout the proceedings, by retaining signage and performing Fantastic Sams-approved salon treatments, all without a franchise agreement or authorization from the franchisor. The arbitrator ordered the franchisee to pay Fantastic Sams $70,309.74 in damages and ordered the franchisee to comply with the post-term non-competition covenant in the franchise agreement. After Fantastic Sams confirmed the arbitration award in court, the franchisee did not respond, pay the damages award, or comply with the non-compete provision.
The franchisor sued for trademark infringement violations, among other claims. The franchisee did not respond to the franchisor’s complaint, and as a result, a default was entered against the franchisee. The court granted franchisor default judgment and issued a permanent injunction in favor of the franchisor.
Franchise counsel can often assist terminated franchisees by facilitating early resolution before arbitration or judicial proceedings are initiated. Not only is the franchisor’s ability to terminate a franchise agreement or enforce a non-compete covenant dependent on the applicable state law, but franchise counsel can also assist franchisees in mitigating the chance of escalation by the franchisor.
Fantastic Sams Franchise Corp. v. DonMarcos, LLC., Civil Action No. 2:24-cv-2867 (W.D. Tenn. Dec. 17, 2024)
