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AMV Holdings, LLC v. American Vapes, Inc

United States District Court, W.D. North Carolina, Statesville Division

July 25, 2019

AMERICAN VAPES, INC., et al. Defendants.



         Plaintiffs AMV Holdings, LLC and Madvapes Franchising, LLC (collectively “Madvapes”), is a franchisor in the “vaping” / e-cigarette business. Defendant American Vapes (“AV” or “Mellow Vapes” (its new trade name)) is a former Madvapes franchisee that terminated the franchise relationship in March 2019. The individual defendants - Bryan Hough, Craig Kinlaw and Wayne Kinley - are owners of AV and/or guarantors of the parties' franchise agreements. Madvapes claims in this action that AV is continuing to operate eight “vaping” stores which had been Madvapes' franchise locations under their new Mellow Vapes trade name thereby infringing Madvapes' trademarks and breaching the parties' franchise agreements. In response, AV has filed counterclaims asserting its own claims of breach of contract and unfair business practices related to Madvapes' use of the common advertising fund into which franchisees were required to contribute.

         Now before the Court is Madvapes' Motion for Preliminary Injunction, (Doc. No. 16), which seeks to force AV to close all its stores under the franchise agreements' covenant not to compete, prohibit infringement of Madvapes' trademarks and enforce confidentiality and other post termination provisions of the franchise agreement. The Court has carefully reviewed the motion and considered the parties' briefs and exhibits and their arguments during the hearing on this motion held on July 19, 2019. For the reasons discussed below, the Court will enter the following Preliminary Injunction, which in effect GRANTS in part and DENIES in part Madvapes' motion. Madvapes is entitled to a preliminary injunction to enjoin AV from using Madvapes' trademarks (which Defendants say they have already stopped using). Madvapes is also entitled to a preliminary injunction to enforce certain portions of the post termination provisions in the franchise agreements. However, Madvapes is not entitled to a preliminary injunction requiring Defendants to close their businesses because, among other reasons, the Court finds that Madvapes is not likely to succeed on the merits of its claim to enforce the franchise agreements' covenant not to compete.


         The standard for considering a motion for a preliminary injunction is well established. A preliminary injunction is “an extraordinary remedy that may only be awarded upon a clear showing that the plaintiff is entitled to such relief” and may never be awarded “as of right.” Winter v. Nat. Res. Def. Council, Inc., 555 U.S. 7, 22, 24, 32 (2008) (noting that even issuance of a permanent injunction after trial “is a matter of equitable discretion; it does not follow from success on the merits as a matter of right.”). The Fourth Circuit has similarly recognized that the grant of such a remedy involves “the exercise of a very far-reaching power, which is to be applied only in [the] limited circumstances which clearly demand it.” Centro Tepeyac v. Montgomery Cnty., 722 F.3d 184, 188 (4th Cir.2013) (en banc).

         In order to receive a preliminary injunction, a plaintiff must establish that: (1) it is likely to succeed on the merits; (2) it is likely to suffer irreparable harm without the preliminary injunction; (3) the balance of equities tips in its favor; and (4) the injunction is in the public interest. Winter, 555 U.S. at 20; Mountain Valley Pipeline, LLC v. Western Pocahontas Properties Limited Partnership, 918 F.3d 353 (4th Cir. 2019); League of Women Voters of N.C. v. North Carolina, 769 F.3d 224, 236 (4th Cir. 2014). Each of these four requirements must be satisfied. Id.

         Accordingly, a plaintiff must make a “clear” showing both that he is likely to suffer irreparable harm absent relief and he is likely to succeed on the merits at trial, as well as demonstrate the balance of equities favors him, and the injunction is in the public interest. See Winter, 555 U.S. at 22; Real Truth About Obama, Inc. v. Fed. Election Comm'n, 575 F.3d 342, 346 (4th Cir.2009), vacated on other grounds, 559 U.S. 1089, 130 S.Ct. 2371, 176 L.Ed.2d 764 (2010). However, plaintiffs “need not show a certainty of success.” Pashby v. Delia, 709 F.3d 307, 321 (4th Cir.2013).


         Madvapes describes the alleged history of the parties' franchise relationship in the Amended Verified Complaint (“Complaint”). See Complaint at ¶¶ 22-24, 30, 35-41. Beginning in 2015, AV became a licensee of Madvapes in Easley, SC. AV added licensed stores in Anderson, South Carolina and Lincolnton and Shelby, North Carolina later in 2015. Over time, these “licensed” stores became “franchise” locations and other franchise locations were added in Boone, Statesville and Belmont, North Carolina and Indian Land, South Carolina from 2016 to March 2018. Id. The purported April 2017 Franchise Agreement (“FA”) for the Statesville store is attached to the Complaint. Id. at ¶ 34. Madvapes alleges that the provisions of each of the franchise agreements for the various locations are in all material respects the same as the FA. Id. at ¶42.[1]

         The FA has an initial term of 10 years and is specifically limited to a single franchise location. FA, ¶¶ 1, 2. In the FA, AV agrees that (with a carveout for “Non-traditional Locations” such as malls, airports, schools and sports arenas) it will not locate or license another store within a very limited territory around the approved franchise location (intended to encompass “a working population of approximately 15, 000”). The franchisee is not permitted to solicit customers by means of an electronic remote-entry system, such as sales over the internet. Thus, by contract, each franchise location is intended to be only a “brick and mortar” store that services a small protected area (although customers are not required to live in the assigned territory). FA, ¶ 5.

         In Section 7(a) and 7(b) of the FA, the franchisee agrees that it will not make any unauthorized use of the Madvapes trademarks and that any unauthorized use is an infringement of Madvapes' rights. The FA further provides that “customer data” and inventions, business plans, ideas, etc. (very broadly defined) that are created in whole or part during the franchise term belong to Madvapes. FA, ¶ 7 (g), (h)).

         Section 8(k) provides that the franchisee is not allowed to maintain any social media sites associated with the Madvapes trademarks without Madvapes' consent, but the FA does not prohibit the franchisee from continuing to use the same social media site so long as it does not use the Madvapes' marks. However, with respect to telephone numbers, upon termination the franchisee agrees not to use the same numbers for another business. FA at ¶ 9; see also, FA at Exhibit F (discussed below).

         Section 13 of the FA gives Madvapes significant (assignable) rights in the event of franchisee's termination of the FA without cause, which is what Madvapes contends has happened. Madvapes has the option within 60 days of the termination to purchase for fair value the Franchised Business (including the land on which the business operates if it is owned by the franchisee or to take over the lease) and/or the right to purchase any current, usable and saleable inventory. However, there is no evidence in the record that Madvapes timely exercised any of these options.

         Section 14 contains the FA's Non-Competition provisions. Section 14(b) restricts Defendants from “[d]irectly or indirectly entering into the employ of, render any service to or act in concert with any person, partnership [etc] that owns, operates, manages, [etc]” any “Competitive Business”[2] or “[b]ecome interested in directly or indirectly as an individual, partner, shareholder, …, agent, … spouse, or in any other relationship or capacity” any “Competitive Business” for a period of two years “in the same state in the United States as (i) the [Franchised Locations] or (ii) any MadVapes franchised business or development territory in existence at the Effective Date[3] … or by any means, including, without limitation, sales via the internet or catalogs.” Madvapes argues that Defendants should be prohibited from operating in North Carolina and South Carolina based on this provision.[4]

         Section 15 of the FA contains a very broad Trade Secrets and Confidential Information provision that purports to prohibit AV “during the Term [of the FA] or at any time after the expiration or termination of this Agreement” … from “directly or indirectly” … using or divulging “any trade secrets, confidential information, knowledge or know-how” concerning the business. “Any and all information, knowledge, or know-how, including, without limitation, drawings, materials, equipment, marketing, e-liquid recipes, and other data which Franchisor designates as secret or confidential shall be deemed Confidential Information [for the] purposes of this Agreement.” In its briefing, Madvapes has not identified specific evidence in the record where it designated any particular information or data as secret or confidential (beyond referencing the FA and general statements regarding the “proprietary” nature of their business) and confirmed that it was not seeking to protect particular trade secrets at the motion hearing.

         Section 18 of the FA imposes a number of obligations on the franchisee upon termination, including ceasing to hold itself out as a Madvapes franchisee, ceasing to use any of Madvapes' trademarks and returning property owned by Madvapes. Also, Madvapes can request assignment of the lease of the premises and if Madvapes does not request an assignment then the franchisee is required to make alterations to the premises “to distinguish the appearance of the premises from that of other Madvapes locations.” FA, ¶ 18(a)-(e). This provision reflects the parties' apparent understanding that the franchisee may stay in the same location if Madvapes does not choose to exercise its right to take over the lease.

         Section 21 of the FA is the Governing Law, Jurisdiction and Venue section. Section 21(a) contains a broad arbitration clause that requires that “any action arising out of or related to this Agreement, [etc.]”… shall upon 30 days written notice be resolved by binding arbitration in Wake County, in accordance with the Federal Arbitration Act under the Commercial Arbitration Rules of the American Arbitration Association. In their Answer, Defendants asserted this arbitration provision as a defense.[5] Section 21(b), however, gives Madvapes the right to seek preliminary injunctive relief outside of arbitration. In Section 21(d) the parties “irrevocably” waive trial by jury in any action or proceeding between them. The parties chose the laws of the State of North Carolina to govern the FA and any claim or controversy among the parties. FA at ¶ 21(h).

         The FA also includes several relevant addenda and agreements. Exhibit B is a Site Selection Addendum in which the parties agreed on a specific store location (the “Approved Location”) and designated the Franchise Territory as “a radius around Approved Location within which a working population of approximately 15, 000 exists …” In the FA, the parties agreed that the Site Selection Addendum was to be an “integral” part of the FA.

         There is also a separate Nondisclosure and Noncompetition Agreement (Exhibit E), which purports to bind American Vapes and all its “managers, officers, beneficial owners, directors, employees, shareholders, partners, members, principals, immediate family members and domestic partners.” However, only Wayne Kinley signed this agreement as AV's President. The restrictions in this agreement broadly mirror the confidentiality and noncompetition provisions in the Franchise Agreement itself.

         Finally, there is a separate Telephone Listing and Internet Authorization Agreement (Exhibit F) in which AV is entitled to obtain telephone service under the Madvapes name. AV agreed as Franchisee that “such telephone numbers, listings and advertisements shall be considered the sole and exclusive property of Madvapes Franchising, LLC” and that “[u]pon termination, expiration, or non-renewal of the Franchise Agreement for whatever reason, Franchisee agrees to immediately cease all use of such telephone numbers…” AV also agreed to transfer the phone number to Madvapes, subject to Madvapes obligation to pay all fees related to the listing or phone service if Madvapes chose to request the transfer. Wayne Kinley and Bryan Hough signed this agreement on behalf of AV for the Statesville franchise location.

         The parties' relationship began to unravel in 2018. On August 6, 2018, defendant Kinley applied for a trademark for the name “Mellow Vapes.” Then, on December 18, 2018, American Vapes, through counsel, sent a notice of default to Madvapes for various alleged breaches of the Statesville Franchise Agreement, mostly related to the common advertising fund to which franchisees were required to contribute. AV claimed that Madvapes efforts to “cure” the alleged issues were insufficient and on March 20, 2019 sent a notice of termination of the Franchise Agreement to MadVapes. Madvapes claims that the termination did not satisfy the process for termination in the FA and that it was entirely pretextual as part of AV's plan to start a competing business.

         Immediately upon the termination, Defendants changed the name of each of their franchised locations to “Mellow Vapes” and continued operating a vaping business from the same locations. The parties do not dispute that Defendants have told customers that they are no longer a Madvapes franchise and “wanted to do their own thing, ” (Complaint at ¶¶ 86, 91). Madvapes claims, however, that AV has made statements such as “new name - same great team” in their advertisements and customer communications, which it contends are wrongful.

         Defendants allege that immediately following the termination, they began the process of “de-identification” of the MadVapes stores (such as removing signage), and that there are no longer any “Madvapes” signs inside or outside the stores. Also, Defendants allege that they no longer sell Madvapes products. While Madvapes criticizes the amount of time (five to six weeks) that it says it took AV to make these changes, it does not challenge AV s representation that these changes have now been made. AV is, however, apparently continuing to use the same telephone numbers at all the former franchise locations. AV has also maintained the same Facebook page and internet site but has changed the identifying name to Mellow Vapes. Madvapes acknowledges these changes but alleges that AV has not yet removed all references to Madvapes in earlier social media posts contained within the Facebook site. With respect to the “Juice Bar” that was present in the stores while they were Madvapes franchise locations, there is no evidence in the record as to previous or current appearance of the “Juice Bar, ” but Defendants acknowledge that it is still in the same relative location in the stores.


         Madvapes seeks injunctive relief in three general areas - (1) requests related to its trademark claims, (2) requests that defendants close their “Mellow Vapes” stores and not compete under the FA's noncompetition covenant and (3) requests related to other alleged de-branding and confidentiality obligations under the FA. Each is discussed separately below.

         A. Trademark Claims

         Related to its trademark claims, Madvapes seeks the issuance of a preliminary injunction to require Defendants to:

         • Cease using the MadVapes Marks[6] (as defined in Complaint ΒΆ16) or any trademark, service mark, logo, trade name or work that is confusingly similar to the MadVapes Marks, including use in any way on any social media ...

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