Operators of N.J. Philly-style soft pretzel business must face claims they violated franchise agreement

A husband and wife who operate a soft pretzel store in South Jersey must

face claims that they violated a franchise agreement to operate their business venture, a federal judge in Philadelphia has ruled.

U.S. District Judge R. Barclay Surrick, sitting in the Eastern District of Pennsylvania, denied a motion by defendants Steven M. Pisasale, his wife, Lisa A. Pisasale, and their business, Taralli Inc., to dismiss a case initiated by Soft Pretzel Franchise Systems Inc.

The plaintiff, a franchisor of Philly Pretzel Factory, which is a retail business offering traditional South Philadelphia-style soft pretzels and other authorized products, initiated a complaint seeking preliminary injunctive relief to enforce a no-compete covenant and an equipment buy-back provision included in parties’ franchise agreement.

The defendants entered into the franchise agreement with the plaintiff in late December 2006 that would allow the couple to operate a Philly Pretzel Factory location in Marlton, N.J., which is located about 20 minutes east of Philadelphia.

The plaintiff claims that the defendants violated the terms of their franchise agreement by failing to report the franchise’s gross sales, and failing to pay royalty, advertising and legal fees.

The plaintiff terminated the franchise agreement in early February of this year, about a month after the plaintiff sent the couple a notice of default giving the couple 15 days to cure their monetary default, the record shows.

After receiving notice that the franchise agreement was being terminated, the defendants filed a petition in the Chancery Division of the Burlington County (N.J.) Superior Court seeking a judge’s order to prevent the termination of the agreement.

Superior Court Judge Karen L. Suter sided with the franchisor and allowed the termination of the franchise agreement to proceed, ruling the termination effective June 14.

Following a trial court hearing in New Jersey, the couple’s attorney informed the plaintiff that his clients would continue to operate a pretzel shop at its current location under a different name, after which the plaintiff’s lawyers responded by maintaining that that would violate the franchise agreement’s no-compete clause, according to the record.

The plaintiff also told the defendants it would exercise its right, pursuant to the franchise agreement, to purchase the couple’s equipment, which included a proprietary pretzel-stringing machine.

To date, the defendants have refused to sell the equipment and they continue to operate their business in Marlton.

The plaintiffs went on to institute arbitration proceedings seeking $60,000 in damages along with injunctive relief.

As for the federal court action, the judge was tasked with determining if the matter belonged in the U.S. District Court in Philadelphia.

While both parties concede they are citizens of different states, which satisfies diversity jurisdiction, the two sides differed over the amount in controversy; $75,000 triggers federal court oversight.

In this case, the defendants argued that the amount in controversy calculation could not include the monetary damages claimed by the plaintiffs in the arbitration proceeding since the damages were not the subject of the federal preliminary injunctive motion, the judicial memorandum states.

The plaintiffs counter-argued that the federal court must look to the value of the object being litigated in arbitration to arrive at the appropriate amount in controversy.

The plaintiffs in the case request preliminary injunctive relief pending the outcome of the arbitration proceeding.

Ultimately, Surrick, the federal judge, ruled that U.S. District Court has jurisdiction over the subject matter of the suit because the amount in controversy requirement has been satisfied.

Surrick wrote that the court could take jurisdiction over the case at this juncture without making a determination as to the value of the damages in question or other injunctive relief requested by the plaintiff.

The judge simply wrote that the franchise fees, equipment costs, the estimated unpaid royalties, and other costs far exceed the $75,000 jurisdictional threshold for federal court.