Saturday, October 9, 2010
Franchise Non-Compete Agreement Enforceable By Sylvan Learning Center (Sylvan Learning v. Gulf Coast Ed.)
It has been a while since I've written on non-compete covenants in the context of franchise agreements. The overriding protectable interest that franchisors assert to justify such covenants is "goodwill" - which is the notion that a business's value as a whole is greater than the sum of its parts.
Other common protectable interests - confidential information, long-term clients - may not directly apply to franchise operations. What a franchisor seeks to protect against is the ability of a franchisee to learn its system and simply replicate a business model under a different name.
I've been an advocate of employing non-solicitation clauses, rather than non-compete agreements, for sales employees. The opposite is true with many retail franchise operators. Non-solicitation covenants probably don't protect the franchisor enough. Given the nature of consumer-driven retail businesses, location, advertising and a unified system of operations often bring in business more than direct solicitation of customers. In this sense, it is very common to see non-compete agreements against terminated franchisees enforced regularly.
A good example of this concerned a recent dispute over the operation of a Sylvan Learning Center. Joe Jezewski's franchise and license agreement with Sylvan Learning was terminated, and he immediately began operating a competing educational center in the same store location with the same phone number and same method of conducting business. A district court in Alabama, applying Maryland law, had little trouble issuing a preliminary injunction against Jezewski and enforcing a 20-mile non-compete agreement.
Of interest was the way Sylvan presented the non-compete. It was very careful to point out what Jezewski could do and it emphasized how limited in scope the restriction actually was. Because courts always will consider the potential hardship to one bound by a covenant, plaintiffs - whether employers or franchisors - should always make as part of their case an affirmative showing that they are not seeking to restrict too much.
Also, the court was careful to note that failing to enforce a non-compete against Jezewski would undermine the franchise system, which is built on permitting franchisees to exploit someone else's investment in branding, advertising, and development of goodwill. In this respect, it is much more difficult for franchisees to claim that restrictions are overbroad on hypertechnical grounds or to assert that the covenants do not protect a legitimate interest.
Court: United States District Court for the Middle District of Alabama
Opinion Date: 10/6/10
Cite: Sylvan Learning, Inc. v. Gulf Coast Education, Inc., 2010 U.S. Dist. LEXIS 107160 (M.D. Ala. Oct. 6, 2010)