21-1033
3rd Cir.Aug 10, 2021Background
- Anna Kaiser developed the "AKT in Motion" fitness program and operated four studios by 2018; she and related companies sold franchise rights and much IP to Xponential Fitness and AKT Franchise LLC under an Asset Purchase Agreement (APA).
- Section 5.11(a) of the APA granted Kaiser a non-exclusive, non-transferable license to use the transferred IP for the Seller Studios, provided the Seller would "cause the AKT Group to operate all of the Seller Studios as franchises" and use commercially reasonable efforts to execute written franchise agreements within three years, with the license terminating if agreements were not executed by the third anniversary.
- Section 5.4 contained a restrictive covenant barring the Sellers from operating or franchising competing fitness studios in North America, defining "Competing Business" to exclude "Seller Studios." Schedule 5.11(a) listed the four current studio locations at closing.
- After buyers missed two post-closing payments, sellers sued for breach and rebranded the studios as "Anna Kaiser Studios;" buyers counterclaimed and sought a preliminary injunction to enjoin Kaiser from operating the studios outside the AKT franchise system.
- The District Court denied both preliminary injunction motions for lack of likelihood of success; AKT Franchise appealed the denial of its preliminary injunction motion.
- The Third Circuit affirmed, holding AKT Franchise failed to show a likelihood of success on (1) whether the APA required immediate operation of the Seller Studios as franchises and (2) whether the Anna Kaiser Studios are "Competing Businesses."
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether APA required immediate operation of Seller Studios as AKT franchises | APA's condition required Sellers to operate the studios as franchises upon closing; license depended on that obligation | Provision is a condition precedent: Purchaser's license depends on Sellers using reasonable efforts to secure franchise agreements within three years, not immediate conversion | No — court treated the clause as a condition precedent and found only a three-year period to secure franchise agreements; AKT failed to show likelihood of success |
| Whether Anna Kaiser Studios are "Competing Businesses" under the noncompete | Rebranded studios are not AKT franchises and therefore fall outside the "Seller Studios" exclusion, making them competing businesses | "Seller Studios" means the AKT in Motion studios as of closing (listed in Schedule 5.11(a)); rebranding does not alter their exemption | No — court held "Seller Studios" refers to the studios at closing, so they are exempt and AKT failed to show likelihood of success |
Key Cases Cited
- ADP, LLC v. Rafferty, 923 F.3d 113 (3d Cir. 2019) (preliminary injunction standard: likelihood of success and irreparable harm)
- Pac. Emp'rs. Ins. Co. v. Glob. Reins. Corp. of Am., 693 F.3d 417 (3d Cir. 2012) (explaining condition precedent concept)
- Exelon Generation Acquisitions, LLC v. Deere & Co., 176 A.3d 1262 (Del. 2017) (Delaware contract interpretation principles)
- United States v. Jackson, 964 F.3d 197 (3d Cir. 2020) (duty to give effect to every clause and word)
- Duncan v. Walker, 533 U.S. 167 (U.S. 2001) (canon against rendering contract language superfluous)
- In re Diet Drugs, 706 F.3d 217 (3d Cir. 2013) (contract meaning determined from the four corners)
- Castle v. Cohen, 840 F.2d 173 (3d Cir. 1988) (contract written in present tense "speaks on" the date of closing)
- Lorillard Tobacco Co. v. Am. Legacy Found., 903 A.2d 728 (Del. 2006) (use of a reasonable-person standard in contract interpretation)