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Post-Expiration Covenants Not to Compete
by Mario Herman
Franchisees need to understand the impact of certain provisions
in their franchise agreement when the agreement is terminated. One of the
most important post-expiration provisions is the non-compete. Learn how to
deal with the non-compete issue.
I am contacted several times a week by persons posing the following
situation: “I purchased a franchise ten years ago and my franchise
agreement will expire this year. I'm concerned about a covenant
contained in the franchise agreement which provides that I cannot perform
the kinds of services offered by the franchised business for two years
within 25 miles of the geographic borders of my franchised territory. Since
this is the only kind of work I have done for the past 10 years, my chances
of engaging in some other kind of work are slim to none. Can they
enforce this provision?”
The provision at issue in the above hypothetical is known as a covenant
not to compete. Most standard franchise agreements contain
post-termination and post-expiration covenants not to compete. These
vary in geographical scope and time restraints. However, as with the
hypothetical above, even once a franchisee has completely performed under
the franchise agreement for its full term, due to such a covenant a
franchisee can feel trapped into renewing the franchise, perhaps on
unfavorable terms or with a franchisor that does not provide support in line
with the royalties and other ongoing fees the franchisee is required to pay.
As to the question of whether such post-expiration covenants not to
compete are enforceable, the answer is: it depends on many factors. In
some states, such as California, post-expiration covenants not to compete
are generally not enforceable. In the majority of states, however,
such provisions are generally enforceable as long as they are in writing,
reasonable in scope, in time and geographic area, and are reasonably
necessary to protect one or more legitimate business interests of the
franchisor.
Of course, the best time to deal with the inclusion of such a covenant in a
franchise agreement is before you execute the franchise agreement.
However, if you find yourself in a situation such as the one above, your
best course of action would be to contact an attorney experienced in
franchise law, and discuss the specifics of your situation. The
attorney will be able to research the laws of the state which govern the
franchise agreement, the laws of the state in which the franchise is
located, and consider all of this with the specific facts of your situation.
For example: does the franchisor have a legitimate business interest to
protect (i.e., is the franchisor still selling franchises), or is the
covenant to broad in time or geographic scope under the laws of the state(s)
at issue?
Mr. Herman based in Washington, D.C., represents franchisees domestically
and internationally in negotiation, mediation, arbitration, and litigation.
mherman@franchise-law.com
www.franchise-law.com
www.internationalfranchiselaw.com
202-686-2886 (ph)
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