Feb 21, 2018 - Blog by |

You have spent the last five years (or longer) learning the business and building a reputation in your local community. Your franchise agreement is about to expire, and you want to begin operating independently. There’s only one problem: Your franchise agreement includes a non-competition covenant which states that you can’t operate a similar business in your geographic area for the next several years. So, this begs the question, “Is the non-competition clause in your franchise agreement enforceable?”

As a General Rule, Non-Competition Clauses Are Enforceable

In the context of business-to-business contracts, the general rule is that non-competition clauses are legally enforceable. This is an acknowledgment of the fact that there are certain circumstances in which a company can have a legitimate business interest in preventing competition. For example, if a company supplies information about a proprietary business system and allows someone else to use its brand to grow a business (sound familiar?), it may be fair for that company to prevent competition for a limited period of time.

Possible Exceptions to the Enforceability of Franchise Agreement Non-Competes

However, the protections available to franchisors through the use of non-competition covenants are not absolute. For example, franchisees may be able to avoid (or limit) their competitive restrictions based upon:

1. State Law Prohibition on Enforceability

The laws regarding enforceability of non-compete provisions vary from state to state. California’s law is one of the least favorable to companies seeking enforcement, as it flatly prohibits competitive restrictions in certain types of relationships. While the franchise relationship presents some unique issues, if your agreement is governed by California law, you may have an argument for non-enforcement.

2. Unreasonable Competitive Restrictions

In all states, in order to be enforceable, a non-competition covenant must serve a legitimate business interest. If your non-compete is overly-broad in scope, geographic reach or duration, you may be able to challenge its enforceability.

3. Poor Contract Drafting

Sometimes, non-competition clauses do not actually say what franchisors want them to say. Like many other franchise agreement provisions, non-competition clauses are often poorly-worded, and this may provide an argument for exiting your franchise without competitive restrictions.

4. Void Franchise Agreement

Some states have franchise-specific laws that will void franchise agreements under certain circumstances. If your franchise agreement is deemed void, you will not be subject to its post-termination restrictions.

5. Negotiated Settlement

Finally, even if your franchise agreement’s non-compete clause is fully enforceable, you may be able to protect your right to operate by negotiating a settlement with your franchisor. Do you have potential claims against your franchisor that could provide leverage in settlement negotiations? This can be an effective strategy under the right circumstances, and it is an option that should not be overlooked.

Need Franchise Legal Advice? Schedule a Free Initial Consultation

If you would like help evaluating your options for exiting your franchise, we encourage you to contact us for a free initial consultation. Franchise attorney Jeffrey M. Goldstein has over 30 years of experience representing franchisees in all industries across the United States and worldwide. You can contact us by phone or online, so call (202) 293-3947 or tell us how we can help online now.

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