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Property Management Business Solutions v. Averitte

United States District Court, D. Utah, Central Division

September 10, 2018

PROPERTY MANAGEMENT BUSINESS SOLUTIONS d/b/a REAL PROPERTY MANAGEMENT, Plaintiff,
v.
RANDALL AVERITTE, Defendant.

          MEMORANDUM DECISION AND ORDER ORDER GRANTING MOTION FOR PRELIMINARY INJUNCTION

          ROBERT J. HELBY, UNITED STATES DISTRICT JUDGE.

         District Judge: Robert J. Shelby Magistrate Judge: Evelyn J. Furse Plaintiff Property Management Business Solutions, d/b/a Real Property Management (RPM), sued Defendant Randall Averitte for breach of contract, false advertising, and unfair competition. RPM moved for a preliminary injunction, [1] basing its Motion on the breach of contract claim. The court held an evidentiary hearing on the Motion on August 21, 2018. After full consideration of the parties' briefing and oral argument, the evidence presented, and the relevant legal authorities, the court finds RPM has met its burden for injunctive relief. The court GRANTS the Motion for Preliminary Injunction and ORDERS the injunctive relief specified below.

         BACKGROUND

         RPM is a property management franchisor with over 250 franchises in forty-six states.[2]Through its franchisees, RPM provides “third-party residential property management services, including the management of maintenance and repair management services, rent collection, and eviction services.”[3]

         In 2007, RPM entered into a Franchise Agreement with Averitte, covering the Phoenix, Arizona “territory.”[4] The Agreement contemplated an initial term of five years with an option to renew. Averitte renewed the Phoenix Agreement in August 2012.[5] In December 2012, he entered into a second Franchise Agreement with RPM covering the Tucson territory.[6] Each of the Franchise Agreements contains a forum selection clause, mandating legal claims be brought in a court “located in or serving Davis County, Utah.”[7] The Agreements also include a choice-of-law provision that calls for the application of Utah law.[8]

         Averitte's Phoenix and Tucson Franchise Agreements expired by their terms in August and December of 2017, respectively. As explained below, the parties continued to operate -at least for a time-as if the Franchise Agreements remained in effect. On May 21, 2018, RPM mailed Averitte two letters stating the company would deem any “implied agreement” to continue the franchises to have expired on June 18, 2018.[9] The parties dispute the nature of their communications during the time between the Agreement expiration dates and May 21, 2018. RPM claims the parties were actively negotiating terms for renewal, while Averitte maintains he expressed to RPM he had no intention of renewing his Agreements. Whatever the nature of those communications, the parties agree that Averitte continued to pay royalties to RPM and maintain his RPM affiliation until at least June 8, 2018.[10]

         In March 2018, Averitte formed a new company, Zorion Real Estate & Property Management (Zorion Management). Zorion Management operates out of the same location as Averitte's Phoenix Franchise.[11] It provides property management services “including residential management, multi-family management, vacation rental management, professional house sitting, commercial property management, HOA management, and traditional real estate services.”[12]Averitte maintains that several of the services Zorion Management provides are not offered by RPM.[13]

         RPM alleges Averitte's operation of Zorion Management violates several provisions of the Franchise Agreements. Specifically, RPM claims Averitte is in breach of his obligations not to compete with RPM, to transfer property management accounts to RPM upon termination of the Franchise Agreements, to cease holding himself out as affiliated with RPM, and to assign his trade name, Real Property Management Pinnacle, to RPM.

         I. Contract Provisions

         Several provisions of the Franchise Agreements rest at the center of RPM's breach of contract claim. Their specific language informs the court's analysis. For that reason, the relevant provisions are recited below in their entirety. These provisions are found in both the Phoenix and Tucson Franchise Agreements.

16.1 Actions to be Taken [Upon Expiration or Termination]
Except as otherwise provided herein, upon termination or expiration, this Agreement and all rights granted hereunder to Franchisee shall terminate and Franchisee shall:
16.1.1 immediately cease to operate the Franchised Business and the specifically developed Real Propertyware and transfer to franchisor the property management accounts, and shall not thereafter, directly or indirectly, represent to the public or hold itself out as a present or former franchisee of Franchisor[.]
* * * *
16.1.4 take such action as may be necessary to cancel or assign to Franchisor, at Franchisor's option, any assumed name or equivalent registration filed with state, city, or county authorities which contains the name “Real Property ManagementSM” or any other Mark, and Franchisee shall furnish Franchisor with evidence satisfactory to Franchisor of compliance with this obligation within thirty (30) days after termination or expiration of this Agreement[.]
16.2 Post-Termination Covenant Not to Compete
16.2.2 Except as otherwise approved in writing by Franchisor, neither Franchisee, nor any holder of a legal or beneficial interest in Franchisee . . . shall, for a period of two (2) years after the expiration or termination of this Agreement, regardless of the cause of termination, either directly or indirectly, for themselves or through, on behalf of or in conjunction with, any person, persons, partnership corporation, limited liability company or other business entity:
16.2.2.1 own an interest in, manage, operate or provide services to any Competitive Business located or operating (a) within a fifty (50) mile radius of the Approved Location, or (b) within a fifty (50) mile radius of the location of any other Real Property Management Business office in existence at the time of termination or expiration; or
16.2.2.2 solicit or otherwise attempt to induce or influence any customer, employee or other business associate of Franchisor to terminate or modify his, her or its business relationship with Franchisor or to compete against Franchisor.
22. Dispute Resolution
22.1 Choice of Law - Except to the extent this Agreement or any particular dispute is governed by federal law, this Agreement shall be governed by and construed in accordance with the laws of the State of Utah (without reference to its conflict of laws principles). . . .
22.2 Consent to Jurisdiction - Any action brought by either party, except those claims required to be submitted to mediation or arbitration, shall only be brought in the appropriate state or federal court located in or serving Davis County, Utah. . . . Claims for injunctive relief may be brought by Franchisor where Franchisee is located. . . .
Definitions
“Competitive Business” means any business that offers or provides . . . real property management services, or offers other services or products the same as or similar to those provided by Real Property Management Businesses, including, but not limited to, maintenance and repair management services and rent collection services for single-family and condominium properties, or in which the Trade Secrets or other Confidential Information could be used to the disadvantage of Franchisor, any Affiliate or its other franchisees.[14]

         ANALYSIS

         I. Forum

         Before reaching the substance of RPM's Motion, the court must first address Averitte's challenge to the court's authority to decide the Motion. The Franchise Agreements contain forum selection clauses stating claims “shall only be brought in the appropriate state or federal court located in or serving Davis County, Utah.”[15] The provisions continue: “[c]laims for injunctive relief may be brought by Franchisor where Franchisee is located.” Averitte relies on the latter sentence in arguing RPM is restricted from bring its Motion in this court. He maintains RPM may seek injunctive relief against him only in Phoenix or Tucson, where he is located.

         Averitte's reading is at odds with the Agreements' plain language. Use of the word “may” in this context is permissive, not mandatory. That is, it gives RPM the option to bring its claim for injunctive relief either in an appropriate court located in Utah - under the forum selection clause - or alternatively “where the Franchisee is located.” The permissive nature of the clause is further supported by the Agreements' contrasting use of “shall” in the prior sentence. RPM therefore appropriately brought its Motion in this court, and the court may decide it.

         II. Preliminary Injunction Standard

         The preliminary injunction RPM seeks is an extraordinary remedy that may only be awarded if the right to relief is “clear and unequivocal.”[16] A party seeking a preliminary injunction must make a clear showing that “(1) [it] is substantially likely to succeed on the merits; (2) [it] will suffer irreparable injury if the injunction is denied; (3) [its] threatened injury outweighs the injury the opposing party will suffer under the injunction; and (4) the injunction would not be adverse to the public interest.”[17]

         RPM's burden is higher here because some of the relief it seeks is mandatory and disfavored in the Tenth Circuit. Specifically, RPM asks the court to order Averitte affirmatively transfer property management accounts to RPM. A movant seeking a disfavored injunction “must make a strong showing both with regard to the likelihood of success on the merits and with regard to the balance of the harms.'”[18] RPM meets its high burden here.

         A. Likelihood of Success on the Merits

         RPM must make a strong showing it is likely to succeed in demonstrating 1) the noncompete provisions are valid and enforceable, and 2) Averitte is in violation of the contract provisions at issue. Before reaching those issues, however, the court must decide what state's law governs the Franchise Agreements.

         The Agreements contain a choice-of-law provision selecting Utah state law.[19] Averitte nevertheless contends Arizona law governs, arguing Utah lacks a substantial interest in the dispute and that there is no reasonable basis for the parties to have selected Utah law.

         To determine the effect of a choice-of-law provision, courts look to the choice-of-law rules in the forum state. “Utah courts generally uphold choice-of-law provisions based on the intent of the contracting parties and a respect of the parties' right to choose the governing law for a contract.”[20] More specifically, under Utah law, “the law of the state chosen by the parties to govern their contractual rights and duties will be applied unless either (a) the chosen state has no substantial relationship to the parties or the transaction and there is no other reasonable basis for the parties' choice; or (b) application of the law of the chosen state would be contrary to a fundamental policy of a state which has a materially greater interest than the chosen state in the determination of the particular issue which . . . would be the state of the applicable law in the absence of an effective choice of law by the parties.”[21]

         Applying that standard to this case, Utah law governs the Franchise Agreements unless (a) Utah has no substantial relationship to the parties or transaction and there is no other reasonable basis for the parties' choice; or (b) application of Utah state law would be contrary to a fundamental policy of Arizona. Neither exception applies here.

         First, Utah has a substantial relationship to the case because RPM is both incorporated and has its principal place of business here.[22] RPM also signed the Franchise Agreements in Utah.[23] Averitte cites two cases in which courts refused to apply parties' choice-of-law, but both are inapposite. In In re Mountain West Industries, the only connection to the chosen state was that the defendant was incorporated there.[24] And in Prows v. Pinpoint Retail Systems, Inc., the chosen state had no substantial relationship to either party or the transaction; the court found the plaintiff's desire to limit the number of forums in which it was required to litigate was not a reasonable basis for the choice.[25]

         Second, the court fails to see how application of Utah law would encroach on Arizona's fundamental policies. Noncompete provisions are enforceable under both Utah and Arizona depending on the scope of the restriction and various other factors. The law between the two states differs on the transfer of property management accounts, but not so much as to constitute a fundamental difference in policy. Arizona law requires express written consent before a property owner's property management agreement may be transferred to another licensee or entity, [26]whereas Utah apparently has no such requirement. That Arizona more closely regulates the transfer of accounts is not so significant as to create a fundamental policy. More importantly, RPM does not seek to have the accounts transferred without property owners' written consent, and the court does not so order. Rather, as enumerated below, Averitte is ordered to coordinate with RPM to facilitate the lawful transfer of the accounts.

         1. Noncompete Provisions

         Having determined Utah law governs the Franchise Agreements, the next question is whether RPM can make a strong showing the noncompete provisions are valid and enforceable. Covenants not to compete are enforceable under Utah law if the party seeking relief demonstrates, “(1) the agreement is supported by consideration, (2) there was no bad faith in contract negotiations, (3) the agreement is necessary to protect the goodwill of the business, and (4) it is reasonable in its restrictions in terms of time and geographic area.”[27]

         Averitte does not appear to dispute the first and second prongs. Nothing in the record calls into doubt RPM's assertion that the Franchise Agreements were supported by adequate consideration and entered in good faith.

         Turning to the third prong, the parties dispute whether the noncompete provisions are necessary to protect RPM's goodwill or are merely - as Averitte contends - “bald restraints on competition.” Noncompete provisions in general have been found necessary to protect franchisors' goodwill.[28] In Bad Ass Coffee, for example, another Judge in this district found a former franchisee's competitive conduct was likely to “send negative messages” about the franchisor to the market and to other franchisees, and signal to other franchisees they could “immediately start competing if they are unhappy with [the franchisor].”[29]

         Similar considerations persuade the court the noncompete provision here is necessary to protect RPM's goodwill. RPM submits it spent years building its goodwill, including the company's reputation, brand recognition, and customer base.[30] The two-year noncompete period is reasonable and necessary to “allow[] the public and RPM's customer base adequate time to stop identifying a former franchisee with the RPM brand.”[31] The noncompete is also necessary to protect current franchisees from unfair competition by former franchisees.[32] Finally, as in Bad Ass Coffee, Averitte's conduct is likely to undermine the integrity of RPM's franchisee system, signaling to other franchisees they could immediately begin competing with RPM without consequence.

         The fourth noncompete prong, reasonableness of the restriction, is contested. “Utah courts consider the following factors in determining the reasonableness of non-compete agreements: “[1] [g]eographical extent; [2] the duration of the limitation; [3] the nature of the employee's duties; and [4] the nature of the interest which the employer seeks to protect such as trade secrets, the goodwill of his business, or an extraordinary investment in the training or education of the employee.”[33] The restriction must be “carefully drawn to protect only the legitimate interests of the employer.”[34]

         Under the terms of the noncompete, Averitte is prohibited from competing with RPM for two years, within a fifty-mile radius of his former franchisee or any of RPM's other franchise locations.[35] Averitte contends this restriction is unreasonable for several reasons.

         First, Averitte argues the geographic scope is unreasonable because it encompasses RPM franchise locations in forty-six states, including states in which Averitte “has never operated” and “has no intention of doing so.”[36] But the reasonableness of a noncompete provision is to be assessed “on a case-by-case basis, taking into account the particular facts and circumstances surrounding the case and the subject covenant.”[37] Given Averitte's representation that he has no intention of operating his business outside Arizona, the court can limit its analysis to whether it is reasonable to restrict Averitte from competing within fifty miles of any RPM franchise in Arizona.

         With that in mind, RPM is likely to succeed in showing the geographic restriction is reasonable. A restrictive covenant is generally enforceable if it “specifies an area no greater than that to which the business extends.”[38] RPM has nine RPM franchises in Arizona. Of those nine, six are in Phoenix, two in Tucson, and one in Kingman, a city 200 miles from Phoenix.[39] Apart from the Kingman franchise, then, the noncompete effectively prohibits Averitte from competing within fifty miles of his two former franchises. This restriction directly ...


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