September 15, 2022
By: Thomas O’Connell
Citation:
Terrier, LLC v. HCAFranchise Corporation, Not Reported in Fed. Supp. (2022).
Executive Summary:
In an unreported decision, Judge Gloria M. Navarro of the United States District Court for the District of Nevada denied Terrier LLC’s motion for a temporary restraining order and preliminary injunction against HCAFranchise Corporation. The case highlighted the enforceability of non-compete clauses and the franchisor’s discretion to modify renewal agreements. While the agreement between the parties allowed for significant changes to renewal terms, the court found no evidence of breach of contract, implied covenant of good faith, or irreparable harm to justify injunctive relief.
Relevant Background:
This case arose from a dispute between the plaintiffs, Terrier LLC, Susan Bruketta, and Harold Pascoe, and the defendant, HCAFranchise Corporation, concerning the renewal of a franchise agreement. In 2006, the plaintiffs entered into an agreement with the defendant to operate a home care assistance business in New Mexico for an initial term of 15 years. The agreement allowed for conditional renewal rights, which gave the franchisor discretion to impose materially different terms upon renewal, including adjustments to royalty fees, advertising contributions, and the size of the protected territory.
In 2021, the plaintiffs exercised their right to renew the agreement, which was set to expire on December 27, 2021. However, HCAFranchise Corporation presented a demand agreement containing new terms, including a compulsory purchase provision granting the franchisor the right to purchase the plaintiffs’ business at its discretion. The plaintiffs refused to sign the agreement, arguing that the new terms were unfair and unreasonable. To allow for further negotiation, the parties agreed to several short-term extensions of the original agreement, with the final extension set to expire in September 2022.
Central to the dispute was the enforceability of the renewal terms and a post-termination covenant not to compete. Under this covenant, the plaintiffs were prohibited from operating competing businesses within 20 miles of their franchise location for two years following the expiration of the agreement. The plaintiffs alleged that the franchisor’s actions violated the agreement, constituted a breach of the implied covenant of good faith and fair dealing, and subjected them to irreparable harm by forcing them to choose between signing an onerous agreement or ceasing operations altogether.
The legal arguments focused on the interpretation of Section 4.2(b) of the agreement, which explicitly allowed the franchisor to impose substantially different terms during renewal, and Section 12, which outlined the non-compete clause. The plaintiffs sought a temporary restraining order and preliminary injunction to prevent the enforcement of the new terms and the non-compete clause.
Decision:
The Court denied the plaintiffs’ motions for injunctive relief, providing the following rationale:
- The Court upheld the enforceability of the non-compete clause under both Nevada and New Mexico law. The clause prohibited the plaintiffs from operating a competing business within a 20-mile radius of their franchise location or any other location operated by the defendant for two years after the agreement’s termination. The Court found the restriction reasonable and necessary to protect the franchisor’s legitimate business interests, citing Bowen v. Carlsbad Ins. & Real Estate, Inc., 724 P.2d 223 (N.M. 1986), and Ellis v. McDaniel, 596 P.2d 222 (Nev. 1979). The clause was also consistent with Section 12.3 of the agreement, which explicitly declared its terms as “fair and reasonable.” The Court noted that the plaintiffs did not demonstrate that the clause imposed undue hardship or prevented them from engaging in other economic activities outside the restricted area.
- The Court rejected the plaintiffs’ claim that the franchisor’s demand agreement, which introduced materially different renewal terms, constituted a breach of contract. Section 4.2(b) of the franchise agreement expressly allowed the franchisor to impose new terms during renewal, including changes to royalties, advertising contributions, and protected territories. The Court cited Canfora v. Coast Hotels and Casinos, Inc., 121 P.3d 559 (Nev. 2005), which holds that unambiguous contractual terms must be enforced as written. Additionally, the Court found persuasive authority in West L.A. Pizza, Inc. v. Domino’s Pizza, Inc., 2008 WL 11424181 (C.D. Cal. 2008), where similar renewal provisions were upheld.
- The plaintiffs argued that the franchisor acted in bad faith by conditioning the renewal on onerous terms, such as a compulsory purchase provision. The Court dismissed this claim, reasoning that the franchisor’s actions aligned with the agreement’s express provisions. Referring to Hilton Hotels Corp. v. Butch Lewis Prods., 808 P.2d 919 (Nev. 1991), the Court emphasized that a breach of the implied covenant arises only when a party deliberately contravenes the contract’s intention. In this case, the franchisor’s conduct adhered to the terms agreed upon by the parties.
- The Court found that the plaintiffs failed to demonstrate irreparable harm warranting injunctive relief. The plaintiffs claimed they would either have to accept unfavorable renewal terms or risk enforcement of the non-compete clause upon the agreement’s expiration. However, the Court held that any harm was foreseeable and resulted from the agreement’s express terms. Citing Rent-A-Center, Inc. v. Canyon Tele. & Appliance Rental, Inc., 944 F.2d 597 (9th Cir. 1991), the Court reiterated that economic harm alone does not constitute irreparable injury.
- The Court concluded that the balance of equities tipped in favor of the defendant. The plaintiffs knowingly entered into an agreement that allowed for the imposition of new terms during renewal. The Court also noted that granting injunctive relief would compel the defendant to continue operating under an expired agreement, which would be inequitable. Additionally, the public interest favored enforcing freely negotiated contracts to uphold business certainty and integrity.
Looking Forward:
This case underscores two key lessons for franchisors:
- First, non-compete clauses are enforceable when they are reasonable in scope and duration, as seen with the Court upholding the two-year, 20-mile restriction. Second, clear and precise language in franchise agreements is critical to ensuring enforceability, particularly regarding renewal terms.
- For California franchisors, the decision highlights the need to carefully navigate state-specific laws that heavily favor franchisee protection. Provisions that conflict with public policy or statutes, such as California Business and Professions Code Section 20040.5, may be invalidated. To avoid disputes, California franchisors should ensure all contract terms align with state law while leveraging federal preemption where applicable.
By and large, this case shows the importance of carefully drafting agreements to protect business interests without overreaching or violating local legal standards.