In Franchise Relationships, Certain Types of Customer Restrictions can Violate Franchisees’ Legal Rights

While territorial restrictions tend to be more common these days, some franchisors still include provisions in their franchise agreements that restrict franchisees’ rights to market and sell to certain customers. Franchisors in certain industries like these provisions for a number of different reasons, few of which (if any) ultimately have franchisees’ best interests in mind.

While some types of customer restrictions are lawful, others are clear violations of state and federal antitrust laws. Others still can violate laws that are intended specifically to protect parties in inferior bargaining positions (such as franchisees). At the Goldstein Law Firm, we represent franchisees nationwide in both in-term and post-termination disputes involving customer restrictions imposed by their franchisors and other parties. If your franchise agreement contains a customer restriction, or if your business is being harmed by an agreement to divide the market, we encourage you to contact us for a free consultation today.

Anticompetitive Customer Restrictions

In legal terms, customer restrictions can broadly fall into one of two categories. They can either be “vertical” restrictions (e.g., imposed by a franchisor on a franchisee), or “horizontal” restrictions (e.g., agreements among franchisees to divide the market).

Franchisor-Imposed Restrictions

Vertical customer restrictions in franchise agreements will often be enforceable. Similar to exclusive territories, customer restrictions can be legitimate tools for incentivizing prospective franchisees to consider franchise opportunities. However, vertical customer restrictions can also violate antitrust laws – particularly when they are enforced with the intent to divide the market and avoid the price-controlling effects of free competition.

Restrictions Agreed Upon Between Franchisees

Horizontal customer restrictions, however, are considered per se illegal. This means that they are illegal as a matter of law, regardless of whether they can be proven to have any negative effects on consumers. In some cases, certain franchisees may agree to divide their market (either alone or in concert with the franchisor), benefitting from this illegal practice to the detriment of other franchisees.

Non-Solicitation and Non-Competition Covenants

Non-solicitation covenants and non-competition covenants are common forms of customer restrictions as well. While these do not generally raise antitrust issues, they can be unenforceable for other reasons.

For example, non-competition covenants in franchise agreements must be reasonably limited and serve a legitimate interest of the franchisor. If the duration is longer, the geographic scope is wider or the type of conduct prohibited is broader than necessary, the clause may be unenforceable. While the courts in some states will revise (or “blue pencil”) a non-competition clause to create an enforceable restriction, courts in other states void unenforceable non-competition clauses entirely.

About the Goldstein Law Firm

The Goldstein Law Firm is a national franchise law firm located in Washington, D.C. The firm’s founder, franchise attorney Jeffrey M. Goldstein, has more than 30 years of experience fighting on behalf of franchisees in arbitration, litigation and other dispute resolution venues across the country. Representing exclusively franchisees and dealers, the Goldstein Law Firm is committed to holding franchisors accountable for unlawful practices while ensuring that their franchisees receive the opportunities to which they are entitled under the law.

Schedule a Free Consultation with Franchise Attorney Jeffrey M. Goldstein

For more information about unlawful customer restrictions in franchising, contact us today to arrange a free, confidential consultation with franchise attorney Jeffrey M. Goldstein. Call 202-293-3947 or send us a message online to learn more about your rights today.

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Phone: 202-293-3947
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