Early last fall, a franchise dispute prompted a decision from the Colorado federal district court that has lessons for both franchisors and franchisees in Colorado.
In Steak ‘N Shake v. Globex Company, the Steak ‘N Shake franchisor terminated the local franchisee’s franchises for restaurants on S. Quebec Street in Centennial and River Point Parkway in Sheridan. The franchisor claimed that the franchisee was in default because it had failed to offer the required “$4 menu”, had altered marketing materials, and charged prices higher than the published menu prices. After the termination, the franchisee continued to operate its business out of the same location and continued to use the Steak ‘N Shake trademarks and other material. After the franchisee declined franchisor’s offer to cure the defaults, the franchisor filed a lawsuit.
In his decision, Judge Moore granted Steak ‘N Shake’s motion for preliminary injunction and barred the local franchisee from continuing to operate its restaurants as Steak ‘N Shake restaurants. The franchisee was compelled to “de-identify” the restaurants as Steak ‘N Shake restaurants and was barred from using any confidential or proprietary information from the franchisor. The franchisee was also compelled to relinquish its Steak ‘N Shake phone numbers, web addresses and designs.
These rulings are not surprising. Courts generally have not been sympathetic to franchisees who disregard their post-termination obligations, including covenants not to compete. Colorado courts have analogized the purchase of a franchise to the purchase of a business and enforced noncompetes under the purchase-and-sale exception under the Colorado noncompete statute.
This case is noteworthy because the dispute was covered closely by the Denver Post, including the court’s decision to shut down or close the franchised restaurants,as the reporter put it. Prior to the commencement of any litigation, franchisors in the future may try to use this case to discourage franchisees from competing with them after the franchises are terminated.
Judge Moore generally was not sympathetic to the franchisee’s arguments in Steak ‘N Shake as he rejected the franchisee’s arguments that the franchise agreements had not been properly terminated. But there was one part of the decision that was favorable for the franchisee. Judge Moore denied the franchisor’s request for a preliminary injunction to bar the franchisee from continuing to operate a competing business at the same location where the franchises were operated. Judge Moore reasoned that there weren’t any other Steak ‘N Shake franchises in the Denver metropolitan area and weren’t any plans to expand into Denver, at least before the trial on the merits. As a result, the court held that the franchisor had failed to make the showing of irreparable harm required for that aspect of the requested injunction. There was a Steak ‘N Shake restaurant in Colorado Springs, however, and Judge Moore barred the franchisee from operating within five miles of it.