BANKRUPTCY BULLETIN
In EllDan Corporation v. Fantastic Sams Franchise Corp. (In re EllDan Corp.), 2023 WL 3394917 (Bankr. D. Minn. May 11, 2023), the bankruptcy court granted summary judgment to the franchisor in holding that the post-termination, non-compete covenants were enforceable; the plaintiffs breached the non-compete covenants by operating in the current locations; the franchisor was entitled to injunctive relief notwithstanding the debtor’s rejection of the franchise agreements under 11 U.S.C. § 365; and the franchisor’s remaining claims were mooted by the parties’ stipulation.
EllDan Corporation and Kevin Steele (collectively, the “plaintiffs”) executed seven franchise agreements, all of which include non-compete covenants for hair care business. In its bankruptcy, the debtor rejected the franchise agreements pursuant to § 365. Nevertheless, the debtor continued to operate salons at certain locations.
The franchisor sought injunctive relief based on the following five counts: (1) breach of contract for violation of covenants not to compete; (2) violation of the Lanham Act; (3) violation of the Minnesota Deceptive Trade Practices Act; (4) common-law trademark infringement; and (5) common-law unfair competition. Further, the franchisor filed a motion for a preliminary injunction. The parties disagreed over the legal effect of the covenants not to compete in their franchise agreements. The parties consented to summary judgment to resolve the dispute.
The court held that the duration and geographic scope of the non-compete covenants in the franchise agreements for the hair care businesses were reasonable under Minnesota law. The non-compete covenants contained a durational restriction of a 2-year period after termination of the agreements, and geographical restrictions of a 5-mile radius from the original location and a 2.5-mile radius from any other franchisee.
Further, the court noted that Kevin Steele (“Steele”) did not execute the non-compete covenants in his capacity as a salon employee, and the businesses were purchased for roughly $1 million. As such, the court concluded that public interest would not be harmed by enforcement of the non-compete covenants in the context because the agreements were between businesses, not an individual employee in a position of unequal bargaining power. Thus, the court determined that the non-compete covenants were reasonable and enforceable under Minnesota law.
The court held the debtor breached the non-compete covenants by currently operating in certain locations.
The court concluded that the franchisor was entitled to injunctive relief as expressly provided under the franchise agreements as a remedy. In support, the court cited its previous decision that the debtor’s rejection of the franchise agreements under § 365 did not result in a rescission of the remedies under those agreements including the franchisor’s right to seek injunctive relief upon a breach of those agreements by the debtor. To read the Bankruptcy Bulletin’s summary of that prior decision, click here.
The court held the remaining claims were mooted by the parties’ stipulation wherein the debtor consented to a permanent injunction with respect to the alleged Lanham Act violations. As such, the court noted there is no additional relief available to the franchisor with respect to its other claims.
The court ordered the plaintiffs to immediately cease to operate the hair care businesses at certain locations, and the plaintiffs were further enjoined from owning or operating a hair care business at any location in violation of the non-compete covenants until 2 years after termination of the agreements. Further, the court ordered that the injunctive relief also applied to the shareholders, members, partners, and managers of the debtor, as well as immediate family of Steele.
To read the bankruptcy court’s decision, click here.
Editors-in-Chief:
C.J. Harayda, Stinson LLP
David M. Tanabe, Winthrop & Weinstine, P.A.