The Franchise Memorandum

A federal court in Michigan has granted a franchisor’s motion for preliminary injunction against former franchisees for violating the franchise agreements’ post-termination noncompete provisions. 1-800 Water Damage Int’l LLC v. Restoration RX, LLC, 2024 WL 3623508 (July 31, 2024). In 2019, 1-800 Water Damage, Gerald Cleveland, and Jenteal Cleveland, as owners of Restoration RX, entered into two franchise agreements that granted them the right to operate a property damage and restoration company in Salt Lake City, Utah. Under the franchise agreements, the Clevelands were required to contribute to 1-800 Water Damage’s national marketing fund and to purchase certain equipment. In June 2023, 1-800 Water Damage provided the Clevelands with a purchase order for certain equipment; the Clevelands approved the purchase order but failed to pay 1-800 Water Damage for the equipment they received. In November 2023, after attempts to negotiate a payment plan failed, the Clevelands told 1-800 Water Damage that they no longer desired to run the franchised business. At the same time, the Clevelands requested a statement of contributions and expenditures for the national marketing fund. 1-800 Water Damage never provided the national marketing fund statement. In December 2023, the Clevelands shuttered their business and re-branded it to Restoration RX, which offered the same property damage and restoration services and continued to use 1-800 Water Damage’s trademarks. 1-800 Water Damage sued Restoration RX, claiming (1) breach of contract against Restoration RX and the Clevelands, (2) unjust enrichment, and (3) Federal trademark infringement.

The court granted 1-800 Water Damage a preliminary injunction, finding that the franchisor was likely to prevail on its claim that defendants breached the franchise agreements’ post-termination noncompetition obligations. The court further found that the Clevelands’ claim that 1-800 Water Damage breached the franchise agreements first by failing to provide statements related to the national marketing fund was inapplicable because 1-800 Water Damage’s failure to do so was not a substantial breach that would render the operation of the franchised business ineffective or impossible and also the Clevelands likely breached the franchise agreements first by failing to pay for $23,000 worth of equipment and three months of royalties. The court next found that the Clevelands’ use of the Google Business profile, which continued to associate Restoration RX with 1-800 Water Damage’s trademarks, could lead to customer confusion and cast 1-800 Water Damage in a negative light. As such, the Clevelands’ improper use of the 1-800 Water Damage trademarks presented realistic prospects of harm which supported issuing the preliminary injunction. Finally, the court found that any harm to the Clevelands in issuing the preliminary injunction would be minimal.