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Covenants Not To Compete: Beware of the Legalese!

By Mario Herman, Esq.

Prospective franchisees need competent legal counsel to advise them before executing their franchise agreement. Franchise contracts include legal terminology that can fool the layperson.

Be careful what you sign at the beginning of a franchise relationship, it could come back to bite you.  Most franchisors include covenants not to compete in their franchise agreements.  Moreover, most franchisors are now including a clause wherein the new franchisee agrees that the time and geographical scope of the covenant not to compete are reasonable and that a violation thereof would cause irreparable harm to the franchisor.  This is something the new franchisee, in reality, has no way of making a reasonable assessment of prior to the opening of the subject franchise.  Phrases like this are most often dismissed by unrepresented prospective franchisees as mere “legalese.”  And, in fact they are – but beware – it is dangerous legalese with teeth – at least in New York. 

On March 19, 2012 the United States Court of Appeals, Second Circuit issued a ruling in the matter of Singas Famous Pizza Brands Corp. v. New York Adver. LLC, 11-1038-CV, 2012 WL 899231 (2d Cir. Mar. 19, 2012) (“Singas”), and affirmed the district court’s granting of a preliminary injunction against a former franchisee and in favor of the franchisor on a ten-mile post-term covenant not to compete.  The court of Appeals concluded that the ten mile geographic restriction in the Franchise Agreement was reasonably calculated towards furthering the franchisor’s legitimate interests in protecting its “knowledge and reputation” as well as its “customer good will.” The Court further concluded that the franchisor would suffer irreparable harm if defendants were allowed to continue operating the competing restaurant in violation of the restrictive covenant.

In so doing, the Court found that the defendants expressly agreed in the Franchise Agreement that the ten-mile geographic restriction was “fair and reasonable,” that the restriction was “reasonable and necessary” for the protection of the proprietary interest of the plaintiff,  and that “violation of [the restriction] would cause substantial and irreparable injury to the plaintiff.  The Court noted that it had previously held in Ticor Title, 173 F.3d at 69 that such contract provisions “might arguably be viewed as an admission ... that plaintiff will suffer irreparable harm were [defendant] to breach the contract's non-compete provision.

Bottom line: have the legalese reviewed by someone who speaks legalese before you sign!

Mr. Herman based in Washington, D.C., represents franchisees domestically and internationally negotiation, mediation, arbitration, and litigation.

202-686-2886 (ph)

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