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Non-compete Provisions in Franchise Agreements
By David Simmons on November 13, 2013 at 3:35 PM

The United States District Court for the Eastern District of Pennsylvania recently enforced a non-compete clause in a franchise agreement and granted a franchisor a preliminary injunction against its former franchisee. The court noted that Pennsylvania law recognizes that a franchisor has a legitimate business interest that can be protected by a non-compete clause, and that there was adequate consideration for the non-compete clause in that the clause was entered into as a condition of the franchise relationship. The court then analyzed if the non-compete clause was “reasonably limited in both time and territory.” The non-compete clause at issue had a duration of two years and the geographic scope of the clause was limited to ten miles from the perimeter of the franchisee’s former territory or the territory of any other franchisee.

The court found that a two-year restriction was enough time for the franchisor to protect its legitimate business interest. The court further found that ten miles was a reasonable geographic limit because ten miles was the approximate distance a customer is willing to travel for the franchisor’s products. The court held that the franchisee was violating the non-compete clause by operating a business similar to franchisor’s business in the same location where the franchisee previously operated his franchise business. The court also noted that a franchisor’s business reputation is irreparably harmed when a former franchisee continues to operate at a franchise location after the expiration of a franchise agreement in violation of a non-compete clause.

Non-compete clauses can be a powerful way for franchisors to protect their legitimate business interests and to prevent former franchisees, who have access to a franchisor’s confidential and proprietary information, including product preparation, assembly techniques, sales techniques, merchandising and display techniques, and business and management practices, from infringing upon those legitimate business interests. A franchisor, however, should be cautious when including non-compete clauses in franchise agreements because each state’s laws are different when enforcing such provisions. It is important that franchisors consult with their legal counsel to determine the enforceability of any non-compete clauses contained in franchise agreements, which would include the state’s law regarding reasonableness of the duration and geographic scope of the non-compete clause. The case is Soft Pretzel Franchise Systems, Inc. v. Taralli, Inc., Civil Action No. 13-3790, 2013 WL 5525015 (E.D. Pa. October 4, 2013).

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