JDS Group Ltd. v. Metal Supermarkets Franchising America Inc.
6:17-cv-06293
W.D.N.Y.Jun 20, 2017Background
- JDS Group Ltd., a Washington franchisee of Metal Supermarkets Franchising America, Inc. (MSFA), operates two stores and used MSFA-provided software “Metal Magic.”
- MSFA developed replacement software, MetalTech, after finding Metal Magic outdated; development took ~3 years and cost over $1 million.
- MSFA began phased MetalTech rollouts in 2015; by the time of litigation 78 of 86 stores had converted. Some franchisees reported operational problems after conversion; MSFA reports average post-conversion sales increases.
- JDS renewed franchise agreements in January 2017 that expressly permit MSFA to require franchisor-developed software; JDS later sued under Washington’s Franchise Investment Protection Act (FIPA) and for breach of the implied covenant of good faith, seeking a TRO/ preliminary injunction to block installation scheduled for June 23, 2017.
- JDS alleges MetalTech is defective and that forced installation would cause irreparable harm to its business; MSFA argues the agreements authorize the software requirement, MetalTech rollout is legitimate, and franchisees generally have not been forced to close.
- The court denied JDS’s expedited hearing as moot and denied the TRO/preliminary injunction, finding JDS unlikely to prevail on FIPA and implied covenant claims and failing to show irreparable harm.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether MSFA violated FIPA § 19.100.180(1) (good faith) | MSFA acted in bad faith by forcing flawed MetalTech on franchisees | MSFA had contractual authority and acted to legitimately modernize systems; no evidence of bad faith | Court: No likelihood of success; no evidence of bad faith or improper motive |
| Whether requiring MetalTech violates FIPA § 19.100.180(2)(B) (restrictive purchasing) | Requiring use of MetalTech is an unlawful forced purchase/service | MSFA’s requirement is permissible franchise system standard; courts have allowed franchisors to mandate proprietary systems | Court: Unlikely to succeed; statute targets antitrust-type restraints and use requirement is valid |
| Whether § 19.100.180(2)(H) (imposing standards) invalidates MSFA’s software mandate | Mandating MetalTech is an unreasonable imposed standard | Franchisors must be able to set uniform standards; courts defer to franchisor business judgment | Court: Held plaintiff unlikely to prevail; refusing to substitute court judgment for franchisor decisions |
| Whether JDS will suffer irreparable harm absent injunction | MetalTech’s flaws will damage business, reputation, and cause losses not fully compensable by money | MSFA points to widespread adoption, sales increases, and lack of store closures; harms speculative | Court: No irreparable harm shown; plaintiff’s evidence speculative and not dispositive |
Key Cases Cited
- Winter v. Natural Resources Defense Council, 555 U.S. 7 (2008) (preliminary injunction standard requires likelihood of irreparable harm and likelihood of success or serious questions and balance of hardships)
- La Quinta Corp. v. Heartland Properties LLC, 603 F.3d 327 (6th Cir.) (franchisor may require use of proprietary computer systems)
- Bores v. Domino’s Pizza, LLC, 530 F.3d 671 (8th Cir.) (upholding franchisor’s right to require specified systems/processes)
- Genesee Brewing Co. v. Stroh Brewing Co., 124 F.3d 137 (2d Cir.) (standards for preliminary injunction and balancing factors)
- Fleetwood v. Stanley Steemer Int’l, Inc., 725 F. Supp. 2d 1258 (E.D. Wash. 2010) (FIPA good-faith duty does not create rights beyond contract; bad faith requires dishonest purpose)