Franchise Sales: U.S. District Court for the E.D. of Michigan's recently issued opinion acts as a reminder of the importance of good faith and transparency 

A recent opinion out of the United States District Court for the Eastern District of Michigan, Fetch! Pet Care, Inc. v. Atomic Pawz Inc., 2025 WL 1921753 (E.D. Mich., July 11, 2025), is another good reminder about how the lack of transparency by a franchisor can lead to dire consequences for the parties and the brand.

Fetch! Pet Care, Inc. (“Franchisor”) is a company that sells franchises for pet care services. 36 individuals or entities who operated Franchisor franchises under various models—some under an older “1.0” model, others under a newer “2.0” model, and a subset under a “managed services” arrangement (collectively, the “Franchisees”).  The dispute arose when the Franchisees allegedly breached their franchise agreements by operating competing businesses, misusing Franchisor’s trademarks and confidential information, and engaging in a coordinated effort to exit the Franchisor’s system.

Franchisor sued the Franchisees in the United States District Court for the Eastern District of Michigan for breach of contract, trademark infringement, misappropriation of trade secrets, and conspiracy to commit tortious interference. Franchisor sought a preliminary injunction to stop the Franchisees from operating competing businesses and using its proprietary information.  The parties are also engaged in a corresponding arbitration proceeding, as required by the franchise agreements. 

The District Court evaluated Franchisor’s request for a preliminary injunction using the standard four-factor test: likelihood of success on the merits, irreparable harm, harm to others, and public interest. As explained below, in analyzing the preliminary injunction factors, the District Court’s finding of possible bad faith by Franchisor was a central reason for denying the injunction.

Likelihood of Success on the Merits

 The District Court found evidence that the Franchisor had acted in bad faith, particularly in how it marketed and sold the “2.0” model and “managed services” franchises.  Franchisor allegedly obscured critical differences between the “1.0” and “2.0” models and made misleading financial representations in the franchise disclosure documents.  The District Court found credible evidence that Franchisor may have acted in bad faith when selling its newer “2.0” franchise model.

Specifically, the court pointed to:

• Changes in franchise disclosure documents that obscured the differences between the older, more profitable “1.0” model and the newer, less profitable “2.0” model.
• Aggressive and possibly misleading marketing to potential franchisees, including representations about likely profits that were not supported by actual results.
• Testimony from franchisees that they were not told about the differences between the models and only learned about them after joining, and that the “2.0” model was not profitable for them.

The District Court concluded that such conduct by Franchisor amounted to “bad faith” and was directly related to the dispute—since many of the Franchisees left or stopped performing under their agreements because they felt misled or could not make the business work as promised.  The District Court found that Franchisor’s conduct was sufficient to deny injunctive relief against the “2.0” and “managed services” franchisees under the doctrine of “unclean hands” – which means that a party asking for an equitable remedy (like an injunction) must itself have acted fairly and honestly in the matters related to the dispute.

In addition, the Court determined that for the legacy “1.0” franchisees, Franchisor had likely committed the first material breach by cutting off Franchisees’ access to its systems before they began competing.  This action made it impossible for the Franchisees to continue operating under the Franchisor’s brand, undermining Franchisor’s breach of contract claims.

The Court did find a likelihood of success for Franchisor on claims that legacy franchisees misappropriated trade secrets (client lists, etc.) and infringed trademarks (using Franchisor reviews and marks in new businesses) after being cut off. But that relief was limited in scope and the court issued a narrowly tailored order enjoining such usage.

Irreparable Harm

The District Court concluded that Franchisor had not shown irreparable harm justifying an injunction. Much of the alleged harm (e.g., loss of goodwill, customers) had already occurred, and any future harm was speculative. The court also noted that monetary damages could compensate Franchisor and that the arbitration process would be rendered meaningless with the imposition of an injunction.

Balance of Hardships

 The District Court found that the harm to Franchisees (i.e., loss of their businesses and livelihoods) outweighed the harm to Franchisor, especially given the Franchisor’s own conduct. 

Public Interest

 The public interest was deemed neutral, as both enforcement of contracts and continuity of business operations are important.

So, why is this decision important for franchisors? The District Court’s finding of possible bad faith by Franchisor was fatal to its request for a preliminary injunction against the “2.0” franchisees. This means that franchisors who are not transparent, or who mislead franchisees about the business opportunity, may lose the ability to quickly stop former franchisees from competing or using confidential information—even if the franchisees are otherwise in breach of contract. Courts generally will not reward a franchisor’s own misconduct by granting them emergency relief.

For franchisees, this opinion confirms that franchisor misconduct can be a strong defense, but using the franchisor’s confidential information or trademarks after leaving the system is still risky. Even when a franchisee leaves as a result of franchisor’s breach, using the franchisor’s confidential information or trademarks can still lead to legal trouble. The court did order the Franchisees to stop using Franchisor’s name and logo.

If you have questions about the content in this article, reach out to McDonald Hopkins' Franchising and Restructuring attorney, Michael Kaczcka.