The decision to file in state or federal court, or even whether to remove a case to federal court, can be outcome determinative. One would not necessarily expect that to be the case, and perhaps some statistical analysis would shed light on the issue. But we know that when it comes to injunctions, federal court may have a higher bar. See Total Liquor Controls v. Berg, (3d. Cir.).

The opinion is written by U.S. Court of Appeals for the Third Circuit Judge Stephanos Bibas, who with his unique writing style, as always, direct and to the point, in remanding the case to the district court to reconsider whether to issue an injunction. The decision is designated “nonprecedential” which under the Third Circuit operating procedures means it was primarily for the parties and not of institutional interest. It could also mean that the decision needed to be issued quickly without circulation to the judges to solicit comments as this was an interlocutory appeal from the denial of an injunction from the district court. Nevertheless, the opinion aids in the interpretation of the requirement of injunctions in federal court.

The case involves the termination of a franchise and the enforcement of a covenant against competition. Berg Co. makes alcohol dispensing products for bars. One of its dealers was Total Liquor Controls. Total’s owner, Albert Dorsey, also agreed not to compete with Berg when he separated from partial ownership of Berg in 2022. As the opinion wryly states, “But soon the relationship soured.” Berg sought to terminate the dealership contract because Total missed its contractual sale quota. Berg also alleged that Dorsey violated his noncompete.

Total was at risk of losing its supplier and filed a lawsuit for breach of contract, breach of duty of good faith and fair dealing and under the New Jersey Franchise Practices Act. The act requires good cause for termination, which under the act basically requires a material breach by the franchisee in order to justify termination. The act provides that a court may issue an injunction against the termination of a franchise in violation of the act. The Third Circuit has held that the termination of a longstanding business relationship can result in irreparable harm justifying an injunction. For example, the court in Carlo C. Gelardi v. Miller Brewing, 421 F.Supp. 233, 236 (D.N.J. 1976), found that “the loss of business and good will, and the threatened loss of the enterprise itself, constitutes irreparable injury to the plaintiff sufficient to justify the issuance of preliminary injunction.”

Total moved the district court for a preliminary injunction to prevent termination of the dealership. Total claimed it would suffer irreparable harm if the relationship ended because its business would fail. The District Court did not grant the injunction, however, reasoning that Total still had revenues and could develop new suppliers and customers. Total filed an interlocutory appeal.

The circuit court reviewed the requirements for a preliminary injunction, reminding us that a preliminary injunction is never awarded as a right. The remedy requires a showing of likelihood on the merits and the likely suffering of irreparable harm. Once that showing is made, then the court is to balance the relative harms among the parties and the public to determine if more harm will occur if the injunction is granted against the harm that will occur if the injunction is not granted.

The nugget contained in this this case is the height of the bar to prove irreparable harm. The court noted that the case turned on irreparable harm that would jeopardize the case and could not be redressed with damages at the conclusion of the case. Some courts have addressed the adequacy of money damages and others have even considered the ability of the counterparty to pay the money damages necessary to compensate for the harm. This court remarked that going out of business or having to file bankruptcy may be a sufficient showing of irreparable harm for a preliminary injunction.

Demonstrating the difficulty of obtaining a preliminary injunction, the court referenced the case of Instant Air Freight v. C.F. Air Freight, 882 F.2d 797, 802–03 (3d Cir. 1989), where the circuit court vacated a preliminary injunction even though a plaintiff company claimed that it would lose 80% of its revenue. The injunction was vacated because the company offered no financial statements or projections to support the claim that it would go out of business and could have gotten more business elsewhere.

The court observed that even though the New Jersey Franchise Practices Act has a lower bar for issuing an injunction, federal cases must still adhere to the federal requirements and precedent for issuing an injunction. Even though an injunction may be obtained to prevent a violation of the act without the required showing of irreparable harm in state court, federal courts still require the showing of irreparable harm.

In this case, the circuit court remanded the case to the district court to review the impact of the noncompete on the ability to maintain Total’s business without an injunction against termination. But the case illustrates that notwithstanding a state law threshold for granting a preliminary injunction, Congress has regulated the equity jurisdiction of federal court such that the outcome in state court might have been different.

Reprinted with permission from the January 23, 2025 issue of The Legal Intelligencer© 2025 ALM Media Properties, LLC. Further duplication without permission is prohibited. All rights reserved.