Fetch! Pet Care, a nationwide franchisor, sued thirty-one former franchisees alleging breach of contract, trademark infringement, and misappropriation of trade secrets. The franchisees, organized under an association called IAFF, had ceased paying royalties and launched competing businesses after becoming dissatisfied with Fetch!'s business model. They argued that Fetch! had marketed its newer '2.0' and 'Managed-Services' models as highly profitable passive income opportunities while obscuring the high attrition rates and exorbitant fees. Additionally, three legacy '1.0' franchisees claimed they were abruptly cut off from Fetch!'s software system while current on payments, forcing them to operate independently to survive. Fetch! sought a preliminary injunction to stop the franchisees from operating competing businesses and using its trademarks. The district court granted the injunction in part but denied it in part, finding that Fetch! had 'unclean hands' due to its conduct in selling franchises and terminating the legacy franchisees.
The Sixth Circuit, writing through Circuit Judge Gibbons, affirmed the district court's decision primarily on the equitable doctrine of unclean hands. The court explained that this doctrine denies injunctive relief to a plaintiff whose conduct involves fraud, deceit, or bad faith related to the transaction at issue. Regarding the '2.0' and 'Managed-Services' franchisees, the court found sufficient evidence that Fetch! aggressively and dishonestly marketed these franchises. The district court had found that Fetch! removed distinctions between its older and newer models in disclosure documents and made exaggerated claims about potential profits, such as $900,000 in annual gross sales, while franchisees testified to significant financial losses and poor support. This bad faith conduct was sufficient to bar equitable relief for these defendants. For the three legacy '1.0' franchisees, the court affirmed the denial of injunctive relief based on Fetch!'s conduct in cutting them off from its system without notice or a cure period, which violated state franchise laws and transgressed equitable standards. The court emphasized that it need not address the other preliminary injunction factors once unclean hands is established. Furthermore, the court clarified its precedent regarding irreparable harm. It rejected the district court's application of a 'clear-and-convincing' standard, noting that the federal standard requires only a showing that irreparable injury is likely. The court also corrected the district court's view that competitive injuries are too speculative, stating that the difficulty in calculating the loss of goodwill and unfair competition is precisely what makes such injuries irreparable.
The decision leaves the preliminary injunction partially in place regarding the use of trademarks but prevents Fetch! from enjoining the franchisees from operating their competing businesses. The ruling effectively forces the dispute over the franchise agreements, including claims of misrepresentation and breach, into arbitration as previously ordered. It also establishes a binding precedent in the Sixth Circuit that district courts must apply the federal 'likely injury' standard for irreparable harm rather than a heightened clear-and-convincing standard, and confirms that speculative competitive injuries are sufficient to meet the irreparable harm requirement.