A franchisee’s franchise agreement will invariably appear to impose competitive restrictions.  These restrictions, typically in the form of a covenant not to compete, will limit competitive activity during the term and, in most cases, for a period of time after the termination and expiration of the franchise agreement.

The franchisee must examine this covenant carefully; the impact of an overly broad covenant not to compete can be financially devastating.  A restricted franchisee can find himself unable to earn a living in the business in which he is most experienced.

By law, a covenant not to compete must be reasonable both temporally and geographically; that is, its duration and area must be limited. Typically, a legitimate covenant will be for a term of months or perhaps 2 or 3 years, and be contained within a radius of blocks or miles from your location and the location of other franchisees. There are many cases which establish parameters for how long a term is enforceable and whether an area is too large. Additionally, such a covenant must serve a legitimate business purpose for the franchisor; that is, it cannot be imposed upon the franchisee for no reason.

Our firm has been successful in contesting franchisor claims of enforcement of covenants not to compete.  In one case, our client had 15 years of experience in a business similar to the franchised business prior to being a franchisee; we argued that there was no legitimate purpose for the franchisor to restrict the franchisee from competing post-franchise.  The franchisee had not obtained any trade secrets or proprietary secrets in the course of his franchise relationship that would have enabled him to compete; his experience already gave him the ability to compete.  The matter was resolved favorably.

Your franchise agreement should be reviewed carefully to determine the affect of any covenants not to compete.  There may be ways in which you can challenge any attempt to enforce these provisions.

Contact Terrence M. Dunn at tmd@ed-lawfirm.com