A Colorado court concluded that a forum-selection clause in a franchise agreement established jurisdiction over companies that did not sign the agreement, permitting the court to hear the case and enjoin those companies for violating a non-compete clause in the franchise agreement because those companies and the claims were “closely related” to the agreement.
Fitness Together licensed various franchisees to operate Fitness Together gyms. Licensed franchisees included Erin Mellinger, EM Fitness, L.L.C., FT Three, L.L.C., and FT Poland, L.L.C. The forum-selection clause required the parties to litigate any dispute relating to the franchise agreements in a Colorado court, and the non-compete clause barred franchisees who terminated their franchise agreements from operating a gym within three-miles of franchise gyms for two years.
One of the franchisees, Ms. Mellinger, decided to close the franchised gyms and open new ones outside of the franchise agreements. Ms. Mellinger and Fitness Together terminated the franchise agreements, retaining the forum-selection clause and reducing the term of the non‑compete clause from two years to one year.
While negotiating the termination agreement, Ms. Mellinger formed the Axio companies to operate her new gyms, intending to violate the termination agreement. Ms. Mellinger had opened her new gyms in the same locations as the franchise gyms, used her mother to register the Axio companies with the Ohio Secretary of State, used her Fitness Together email to order gym equipment and contact clients about switching to Axio, and used Fitness Together trademarks on signs and a doormat.
Fitness Together sought a temporary restraining order against Ms. Mellinger and the other franchisees, but the court denied that motion and allowed Fitness Together to re-file its motion as a motion for a preliminary injunction. Fitness Together refiled, also adding the Axio companies. The Axio companies responded by moving to dismiss the action for lack of personal jurisdiction because they were not signatories to the franchise agreements.
The court held the forum-selection clause in the franchise agreements applied to the Axio companies and bound them to the court’s jurisdiction. To do so, the court relied on a variety of doctrines where forum selection clauses are enforced against non-signatories.
First, the court discussed the “closely related” doctrine where non-signatories are bound to a forum-selection clause if they or their claims are closely related to the contractual relationship at issue. This doctrine prevents parties from escaping unfavorable contracts by shifting their business to a related entity. Here, Fitness Together presented ample evidence that the Axio companies benefited from their close relationship with Ms. Mellinger and that she had her mother create the Axio companies to evade the Franchise Agreements.
The Axio companies argued they were not bound to the forum-selection clause because it was not foreseeable they would be included in the franchise agreements’ definition of a bound party. The court dismissed this argument, explaining that enforcement of such clauses is foreseeable because the parties are closely related. By engaging in activity with Ms. Mellinger and the other franchisee defendants with knowledge of the Franchise Agreements, the Axio companies effectively consented to the forum-selection clause. The court concluded its “closely related” analysis noting that Ms. Mellinger’s actions were the type of evasive activity the doctrine was designed to prevent.
Noting criticism by other courts of the “closely related” doctrine as too vague to be workable, the court also found the Axio companies were bound by the forum-selection clause under doctrines of estoppel, successor liability, and agency. Equitable Estoppel prevents a party from avoiding a forum-selection clause if they have directly benefited from an agreement. Here, the Axio companies exploited their relationship with the original franchisees to lure clients, order new equipment, and use Fitness Together trademarks, thus binding them to the forum‑selection clause.
Successor liability transfers the liabilities of a selling company to the purchasing company if the purchaser is a continuation of the seller, or if the transaction occurs to fraudulently escape liability. Here, both theories supported application of the doctrine because the Axio companies were a continuation of the original franchisees, and the very reason for the Axio companies’ existence was to evade the terms of the agreements with the original franchisees.
Finally, agency allows enforcement of a contract on a third party if the contract is made by the third party’s agent. Here, the court reasoned that Ms. Mellinger acted as the agent of the Axio companies when she signed the termination agreement with Fitness Together. Because the Axio companies were the secret party behind that agreement, they are likewise bound to the incorporated forum-selection clause.
Next, the court turned to Fitness Together’s motion for a preliminary injunction, granting the injunction against the original franchisees and Axio companies. To prevail on a motion for preliminary injunction, the moving party must show: (1) likelihood of success on the merits; (2) irreparable injury if the injunction is denied; (3) the threatened injury without the injunction outweighs the opposing party’s harm under the injunction; and (4) the injunction is not adverse to the public interest.
Here, the court found Fitness Together was likely to succeed on the merits. As an initial matter, the defendants did not dispute the merits of the claims, but only presented a jurisdiction defense. While the Axio companies were not signatories to the agreements, the court explained that Colorado law binds non-signatories if they assist a signatory in violating the agreement. And even though Colorado law generally disfavors enforcement of non-compete agreements, they are permissible to protect trade secrets so long as their terms are reasonable.
The court concluded that Fitness Together’s non-compete agreement was necessary to protect its trade secrets and its terms (blocking a three-mile radius for one year) were likely reasonable. The court further found that Fitness Together presented abundant evidence it was likely to succeed on its trade secret misappropriation and trademark infringement claims.
Regarding irreparable harm, the court explained that Fitness Together showed difficulty in calculating damages and showed intangible harm such as loss of goodwill, customers, and market presence. The court further found the harm to Fitness Together outweighed any harm to the defendants, even considering that an injunction would force the defendants to temporarily close their businesses because they brought that harm upon themselves by violating the non‑compete clause in the agreements.
Finally, the court explained that the public interest favored enjoining the defendants from operating competing gyms. While the court expressed concern for defendants’ employees who would be adversely affected by the injunction, the public interest is best served by protecting businesses from unfair competition and by encouraging investments in the very businesses that give rise to opportunities for individuals like the defendants’ employees.
Forum-selection clauses in an agreement may bind entities that have not signed the agreement if those entities are closely related to claims arising under the agreement or the signatories to the agreement. Thus, based on a forum-selection clause, courts can have jurisdiction over entities when they would otherwise not have personal jurisdiction over such entities.
The Fitness Together decision can be found here.
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