ASK LAWYERS DOT INFO

Franchise Agreements and Covenants Not To Compete

Legal Article Guide

By: Lance Winslow

When there is a dispute in a franchise agreement between a franchisor and a franchisee, often the franchisee will assume that they may merely stop paying royalties, change the name on the sign of their franchised outlet and immediately go into competition with the franchisor. It is one of the most common legal disputes and franchisee today.

Therefore each and every franchisor must be careful to protect their proprietary knowledge and know-how with covenants not to compete in their franchisee agreements. In my franchisee company I had determined that this was the most single important issue in the entire franchise agreement. Below you will find a clause called covenants not to compete that I inserted in every franchise agreement;

3.20 Covenants Not To Compete

Franchisee specifically acknowledges that, pursuant to the Franchise Agreement, Franchisee will receive valuable specialized and confidential information, including information regarding the operational, sales, promotional and marketing methods and techniques of Franchisors and the System. Franchisee agrees not to copy, download to internet, intranet, modem, fax, e-mail, mail or send any confidential material or divulge any material directly or indirectly to any other person or enterprise outside of this System. Franchisees agree that, during the term of the Franchise Agreement, except as otherwise approved in writing by Franchisor, Franchisee must not, either directly or indirectly, divert or attempt to divert any business to any competitor, by direct or indirect inducement or otherwise, or do or perform, directly or indirectly, any other act injurious or prejudicial to the goodwill associated with the Franchisor’s proprietary marks and System.

Franchisee specifically agrees that, except as otherwise approved in writing by Franchisor, Franchisee will not, during the term of the Franchise Agreement and for a continuous uninterrupted two (2) year period commencing upon the expiration or termination of the Franchise Agreement, regardless of the cause of termination, either directly or indirectly for Franchisee or on behalf of or in conjunction with any other person, partnership, corporation or limited liability company, own, maintain, engage in, participate in or have any interest in the operation of any business that offers products, that are essentially the same as, or substantially similar to, the products, Core Services or Optional Services that are part of The Car Wash Guys or the WASH GUY.COM System, a predecessor, sister or co-branding company of Franchisors except other franchises offered by Franchisor (any business carrying on such activities, being called a “Competing Business”) which is, or is intended to be, located anywhere in the country of the Franchisee’s Marketing Area.

Franchisee specifically agrees not to compete with any other franchisees or establish customers in franchisee’s respective Marketing Areas or within thirty-five (35) miles for two (2) years from expiration or termination of the Franchise Agreement.

These covenants against competition will not apply to ownership by Franchisee of less than a five percent (5%) beneficial interest in the outstanding equity securities of any publicly held corporation even if that corporation is in competition with Franchisor.

Franchisee specifically agrees that during the term of the Franchise Agreement and for a continuous uninterrupted two (2) year period commencing upon the expiration or termination of the Franchise Agreement, regardless of the cause of termination, Franchisee will not, either directly or indirectly, on Franchisee’s own behalf or in the service or on behalf of others, solicit, divert, or hire away, or attempt to solicit, divert, or hire away, to the Franchised Business or any Competing Business, any person employed by the Franchisor, whether or not such employee is a full-time or temporary employee of the Franchisor, whether or not such employment was pursuant to written agreement and whether or not such mployment was for a determined period or was “at will.” Similarly, Franchisee will not solicit, divert, or hire away, or attempt to solicit, divert, or hire away, to the Franchised Business or any Competing Business, any such employee of any licensee or Franchisee of the Franchisor, without the prior written consent of such licensee or Franchisee.

Franchisee expressly agrees that the existence of any claims Franchisee may have will not constitute a defense to the enforcement by Franchisor of the covenants described above. Franchisee will pay all costs and expenses (including attorneys’ fees) incurred by Franchisor and Franchisee in connection with the enforcement of these covenants.

Franchisee acknowledges that any violation of the covenants not to compete would result in irreparable injury to Franchisor for which no adequate remedy at law may be available and Franchisee accordingly consents to the issuance of an injunction prohibiting any conduct by Franchisee in violation of the terms of the covenants not to compete.

Franchisee agrees that each of the foregoing covenants will be constructed as independent of any other covenant or provision. If all, parts or any portion of a covenant in the Franchise Agreement is held unreasonable or unenforceable by a court or agency having valid jurisdiction in an unappealed final decision to which Franchisor is a party, Franchisee expressly agrees to be bound by any lesser covenant subsumed within the terms of such covenant that imposes the maximum duty permitted by law, as if the resulting covenant were separately stated in and made a part of this item.

Each of these covenants is a separate and independent covenant in each of the separate countries and states in the United States in which Franchisor transacts business. To the extent that any such covenant may be determined to be judicially unenforceable in any country or state, that covenant will not be affected with respect to any other country or state.

Franchisee acknowledges that upon violation of any of these covenants, it will be difficult to determine the resulting damages to the Franchisor and, in addition to any other remedies it may have, Franchisor will be entitled to make application in a court of competent jurisdiction for temporary and permanent injunctive relief without the necessity of proving actual damages. When actual damages are tabulated, Franchisee agrees to pay those damages plus attorneys’ fees incurred by both Franchisee and Franchisor immediately. If these monies are not paid within thirty (30) days, they will at that time begin accruing interest at the rate of twelve percent (12%) per annum which Franchisee is also obligated to pay.

If Franchisee is operating as a partnership, corporation, limited liability company or other legal entity, each partner, shareholder, member or other owner of Franchisee will execute and deliver in favor of Franchisor a non-compete covenant in form and substance satisfactory to Franchisor containing provisions substantially the same as those contained in this Section 3.20.

- - - - - - - - - -

It is very important that you find inexperienced and knowledgeable franchising attorney and you discussed this exact issue with them to protect your franchisee company. As a franchisor you must know this information and understand it. It is worth your time to pay an attorney to explain it all to you. Consider all this in 2006.

Lance Winslow - Online Think Tank forum board. If you have innovative thoughts and unique perspectives, come think with Lance; www.WorldThinkTank.net/wttbbs/

Bookmark & Share Articles:

Leave a comment to Franchise Agreements and Covenants Not To Compete

No Responses to Franchise Agreements and Covenants Not To Compete

Average Rating: (From 0 Votes)

Request a Case Evaluation with a Local Attorney

Regardless of your legal situation, a local attorney can help explain the legal process involved and answer any questions you have along the way. Fill out the form below for your case evaluation with a local attorney.

 RSS Legal Guide Feed

Email to a friend
Print this page
View in PDF format

Latest Legal Guide

TOLL FREE HELP LINES:

- Bankruptcy (866) 233-3092
- Divorce (866) 233-3093
- Injury (866) 233-3098
- DUI (866) 233-3099
- Criminal Defense
  (866) 233-3094