September 10, 2025|Franchise Frontlines
September 10, 2025 | United States District Court, Middle District of Pennsylvania | Unpublished Memorandum
Executive Summary
In an unpublished memorandum, Judge Keli M. Neary of the U.S. District Court for the Middle District of Pennsylvania denied Koala Insulation Franchisor, LLC’s motion for a preliminary injunction against Lotus & The Rooster Holdings Company and its owner, Salim Michel Makhlouf. Koala sought to stop Makhlouf from continuing to operate a home-insulation company called the Cozy Penguin, relying on post-termination restrictive covenants in its franchise agreements. Koala argued that Makhlouf’s new venture violated non-compete provisions spanning 100 miles (under Florida law) and 25 miles (under Virginia law). The court found Koala had not shown irreparable harm and that the covenants, as written and supported, were unenforceable under both state frameworks.
Relevant Background
In 2022, Makhlouf purchased three Koala franchise territories in Pennsylvania—Harrisburg, Carlisle, and Elizabethtown—through agreements governed by Florida law. He testified that he was attracted to Koala’s “semi-absentee” model, but soon encountered difficulties. According to Makhlouf, training was limited and did not cover essential equipment, while marketing support such as Google Business integration was minimal. His units never turned a profit.
In 2023, when another prospect abandoned neighboring territories, Makhlouf acquired two more (Lancaster and Brickerville) under Virginia-governed agreements. By late 2024, still facing financial losses, he asked Koala to pause his minimum royalty obligations. Koala declined but later offered a uniform amendment across the system to reduce royalties in exchange for franchisees releasing claims. Makhlouf refused, citing his perception of unequal bargaining power. In March 2025, Koala declared him in default for royalty nonpayment and inconsistent sales reporting, then terminated his agreements.
The franchise contracts required Makhlouf to stop using Koala marks and to refrain from competing within specified territories for up to three years. Instead, he rebranded his operation as the Cozy Penguin. He kept the same phone number, warehouse, and Google Business profile, and employed some of the same staff. While Koala alleged ongoing misuse of brand elements, the record reflected only two overlapping customers, an invoice referencing Koala, and a now-removed website photo of a worker in a Koala shirt. The Cozy Penguin’s website continued to display Google reviews originally posted during Koala operations, though testimony established that Google—not Makhlouf—controlled removal.
Decision
The court began by emphasizing the demanding standard for preliminary injunctions, citing Veterans Guardian VA Claim Consulting LLC v. Platkin, 133 F.4th 213, 218 (3d Cir. 2025), which requires a showing of both likelihood of success on the merits and irreparable harm. On both issues, the court found Koala’s record insufficient.
With respect to Koala’s claims of mark misuse, the court found no evidence of continuing harm. The use of Housecall Pro software was not a violation because the program was publicly available rather than proprietary. A stray invoice referencing Koala and a now-removed website photo of a worker in a Koala shirt were considered isolated incidents. Even the customer reviews that still referenced Koala on the Cozy Penguin’s website were controlled by Google’s algorithms, not by Makhlouf. On this record, the court concluded Koala had not shown irreparable harm, and at most might pursue damages for past instances.
On the non-compete provisions, the court evaluated the agreements separately under Florida and Virginia law.
Under Florida Statutes § 542.335, a franchisor must “plead and prove” a legitimate business interest to enforce a restrictive covenant. Koala argued that its franchise system depended on strict non-compete enforcement, and that allowing franchisees to operate competitors after termination would undermine the model. The court found this reasoning circular: Koala’s justification for the covenant was simply the need to enforce the covenant itself. As Judge Neary explained, “the necessity of enforcing a noncompete covenant cannot—by itself—be a legitimate business interest.” White v. Mederi Caretenders Visiting Servs. of Se. Fla., LLC, 226 So. 3d 774, 785 (Fla. 2017). Because Koala did not establish separate protectable interests—such as confidential methods or recurring customer goodwill—the court found the Florida-governed restraints unenforceable. The court also noted the evidence showed insulation customers typically required service only once every 15 to 20 years, making it difficult to argue for location-specific goodwill akin to storefront franchise cases.
Turning to Virginia, the court applied that state’s established framework, under which restrictive covenants are enforceable only if they are narrowly drawn in function, geographic scope, and duration. Preferred Sys. Sols., Inc. v. GP Consulting, LLC, 732 S.E.2d 676, 681 (Va. 2012). Courts often apply stricter scrutiny to employer-employee agreements than to buyer-seller agreements. Here, because Koala offered its franchise agreements on a “take-it-or-leave-it” basis and did not allow franchisees to negotiate individualized terms, the court found the stricter standard appropriate. Applying that test, the court found that while a three-year duration could be permissible (see Simmons v. Miller, 544 S.E.2d 666, 678 (Va. 2001)), Koala had not identified any legitimate business interest beyond avoiding competition, and it failed to provide evidence of franchise territory boundaries that would give meaning to its 25-mile restriction. Without that proof, the court found the covenants’ scope and function unreasonable under Virginia law.
Accordingly, the court denied Koala’s request for a preliminary injunction, finding that it had not shown either ongoing harm or enforceable non-compete provisions.
Looking Forward
This case illustrates how courts may view franchise non-competes skeptically when they are broadly worded and unsupported by evidence. Franchisors should consider:
- Drafting restrictive covenants that tie directly to legitimate and demonstrable business interests, such as confidential information or specific goodwill.
- Defining geographic scope with precision and keeping records (such as maps of territories) to demonstrate the boundaries that will matter in enforcement.
- Recognizing that unequal bargaining power between franchisors and franchisees may influence how strictly courts scrutinize restrictions.
- Adapting covenants to the business model: service businesses with infrequent, job-based customers may have a harder time showing protectable goodwill compared to storefront concepts.
Taken together, these lessons reflect the need for franchisors to review their non-compete provisions regularly and adapt them to both the realities of their business model and the shifting legal environment. With state legislatures and federal regulators continuing to revisit restrictive covenant law, careful drafting and documentation remain essential.
Thomas O’Connell is a Shareholder at Buchalter APC and Chair of the firm’s Franchise Practice Group. For questions about this article or media inquiries, you can contact Tom at toconnell@buchalter.com.
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