Get Kaisered Inc v. AKT Franchise LLC ( 2021 )

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
_________________
No. 21-1033
GET KAISERED, INC., A New York Corporation; KAISER FITNESS LLC, A New
York Limited Liability Company; ANNA KAISER, An Individual
v.
AKT FRANCHISE, LLC., A Delaware Limited Liability Company; XPONENTIAL
FITNESS, LLC., A Delaware Limited Liability Company
AKT Franchise, LLC.,
Appellant
On Appeal from the United States District Court
for the District of Delaware
(D.C. Civil No. 1-20-cv-01037)
District Judge: Hon. Colm F. Connolly
Argued June 22, 2021
Before: SMITH, Chief Judge, MATEY, and FISHER, Circuit Judges.
(Opinion filed: August 10, 2021)
Witt W. Chang
Jeffrey K. Logan
Alex M. Weingarten
Venable
2049 Century Park East
Suite 2300
Los Angeles, CA 90067
Bryan A. Garner [ARGUED]
14180 Dallas Parkway
Suite 280
Dallas, TX 75254
Counsel for Appellant
Kerry A. Brennan [ARGUED]
Brennan Law PLLC
902 Broadway, 6th Floor
New York, NY 10010
Counsel for Appellees
OPINION *
MATEY, Circuit Judge.
Xponential Fitness and AKT 1 Franchise bought the right to franchise Anna Kaiser’s
cardio fitness business and the intellectual property they hoped would make the new
franchises thrive. But the relationship quickly soured, and lawsuits largely grounded on
contract claims followed. Both sides sought preliminary injunctions, remedies largely
denied by the District Court. Agreeing that Appellant AKT Franchise has failed to show a
likelihood of success on its claims, we will affirm.
I. BACKGROUND
Over two decades, Anna Kaiser developed a custom fitness program. By 2018, she
operated four “AKT in Motion” studios in the New York area. With hopes of expansion,
* This disposition is not an opinion of the full Court and, pursuant to I.O.P. 5.7, does
not constitute binding precedent.
1
AKT is short for “Anna Kaiser Technique,” Kaiser’s unique fitness program.
2
Kaiser 2 agreed to sell the franchise rights to her studios and much of the intellectual
property related to her business to Xponential Fitness and a new company, AKT Franchise
LLC. The parties spelled out the deal in an Asset Purchase Agreement (“APA”) that,
among other terms, granted Kaiser a non-transferable, non-exclusive license to use the
intellectual property, and her persona, in her existing AKT in Motion studios. But that
license came with a condition: those studios must become franchises, and the APA
contained a restrictive covenant prohibiting the selling parties from operating competing
businesses for five years after closing. That license forms the heart of this dispute.
Trouble began, as commercial troubles often do, when the buyers failed to make
two post-closing cash payments. Kaiser and the sellers tried to scuttle the deal, suing for
breach of contract and changing the names of the existing studios to “Anna Kaiser Studios.”
The buyers fought back with counterclaims of breach. Both parties sought preliminary
injunctions with AKT Franchise and Xponential seeking to enjoin Kaiser from operating
her original studios because, they alleged, her operation of the studios outside the AKT
franchise violated the APA’s restrictive covenant. The District Court denied both motions,
finding neither side showed a likelihood of success on their claims. AKT Franchise timely
appealed. 3
2
Along with her companies AKT in Motion and Get Kaisered, Inc., the Appellees.
3
AKT Franchise’s co-defendant/co-counterclaimant Xponential is not a party to this
appeal. The District Court had jurisdiction pursuant to 28 U.S.C. § 1332, and we have
jurisdiction to review an order refusing injunctive relief under 28 U.S.C. § 1292(a)(1). We
review the denial of a preliminary injunction for an abuse of discretion, but any underlying
legal questions are subject to plenary review. ADP, LLC v. Rafferty, 923 F.3d 113, 119 (3d
Cir. 2019). Under Delaware law, the “proper construction” of a contract is a question of
3
II. DISCUSSION
As the party seeking a preliminary injunction, AKT Franchise must “demonstrate a
reasonable likelihood of success [on its breach of contract claims] and that it would likely
suffer irreparable harm absent an injunction.” ADP, LLC v. Rafferty, 923 F.3d 113, 119–
20 (3d Cir. 2019). Here, success depends on two questions: 1) whether the APA required
Appellees to operate Kaiser’s studios as AKT franchises, and 2) whether the Anna Kaiser
Studios are “competing businesses” under the APA. Because we agree with the District
Court’s conclusion that Appellant failed to establish a likelihood of success on either
question, we will affirm.
A. The Franchise Requirement
Section 5.11(a) of the APA provides that the Purchaser (Appellant) must grant the
Seller (Appellees) a “non-exclusive, non-transferable” license back of the transferred AKT
intellectual property “to be used for the exclusive purpose of the [Seller] maintaining and
operating its current ‘AKT in Motion’ studios . . . (‘the Seller Studios’).” 4 The provision
adds that the license is granted “provided that the Seller shall cause the AKT Group to
operate all of the Seller Studios as franchises of the Purchaser in the Ordinary Course of
Business. Following the Closing, Purchaser and Seller . . . shall use commercially
law. Exelon Generation Acquisitions, LLC v. Deere & Co., 176 A.3d 1262, 1266–67 (Del.
2017).
4
Section 5.11(a) refers to the “current ‘AKT in Motion’ studios” as “Current
Studios,” and provides for the creation of at least two new “Additional Studios,” with the
Current Studios and Additional Studios collectively labeled “Seller Studios.” (App. at
1345.) No Additional Studios were ever opened, so the Current Studios alone are the Seller
Studios. For simplicity, we will call them Seller Studios.
4
reasonable efforts to enter written Franchise Agreements for the Seller Studios[.]” (App. at
1345.) But if “such Franchise Agreements are not executed by the third (3rd) anniversary
of the date hereof,” the license terminates. (App. at 1345.)
Appellant argues the provision in Section 5.11(a) requiring that Kaiser’s studios
operate as AKT franchises did not just condition the IP license, but created an affirmative
promise to operate the studios as franchises or not at all. Like the District Court, we
disagree. The proviso is best read as creating a condition precedent, “an event, not certain
to occur, which must occur . . . before performance under a contract becomes due.” Pac.
Emp’rs. Ins. Co. v. Glob. Reins. Corp. of Am., 693 F.3d 417, 430 n.6 (3d Cir. 2012) (quoting
Restatement (Second) of Contracts § 224 (1981)). Appellant’s obligation to perform—to
grant Kaiser the IP license—was dependent upon her execution of franchise agreements.
If no such agreements were executed by the third anniversary of the closing, the result was
clear: the license would simply terminate. The APA did not provide that Kaiser had to then
cease operating her studios altogether.
Appellant also believes Section 5.11(a) to immediately, upon closing, require the
Appellees to operate the Seller Studios as AKT franchises. Not so, say Appellees; they just
had to use commercially reasonable efforts to enter written Franchise Agreements within
three years of closing. And like the District Court, we agree the Appellees have the better
interpretation. While Section 5.11(a) does grant Appellees a license to use AKT
Franchise’s newly acquired intellectual property to operate the Seller Studios as franchises,
the clause includes a three-year period to fulfill that obligation.
5
That conclusion is confirmed by the whole text of the APA. Section 2.4 of the
Consulting Agreement, Exhibit B to the APA, 5 says, “Nothing in this Section 2.4 shall
prohibit [Kaiser] from . . . owning or operating any ‘AKT in Motion’ studio or franchise.”
(App. at 1373 (emphasis added).) Under Appellant’s argument, the Seller Studios—which
were the only existing AKT in Motion studios at closing—would automatically become
franchises when the deal closed. But if that is correct, there would be no AKT in Motion
studios that were not franchises after the contract was signed, making “studio or”
superfluous. Such a reading would violate “our duty to give effect, if possible, to every
clause and word” in a written text. United States v. Jackson, 964 F.3d 197, 203 (3d Cir.
2020) (quoting Duncan v. Walker, 533 U.S. 167, 174 (2001)). Here, post-closing, the
Consulting Agreement contemplated that Kaiser could operate an AKT in Motion franchise
or a non-franchise AKT in Motion studio. That conflicts with Appellant’s reading of
Section 5.11(a), but squares with the meaning “determined from the four corners of the
contract.” In re Diet Drugs (Phentermine/Fenfluramine/Dexfenfluramine) Prod. Liab.
Litig., 706 F.3d 217, 223 (3d Cir. 2013) (quotations and citation omitted).
Because the best reading of the APA suggests that the IP license did not condition
Appellees’ freedom to operate and that Appellees were not required to immediately operate
the Seller Studios as AKT franchises, Appellant has not shown a likelihood of success. The
District Court correctly denied the motion for a preliminary injunction.
5
Under the APA, “the Exhibits attached hereto form part of this Agreement.” (App.
at 1353.)
6
B. The Noncompete Clause
Appellant’s argument about the alleged breach of the APA’s restrictive covenant
similarly falls short. 6 Section 5.4 of the APA prohibits Appellees from engaging in an
extensive list of activities related to any “Competing Business” in North America, with
“Competing Business” defined as “the operation or franchising of fitness studios other than
Seller Studios.” (App. at 1342.) Despite the Seller Studios’ exemption from the definition
of Competing Business, Appellant argues that Anna Kaiser Studios do not qualify because
they are not AKT franchises.
But the Seller Studios are, per the definition of Current Studios, the Sellers’ “current
‘AKT in Motion’ studios set forth in Schedule 5.11(a).” (App. at 1345.) Schedule 5.11(a)
contains only a list of general locations and street addresses for four studios. And we have
held that a contract written in the present tense is “speaking on” the date of closing, Castle
v. Cohen, 840 F.2d 173, 177 (3d Cir. 1988), so the definition of Seller Studios refers to the
AKT in Motion studios, listed in Schedule 5.11(a). When interpreting an unambiguous
contract governed by Delaware law, we ask “what a reasonable person in the position of
the parties would have thought the language of [the] contract means.” Lorillard Tobacco
Co. v. Am. Legacy Found., 903 A.2d 728, 739 (Del. 2006). And a reasonable person would
infer the word “current” matters to the definition of Seller Studios. Because the relevant
time is the moment of closing, it does not matter that Appellees later rebranded the studios.
6
Appellant expressly disclaims any argument that the APA is ambiguous, thus
confining our review to whether the APA unambiguously supports Appellant’s reading.
7
They are still the same studios 7 listed in Schedule 5.11(a), so they are exempt from the
APA’s restrictive covenant, and there is no likelihood of success on this claim.
III. CONCLUSION
For these reasons, we will affirm the District Court’s denial of Appellant’s motion
for a preliminary injunction.
7
Except for one studio that closed in 2020.
8