Court of Special Appeals rules that DMF Leasing is entitled to

A Maryland company struck a blow to the plans of Budget Rent-A- Car Systems Inc. to buy out three franchises in the Baltimore- Washington area.

DMF Leasing Inc., the operator of Budget subfranchises in Catonsville, Silver Spring and Rockville, is entitled to a preliminary injunction against acquisition of those locations by the national rental car giant, the Court of Special Appeals has held.

According to last week's opinion, the acquisition would cause irreparable harm to DMF - namely, the loss of its business. That factor weighed heavily in favor of granting the injunction pending trial.

The decision reverses the Circuit Court for Montgomery County, which refused to enjoin the acquisition pending litigation.

While the lower court used the proper four-factor test to decide whether to issue a preliminary injunction, it erred in applying that test, the Court of Special Appeals held.

Significantly, the appellate court gave a liberal reading to the first factor of the test, the likelihood of success on the merits.

A likelihood of success does not necessarily equate to a probability of success, the court noted. Under the Court of Appeals' 1986 decision in Lerner v. Lerner, it also encompasses a claim that raise[s] questions going to the merits so serious, substantial, difficult and doubtful, as to make them fair ground for litigation.

But the court also cautioned that the approaches are more of a continuum than discrete tests.

Pigeonholing the success-on-the-merits factor as either 'probability of success on merits' or 'raising a substantial question on the merits' is inconsistent with the flexibility that remains one of the cornerstones of meting out the equitable remedy of an injunction, the court reasoned.

It found that this factor weighed in DMF's favor because at least one of its claims met the Lerner criteria.

Further tipping the scales in DMF's favor was the second factor - the balance of convenience test. The court found that the harm to DMF from denying the preliminary injunction outweighed the harm to Budget from granting the injunction.

The third factor - whether DMF would suffer irreparable harm - also favored issuing the injunction. While the circuit court found the harm was strictly monetary, and thus could be rectified with a damage award, the appeals court noted that the loss of a going concern is generally considered an irreparable harm.

Even assuming, as the trial judge concluded here, that damages were readily ascertainable, we hold that the loss of [DMF's] business constitutes irreparable injury under our injunctive relief analysis, wrote Judge Arrie W. Davis for the appellate panel.

The fourth factor, public policy considerations, was a wash, since the rental car locations would continue to operate regardless of the outcome.

Thus, the court reversed the lower court's decision and found DMF was entitled to the preliminary injunction. DMF's suit to enjoin permanently the termination of its sublicense agreement is scheduled for trial in October.

Pending the outcome of that case, attorneys for both sides refused comment.

Revised agreement

Underlying the litigation is a master franchise agreement between Budget Rent-A-Car Systems (National Budget) and Budget Rent-A-Car of Maryland (Maryland Budget), two distinct and non-affiliated corporations, last week's opinion says. The master agreement allowed Maryland Budget to sublicense Budget Rent-A-Car franchises in the state.

DMF had three sublicense agreements with Maryland Budget, each of which provided that the agreements would terminate if the master agreement between National Budget and Maryland Budget terminated.

In August 2002, rumors of National Budget's pending buyout of Maryland Budget prompted litigation between DMF and Maryland Budget.

That litigation ended with a settlement, executed in June 2004, modifying the license agreements between DMF and Maryland Budget. The revised agreement provided that each of DMF's sublicenses had a term of five years, renewable at DMF's election.

DMF interpreted that to mean that it was no longer vulnerable to National Budget's acquisition of Maryland Budget. Contemporaneous with its settlement with Maryland Budget, DMF filed this case in the circuit court, initially seeking an injunction to prevent the acquisition and consequently the termination of its licenses.

The circuit court denied DMF's motion for preliminary injunction and denied a subsequent request for injunction pending appeal.

Upon receiving DMF's Notice of Appeal, the Court of Special Appeals promptly issued an injunction pending appeal, and, last week, reversed the circuit court in an expedited decision.

WHAT THE COURT HELD

Case:

DMF Leasing Inc. v. Budget Rent-A-Car of Maryland Inc. et al.,, CSA No. 1842, Sept. Term 2004. Reported. Opinion by Davis, J. Filed April 4, 2005.

Issue:

Did the lower court err in denying a preliminary injunction to a subfranchisee against the master franchisor's acquisition of its locations?

Holding:

Yes; preliminary injunction ordered. The balance of the four- factor test favored the subfranchisee because, among other things, its claim raise[s] questions going to the merits so serious, substantial, difficult and doubtful, as to make them fair ground for litigation and the acquisition would result in the loss of the subfranchisee's business, which constitutes irreparable harm.

Counsel:

George C. Shadoan for appellant; John F. Dienelt, Washington, D.C., for appellee Budget Rent-A-Car Systems Inc.; David L. Jacobson for appellee Budget Rent-A-Car of Maryland Inc.

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