Covenants against competition or covenants not-to-compete are included in almost every franchise agreement. Disputes regarding the validity and enforceability of relevant post-term covenants usually arise when distribution, dealership or franchise agreements come to an end, either through a termination or expiration. Although courts are quick to recognize that restrictions on trade are spiritually disfavored under the US legal and economic systems, many of these same courts do not hesitate to grant a franchisor’s request to enforce one of these covenants when a franchisee decides to compete with its former franchisor at the end of the franchise term.
From a litigation point of view, the franchisee’s motivation for his post-termination conduct can play a significant role in whether a court views the post-term covenant to have been violated. In a recent case, Handel’s Homemade Ice Cream & Yogurt v. Moonlight 101, Inc., United States Court of Appeals, 2019 WL 1466968 (6th Cir. April 1, 2019), the franchisee did himself no favors in this regard. In Handel’s, the Defendant, a Handel’s ice-cream franchisee, was on the verge of purchasing a second Handel’s franchise in addition to the one it had originally purchased and had been operating. During negotiations with the franchisor, the franchisee allegedly “informed Handel’s that he did not think he should have to pay a separate franchise fee for the new location, did not wish to sign another franchise agreement, and refused to provide a final lease of the proposed Gaslamp Location to Handel’s.” Consequently, Handel’s did not approve the opening of the second franchise location. The franchisee, after refusing to sign a new franchise agreement, then, without the franchisor, executed a lease and proceeded with plans to open an independent ice-cream parlor at the proposed second franchise location.
In affirming the federal district court’s granting of the franchisor’s motion for preliminary injunction to shut down the franchisee’s operation of the second independently-operated location, the US Sixth Circuit Court of Appeals held, inter alia, that the post-term covenant was geographically and temporally reasonable, and that the franchisee’s operations caused irreparable harm to the franchisor.