Non-compete agreements are generally enforceable in Missouri in order to protect an employer’s legitimate business interests. In the recent case of Imo’s Franchising, Inc. v. Kanzoua, Inc., the popular St. Louis, Mo., pizza restaurant group asked the United States District Court for the Eastern District of Missouri for a temporary restraining order (TRO) against Kanzoua, Inc.—a gas station / convenience store that operated an Imo’s Pizza out of its facility—alleging that Kanzoua, Inc. broke their Agreement. 2020 WL 5534425 (E.D. Mo. Sept. 14, 2020).
BACKGROUND OF THE CASE
Imo’s Pizza initially entered into a five-year agreement with Kanzoua, stating that Kanzoua could operate an Imo’s Pizza out of its facility. Once the five-year agreement ended, the parties renewed the Agreement’s terms on a monthly basis. However, Imo’s ended the contract in July of 2020. Upon termination of the contract, Imo’s stated that Kanzoua must stop selling pizza of any kind for a period of 18 months and stop associating itself with Imo’s Pizza. Imo’s alleges that Kanzoua not only continued to sell pizza but held itself out as an Imo’s affiliated restaurant and used confidential company information. Lastly, Imo’s alleged that Kanzoua operated a pizza restaurant using the “same taste, different name,” as Melanos Pizza.
Based on these allegations, Imo’s filed a Complaint alleging breach of their Agreement (Counts I, II, and III), violation of the Missouri Uniform Trade Secrets Act (Count IV), violation of the Defend Trade Secrets Act (Count V), and violation of the Lanham Act (Count VI).
WHY IMO’S WAS GRANTED A PARTIAL TRO
The Court granted Imo’s Pizza a partial TRO. In considering the TRO request, the Court examined the following four factors:
- The threat of irreparable harm to the movant;
- The balance between that harm and the harm that granting the injunction will inflict on other parties;
- The probability that movant will prevail on the merits; and
- The public interest.
2020 WL 5534425 at *2 (citing Dataphase Sys., Inc. v. C L Sys., Inc., 640 F. 2d 109, 113 (8th Cir. 1981); see also City of Berkeley, Missouri v. Ferguson-Florissant Sch. Dist., No. 4:19CV168 RLW, 2019 WL 1558487, at *2 (E.D. Mo. Apr. 10, 2019)).
The Court started its analysis by considering Imo’s’ likelihood of success on the merits of its claims against Kanouza. Id. Imo’s asserted Kanzoua violated Paragraph 21(c) of their Agreement by continuing to sell pizza at their St. Louis location. Id. This provision provides that for 18 months Kanouza shall not:
directly or indirectly, through [itself] or through corporations, partnerships, limited liability companies, trusts, associations, joint ventures, unincorporated businesses, or otherwise perform any services for, engage in or acquire, be an employee of, have any financial, beneficial or equity interest in, or have any interested based on profits or revenues of any food business which sells any type of pizza anywhere within the Facility or at the Location.
Id. The parties disputed the meaning and breadth of this written prohibition. Kanzoua contended this language only prohibits Kanouza from affiliating with any “food business” that sells pizza, but not from engaging in the mere act of selling pizza. Id.
The Court noted the term “food business” is not defined in their Agreement and, in absence of specified definitions, contractual terms are “given their plain, ordinary, and usual meaning.” Id. (citing Dunn Indus. Group, Inc. v. City of Sugar Creek, 112 S.W.3d 421, 428 (Mo. banc 2003)). Despite some questions about “the precise contours” of the meaning of the phrase “food business,” the Court concluded, on the record before it, that Kanzoua appeared to be “engaging” in a “food business which sells any type of pizza” within the ordinary meaning of the contractual terms. Id.
In doing so, the Court rejected Kanouza’s claim that Paragraph 21(c) was limited in application to only “entities similar to Imo’s.” Id. The Court reasoned that principles underlying non-complete clauses “seem[] to run counter” to such an interpretation. Id. (citing W. Michael Graner, Franchising & Distrib. Law & Prac. § 8:53 (West 2019-20)). The Court explained:
Imo’s reputation, goodwill, and brand recognition are threatened where, as here, one of its former licensees de-affiliates continues to make a similar product under their own name as when the same former Imo’s licensee enters a new license with an independent pizza manufacturer that has its own distinctive recipes and branding.
Id. Indeed, the Court stressed its belief that “the risks of confusion, reputational harm, and muddled brand recognition are higher in a situation like this than in a case involving when a former licensee switches entirely to another recognizable rival pizza brand.” Id. Having found a likelihood of success on the merits, the Court turned to the question of irreparable harm.
Kanzoua argued there is no threat of irreparable harm because Imo’s Pizza has not identified any actual customers who have mistaken Melanos Pizza for Imo’s Pizza, and any harm to Imo’s could be remedied in the form of quantifiable monetary damages. Id. at *3. In the Court’s view, “[n]either argument [was] convincing.” Id.
The Court concluded Imo’s does not need to prove that customers mistook Melanos Pizza for Imo’s Pizza. Id. (citing Osage Glass, Inc. v. Donovan, 693 S.W.2d 71, 75 (Mo. banc 1985)). The Court reasoned, “as the Eighth Circuit has explained, breach of a non-compete agreement typically amounts to a per se irreparable injury.” Id. (citing N.I.S. Corp. v. Swindle, 724 F.2d 707, 710 (8th Cir. 1984)).
Further, the Court found that Kanouza’s argument that the restaurant chain could recoup losses through monetary damages ignores the “intangibility of some of Imo’s Pizza’s interests.” Id. (citing Med. Shoppe Int’l, Inc. v. S.B.S. Pill Dr. Inc., 336 F.3d 801, 805 (8th Cir. 2003) (“[h]arm to reputation and goodwill is difficult, if not impossible to quantify in terms of dollars”)).
The Court then weighed this alleged irreparable harm to Imo’s against the harm that will result to Kanouza and its employees. Id. Kanouza stated its pizza sales represented 10% of its profits and it would be forced to lay off four employees if it had to shut down its pizza operation. Id. While “not unsympathetic to [this] hardship,” the Court concluded these harms simply did not outweigh “the potential damages to Imo’s Pizza brand and goodwill by continued violation of the Agreement.” Id.
Finally, in terms of the public interest, the Court succinctly noted the public has an interest in enforcing covenants not to compete within valid contracts. Id. at *4.
THE OUTCOME & WHY TRO’S ARE IMPORTANT IN NON-COMPETE CASES
As here, the first step in a non-compete case often involves a company filing in Court a request for a TRO. In such instances, the company quickly seeks to prevent the former company affiliate from working for a competitor or exploiting some knowledge or client relationship that he or she gained while working for the company. These expedited proceedings involve consideration of the merits of the lawsuit itself, but more importantly tend to focus on claims of irreparable harm if the status quo is not preserved via a TRO. If the company is successful early on in securing a restraining order—even temporarily—that can put a former employee or affiliate out of work until further order of the Court. As such, it is critical to retain experienced and knowledgeable counsel early in the process in order to successfully navigate the variety of legal and factual issues that can arise in these expedited proceedings.
Stay tuned for further developments on non-compete cases within Missouri.
