Despite arguably conflicting terms in a franchise agreement, a franchisor could enforce a non-compete provision whenever the agreement ended, whether by termination or expiration. An arbitrator reached that conclusion by harmonizing two provisions in the franchise agreement that referenced a non-compete obligation — one that referenced termination and one that referenced both termination and expiration. This was a reasonable interpretation of the contract, according to the Maryland federal district court that found no basis to upset the arbitration award.
The franchisee had argued that the limitation on competition “for a period of 24 months after termination of this Agreement” was triggered only if a party terminated the franchise agreement and did not apply if the franchise agreement simply expired by its own terms, as was the case here. The arbitrator, however, found that another provision that outlined the franchisee’s post-termination obligations — regardless of the paragraph’s title “Effect of Termination” — stated that in the event of termination or expiration of the agreement, the franchisee was required to comply with the non-compete provision. The arbitrator then enforced the non-competition agreement for 24 months after the franchisee first complied with it rather than the date that the franchise agreement expired because the franchisee had continued to operate the franchise for 20 months after the agreement expired. This ensured that the franchisee was subject to the 24-month non-compete the parties had originally agreed to, rather than only four months left from the original date of the agreement’s expiration.
This opinion demonstrates the importance of careful drafting of non-compete clauses to avoid legal challenges and to ensure that former franchisees do not benefit immediately from the knowledge and clientele they acquired during the franchise relationship. A non-compete provision must be drafted to comply with state laws and contemplate potential ways a franchise relationship might end. The opinion also demonstrates the difficulty of overturning an arbitrator’s decision, which is usually entitled to great deference.
The decision is Frye v. Wild Bird Centers of America, Inc., No. CV TDC-16-3216, 2017 WL 605285 (D. Md. February 14, 2017), which can be found here.
Greensfelder attorneys are knowledgeable in the franchise and employment laws of multiple jurisdictions. If you have any questions about this article or issues surrounding a non-compete provision, please contact the authors of this article or Greensfelder’s Franchising & Distribution Group attorneys.