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Post-Expiration Covenants Not to Compete

by Mario Herman

Franchisees need to understand the impact of certain provisions in their franchise agreement when the agreement is terminated. One of the most important post-expiration provisions is the non-compete. Learn how to deal with the non-compete issue.

I am contacted several times a week by persons posing the following situation:  I purchased a franchise ten years ago and my franchise agreement will expire this year.  I'm concerned about a covenant contained in the franchise agreement which provides that I cannot perform the kinds of services offered by the franchised business for two years within 25 miles of the geographic borders of my franchised territory. Since this is the only kind of work I have done for the past 10 years, my chances of engaging in some other kind of work are slim to none.  Can they enforce this provision?

The provision at issue in the above hypothetical is known as a covenant not to compete.  Most standard franchise agreements contain post-termination and post-expiration covenants not to compete.  These vary in geographical scope and time restraints.  However, as with the hypothetical above, even once a franchisee has completely performed under the franchise agreement for its full term, due to such a covenant a franchisee can feel trapped into renewing the franchise, perhaps on unfavorable terms or with a franchisor that does not provide support in line with the royalties and other ongoing fees the franchisee is required to pay.

As to the question of whether such post-expiration covenants not to compete are enforceable, the answer is: it depends on many factors.  In some states, such as California, post-expiration covenants not to compete are generally not enforceable.  In the majority of states, however, such provisions are generally enforceable as long as they are in writing, reasonable in scope, in time and geographic area, and are reasonably necessary to protect one or more legitimate business interests of the franchisor.   

Of course, the best time to deal with the inclusion of such a covenant in a franchise agreement is before you execute the franchise agreement.  However, if you find yourself in a situation such as the one above, your best course of action would be to contact an attorney experienced in franchise law, and discuss the specifics of your situation.  The attorney will be able to research the laws of the state which govern the franchise agreement, the laws of the state in which the franchise is located, and consider all of this with the specific facts of your situation.  For example: does the franchisor have a legitimate business interest to protect (i.e., is the franchisor still selling franchises), or is the covenant to broad in time or geographic scope under the laws of the state(s) at issue? 

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

202-686-2886 (ph)


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