Koala Insulation Lawsuit: Why the Non-Competes Failed

The Koala Insulation lawsuit is a federal franchise dispute in which the franchisor, Koala Insulation Franchisor, LLC, tried to shut down a competing insulation business launched by a former franchisee and lost. On September 10, 2025, Judge Keli M. Neary of the U.S. District Court for the Middle District of Pennsylvania denied Koala’s motion for a preliminary injunction, holding that its post-termination non-compete clauses were unenforceable under both Florida and Virginia law and that it had not shown irreparable harm. The underlying case remains pending, but the ruling let the former franchisee’s new company keep operating.

Who Sued Whom

Koala Insulation is a home insulation franchise system that began franchising in 2020 and is owned by Empower Brands, a multi-brand home services franchisor backed by MidOcean Partners. As of July 2025, the system reported 98 active franchises across 391 territories.¹

The defendant, Salim Michel Makhlouf, ran five Koala territories in central Pennsylvania through Lotus & the Rooster Holdings Company. He acquired Harrisburg, Carlisle, and Elizabethtown in 2022 under agreements governed by Florida law, then Lancaster and Brickerville in 2023 under agreements governed by Virginia law.¹

By late 2024, Makhlouf’s business was near bankruptcy. He asked Koala to suspend the minimum royalty payments he blamed for his distress. Koala instead offered a system-wide amendment in January 2025 reducing minimum royalties in exchange for a release of all claims against the company. Makhlouf refused to sign. After he defaulted on royalties and sales reporting, Koala terminated all five franchise agreements in March 2025.¹

Within weeks, Makhlouf launched a new insulation company, The Cozy Penguin, out of the same warehouse. He kept the same phone number, retained some of the same employees, continued using his existing Google Business profile, and served the same five markets.²

What Koala Asked the Court to Do

Koala sued on June 4, 2025, and moved for a preliminary injunction to close down The Cozy Penguin. It advanced two theories. First, that Makhlouf was still using Koala trademarks and proprietary systems, pointing to invoices referencing Koala, a website photo of a worker wearing a Koala t-shirt, and Google reviews mentioning the Koala name. Second, that the post-termination non-compete clauses in the franchise agreements barred him from running a competing insulation business at all.¹

The non-competes differed by year. The 2022 Florida-law agreements imposed a 100-mile restriction from any former territory or active Koala franchise. The 2023 Virginia-law agreements imposed a narrower 25-mile restriction. Both lasted up to three years after termination.¹

Why the Irreparable Harm Claim Failed

Judge Neary held an evidentiary hearing on July 14, 2025, and applied the standard four-factor preliminary injunction test, treating likelihood of success and irreparable harm as gateway factors Koala had to clear.

On harm, the court found no ongoing misuse of Koala’s trademarks or systems. The overlapping invoices and the t-shirt photo were isolated incidents, not a pattern. The lingering Google reviews that named Koala were controlled by Google, not Makhlouf. His use of Housecall Pro scheduling software wasn’t a violation, because that software is commercially available and not proprietary to Koala. The record showed only two overlapping customers between the two businesses.¹

Why the Florida Non-Competes Failed

For the three Florida-law territories, the court applied Florida Statutes § 542.335, which requires the party seeking enforcement to plead and prove a “legitimate business interest,” such as trade secrets or customer goodwill. Koala did neither.

Judge Neary rejected the argument that a franchise model is itself a legitimate business interest deserving of a non-compete, calling that “circular logic”: “The necessity of enforcing a noncompete covenant cannot — by itself — be a legitimate business interest.”¹

The court also found no protectable customer goodwill. Home insulation is a mobile, project-based service. Crews travel to homes, there is no storefront or foot traffic, and most customers need the work only once every fifteen to twenty years. Without meaningful repeat business, there were no “special facts over and above ordinary competition” to justify locking a former franchisee out of the market.¹

Why the Virginia Non-Competes Failed

For the two Virginia-law territories, the court applied heightened scrutiny. Virginia treats restrictions in arm’s-length business sales more leniently than those in employer-employee arrangements. Despite the franchise label, Judge Neary found the relationship here looked more like employment, because the agreements were offered on a take-it-or-leave-it basis with no room to negotiate. That triggered the stricter standard.¹

Two problems sank the 25-mile clause. First, Koala offered no legitimate business interest beyond preventing competition, which isn’t enough. Second, Koala couldn’t tell the court where the 25-mile boundary actually started. The restriction ran from the edge of active Koala franchise territories, but Koala never introduced evidence defining those boundaries. In the court’s words: “A 25-mile boundary is meaningless without knowing where to begin. But that is precisely the situation Makhlouf, and this court, is in.”¹

What the Ruling Did and Didn’t Decide

The September 2025 order denied only the preliminary injunction. It did not resolve the case on the merits, and the lawsuit remains pending. Judge Neary noted that Koala retains the right to pursue damages for any past unauthorized use of its trademarks. Makhlouf raised fraudulent inducement as an affirmative defense but did not file formal counterclaims based on the available record. The court was unpersuaded by his fraud arguments, noting he had “plenty of information in front of him” and that many of his support complaints were undercut by discretionary language in the franchise agreements. That skepticism didn’t matter to the injunction outcome, because Koala had to prove its own case first, and it didn’t. The Cozy Penguin continues to operate in central Pennsylvania.¹³

Why This Ruling Matters for Franchise Non-Competes

The decision landed during a period of increased scrutiny of franchise non-competes. In February 2025, the North American Securities Administrators Association issued a non-binding advisory urging state regulators to review post-term franchise non-competes for reasonableness, flagging overly broad geographic and durational restrictions. States including California, Illinois, Maryland, Minnesota, New York, and Washington have reportedly stepped up review of these provisions during franchise registration.⁴

Virginia went further. Effective July 1, 2026, its amended Retail Franchising Act prohibits post-termination non-compete provisions in franchise agreements, with a narrow exception for franchise resale situations.⁵

The federal picture is different. The FTC’s 2024 attempt to ban non-compete agreements nationwide was struck down by a Texas federal court in August 2024 and remains vacated. That rule had expressly excluded franchise agreements, treating the franchisor-franchisee relationship as business-to-business rather than employment.⁶

Judge Neary’s ruling cuts the other way. By treating a franchise agreement offered on take-it-or-leave-it terms as closer to an employment relationship for non-compete purposes, and by refusing to accept the franchise model itself as a legitimate interest, the decision gives former franchisees a template for challenging post-termination restrictions, and gives franchisors a warning that vague geographic boundaries and boilerplate justifications may not survive scrutiny.

1
U.S. District Court for the Middle District of Pennsylvania. Koala Insulation Franchisor, LLC v. Lotus & The Rooster Holdings Company, Case No. 1:25-cv-01008-KMN
2
Unhappy Franchisee. Empower Brands Franchises
3
Carlisle Area Chamber of Commerce. The Cozy Penguin
4
NASAA. NASAA Franchise Advisory on Post-Term Non-Competes
5
Faegre Drinker. Significant Amendments to Virginia Franchise Law Prohibit Post-Termination Noncompete Provisions in Franchise Agreements
6
American Bar Association – Franchise Law Journal. Blurring the Lines: How NASAA’s Franchise Noncompete Advisory Threatens Doctrinal Clarity