Buying a franchise is a long-term commitment. As a franchisee, not only are you required to comply with the terms of your franchise agreement (and the operations manual) for the duration of your franchise, but you will likely be required to comply with various post-termination obligations as well. National franchisee lawyer Jeffrey M. Goldstein explains.
Common Post-Termination Obligations in Franchising
A post-termination obligation is a contractual requirement that applies after the contract ends. In the franchising context, franchise agreements routinely include several post-termination obligations for franchisees—and these obligations apply regardless of whether the franchise agreement expires or one party (i.e. the franchisor) terminates the agreement pre-expiration.
Common post-termination obligations in franchising include:
- Covenants Not to Compete (Non-Competes) – Most franchise agreements include non-competition covenants. These covenants prevent former franchisees from operating competing businesses (whether franchised or independent) within a specified geographic radius of their former franchised outlet for a defined period of time.
- Covenants Not to Solicit – Non-solicitation covenants are also common. These covenants prevent former franchisees from contacting the franchise’s customers to promote their new businesses (in the franchise model, the franchisor owns the customer list, not the franchisee).
- Confidentiality Obligations – Confidentiality obligations prevent former franchisees from using any information to which they had access as franchise owners (i.e. information contained in the franchisor’s operations manual). They also frequently prevent former franchisees from discussing or sharing any information about their experience within the franchise system.
- Return of IP Obligations – At the end of the franchise relationship, franchisees will generally be required to return all branded products and cease all use of the franchisor’s intellectual property (IP) going forward.
While there are some exceptions, post-termination obligations in franchising are generally enforceable. Most post-termination obligations serve a legitimate business purpose, and this means that they will withstand judicial scrutiny in most cases.
What Happens if You Don’t Comply?
So, what happens if you don’t comply? Franchisors will not hesitate to take legal action against their former franchisees when necessary. If you violate a non-compete or continue using your franchisor’s branded products post-termination, there is a good chance that you will get sued. Even if your franchise agreement contains a mandatory arbitration provision, this provision almost certainly includes a carve-out for enforcing your franchisor’s post-term legal rights.
With all of this in mind, prospective franchisees need to carefully review the post-termination obligations in their franchise agreements, and they should seek to negotiate protections as necessary. For existing franchisees who are preparing to exit, it is important to ensure that you have a clear understanding of the post-termination obligations that apply—and to make sure you comply with all enforceable obligations to avoid the risk of being sued.
Get Advice from National Franchisee Lawyer Jeffrey M. Goldstein
If you are thinking about buying a franchise, preparing to exit a franchise system or facing a post-termination dispute with your former franchisor, national franchisee lawyer Jeffrey M. Goldstein can help. To get started with a free and confidential consultation, call 202-293-3947 or request a call online today.
