Organizations are built on the strength of their contracts. From a small family business to a large organization with international clients, contracts form the foundation upon which the company is built. Likewise, franchise agreements are in place to ensure the franchisee follows the guidelines established by the mature organization. Various clauses, however, might be deemed too restrictive.
A common clause in any franchise agreement is the non-competition covenant. These are often broad measures taken to prohibit the franchisee from engaging in competitive business activities against the franchisor or other franchisees. Generally, the restrictive covenant is tied to both a defined period of time as well as a defined geographic region.
It is not uncommon, however, for a non-competition covenant to be too strict in favoring the franchise over the franchisee. There are typically three elements that a court can examine to determine unreasonableness:
- A protectable interest: If the franchisor seeks to protect their proprietary interest – namely trade secrets and similar confidential information – the restrictive covenant might be considered reasonable. For example, the franchisor might be protective of a food recipe, a chemical solution or a process improvement over other similar companies. If the franchisor, conversely, is simply using the franchise agreement as a way to prevent future competition, it might be considered unreasonable.
- Temporal and special limits: As mentioned, non-competition covenants will almost always include limits on duration and regional restrictions. In general, the restrictive duration is around two years. Where a covenant can become problematic, however, is the scope of the geographic region. As a general rule, the courts will want to see the non-competition area limited to the actual market territory of the franchise in question. An area much larger than that might be considered unreasonable.
- Ambiguity: Many elements of the franchise agreement will be finely crafted to favor the established franchise. However, some businesses will attempt to use vague wording to further protect themselves. This unclear language can cause more harm than good, unfortunately, as ambiguity could be seen as a marker of an unreasonable non-competition restrictive covenant.
Franchise agreements and their non-competition restrictive covenants perform an important function for business success. Unfortunately, in an effort to be too over-protective, a franchisor might give the franchisee more ammunition to prove the terms of the agreement are unreasonable. It is wise to discuss your situation with an experienced business lawyer who can answer questions and provide legal guidance.