The interpretation and enforcement of non-competition covenants is always a hot button issue and varies from state to state. In Our Town v. Michael Rousseau and Jennifer Rousseau, the United States District Court for the Middle District of Pennsylvania (“Court”) granted a temporary restraining order filed by a franchisor, Our Town, against its former franchisees to prohibit them from operating a competing business in direct violation of the terms of the franchise agreement.
Here, on the same day that the former franchisees sent a letter to Our Town in November 2016 to inform Our Town that it was terminating the franchise relationship, Our Town learned that the former franchisees were operating a similar publication called “Home Town” in the same geographical region as its former franchised business.
As such, Our Town filed for a temporary restraining order to prevent such competitive conduct because it violation of the franchise agreement. In interpreting non-competition covenants in franchise relationships in Pennsylvania, courts look to the rule in Piercing Pagoda, Inc. v. Hoffner, which provides that non-competition clauses will be upheld in Pennsylvania if the clause relates to a contract for the sale of goodwill or other proprietary interests, the clause is supported by sufficient consideration, and the restriction is reasonably limited in time and scope. The Court first determined that the covenant is ancillary to sale of a business interest (the Our Town franchise and its goodwill) and that the $3,800 franchise fee was sufficient consideration.
Next, the Court analyzed the language of the franchise agreement in connection with the Piercing Pagoda standard, which provided that the former franchisees could not operate any business that is similar to the former franchised business for a period of three years after the termination or expiration of the franchise agreement either at the franchise location or within fifty miles of any Our Town franchised location. Further, the franchise agreement provided Our Town with the right to seek injunctive relief for violations of the non-competition covenant. The Court held that these restrictions were reasonable because other courts in Pennsylvania had also held three-year time limits and 50-mile geographical limits to be reasonable. However, please note that the Court did not specifically rule on whether the entire geographical restriction was reasonable; only that part which applies to the operation of a competing business in the same location as the former franchised business. As such, in granting the temporary restraining order, the Court held that Our Town was likely to succeed in showing that the former franchisees acted in direct violation of the franchise agreement and that such provisions of the franchise agreement were enforceable. Further, the Court held that Our Town will suffer irreparable injury in the absence of this relief because Our Town’s legitimate business interests will be affected and the harm to the non-moving party, former franchisees, weighs in favor of granting the injunction due to the self-inflicted nature of the harm.
With that said, drafting an enforceable non-competition covenant is a very complicated task and should be approached with care. It is important to keep in mind that all restrictions must be reasonable in geography, time and scope of activities. Lastly, it is important that a franchise agreement contain language that provides a franchisor with the immediate right to obtain injunctive relief to stop such behavior.