Franchise Non-Compete Agreements: Mostly Unenforceable As Written

franchise non-compete agreements
Share on facebook
Share on twitter
Share on linkedin
Share on pinterest
Share on email

For the past several decades, courts in many jurisdictions have handed out injunctions like candy in franchise non-compete cases. This is, of course, dead wrong. Here is a great example from my case files. Joe owns five McDonald’s locations in a high traffic area. Joe decides not to renew his franchise agreement. He figures he can go start some other food business. But according to his franchise non-compete agreement, Joe is prohibited from working in, owning or operating ANY quick service food establishment for three years from the date of termination. According to the McDonald’s franchise agreement, that includes Wendy’s, Chipotle, Smoothie King, Subway, Starbucks and more. Let’s run this through the legitimate business interest framework.

Suppose Joe goes across the street and starts a BurgerFi. McDonald’s will scream bloody murder. Joe signed a contract! And now, he’s across the street running a burger place, just like Mc- Donald’s! But how does this implicate any legitimate business interest and threaten unfair competition? Answer: It doesn’t.

CONFIDENTIAL INFORMATION

Confidential information only constitutes a legitimate business interest when that information is valuable, truly confidential, unique to the holder, and the defendant (Joe) could use that information to gain an unfair advantage. Let’s assume that Joe had access to certain confidential information about methods, strategy, finances, etc.

Numerous other quick service restaurant chains have the same type of general/ strategic market data.Numerous other quick service restaurant chains have the same type of information about methods, processes, etc.

If McDonald’s has specific financial data related to, e.g., its sales in various markets, that information might be valuable to someone running a McDonald’s in the same exact location, but that information is not useful for somebody running a BurgerFi up the street. BurgerFi might be a burger joint, but it is a completely different product, market level, supply chain, and target demographic. Information about running a McDonald’s is largely irrelevant to someone running a BurgerFi. And it’s even more irrelevant for somebody running a different type of quick service food establishment (e.g., a Starbucks).

CUSTOMER RELATIONSHIPS & GOODWILL

McDonald’s cannot plausibly contend that Joe could convert walk-in, retail McDonald’s customers to BurgerFi customers. Even if McDonald’s magically could make such a showing, they cannot demonstrate that it involves unfair competition or any legitimate business interest. This is all about market realities.

In this context, the market dictates that there are no protectable customer relationships. Customers who want McDonald’s will still get McDonald’s. Customers who want BurgerFi will get BurgerFi. The fact that Joe switches chains does not deprive McDonald’s of any substantial, special, protectable customer relationships. It is not unfairly harming McDonald’s customer goodwill. These are walk-in fast food customers. There are no contracts. These aren’t high-dollar transactions. The relationships are hardly exclusive. Customers are not making these purchasing decisions based on goodwill. Customers consume lots of food and beverages across multiple vendors. It is a free for all. The market dynamics do not suggest the existence of any protectable customer relationships.

TRAINING

Any claimed interest in training is bogus unless the training is truly extraordinary and goes beyond the training available elsewhere in the industry. Lots of companies like to pretend that they have unique, cutting edge training. But most of the time, there is nothing unique or extraordinary about a company’s training. I have seen this play out in litigation dozens of times. Most corporate training programs are built on other well-established, commercially available training programs. That destroys any claim that the training is extraordinary.

THE UPSHOT OF ALL THIS

The only legitimate restriction here would be a post-term restriction that prohibited Joe from operating a burger joint at the exact same location. But since McDonald’s likely owns the property, that is impossible. If Joe goes anywhere else – even literally across the street – and opens another burger joint, that does not threaten unfair competition. That does not infringe upon Mc- Donald’s confidential information, customer relationships or any interest in “extraordinary” training.

But it doesn’t stop there. As noted above, McDonald’s considers dozens of restaurants, coffee shops and convenience stores to be competitive businesses. It should be abundantly clear by now, McDonald’s is not concerned about preventing unfair competition. McDonald’s is using franchise noncompete agreements to (1) prevent ordinary competition and (2) prevent franchisees from leaving the company by limiting their post-term business options.

McDonald’s is just one example out of hundreds, if not thousands.

Bottom line: The vast majority of large franchises use incredibly broad franchise non-compete agreements that are unenforceable as written and not necessary to protect any legitimate business interest. This is fertile territory for a declaratory judgment action. Jonathan Pollard

TRENDING ARTICLES

Leave a Reply

Your email address will not be published. Required fields are marked *

Subscribe to Our Newsletter

You have successfully subscribed!

X