Beware the overbroad non-competition provision. The Nebraska Supreme Court recently sent this message loud and clear in Unlimited Opportunity, Inc. v. Waadah, 861 N.W.2d 437 (Neb. 2015). There, a clear violation by a franchisee of a non-competition provision in a franchise agreement resulted in defeat…for the franchisor.
The case involved franchisor Unlimited Opportunity, Inc., doing business as Jani-King of Omaha (“Jani-King”), and franchisee Anthony Waadah. Jani-King provides professional cleaning and maintenance services. When Jani-King received reports of Waadah diverting Jani-King customers to his own janitorial business, it terminated its relationship with Waadah for breach of contract. Approximately 18 months later (within a 2-year non-compete) Waadah formed a janitorial services company and began servicing several of Jani-King’s client accounts in his old territory.
Jani-King sued Waadah for breach of the non-competition provision of their franchise agreement. Both Jani King and Waadah agreed that, had the franchise agreement been followed, Waadah’s new contracts would have belonged to Jani-King.
So how could Jani-King lose? According to the court, in two short steps:
First, the court invoked Nebraska’s long standing rule that, if a portion of a non-competition provision is legally unenforceable, all of the provision is unenforceable — and Nebraska courts will not rewrite the provision to make it enforceable. This is a minority position. Many states follow the “blue pencil” rule, which allows a court to reform an otherwise illegal covenant into an enforceable one. But in Nebraska, it’s up to the parties to get it right at the outset.
Second, the court determined that Jani-King’s non-competition provision was, in part, unenforceable and struck the entire provision from the franchise agreement. Jani-King’s non-competition provision boiled down to two different restrictions:
- Franchisees cannot operate the same or similar business within the territory for 2 years after termination.
- Franchisees cannot operate the same or similar business in any other territory where a Jani-King franchise operates for 1 year after termination.
The court held that the second restriction was unreasonable in geographic scope. Jani-King operates internationally, so, in theory, Waadah could be restricted from competing as far away as Australia.
To be clear, Jani-King was not attempting to enforce the second restriction. And Waadah admitted to violating the first restriction. Still, the overreaching second restriction sunk the entire provision, leaving Waadah free to compete with Jani-King.
The court was not willing to redraft Jani-King’s non-competition provision, but it did write a cautionary tale for franchisors. Franchisors and their counsel must ensure that non-competition provisions are enforceable under local law, especially in states that do not follow the blue pencil rule. The more that parties rely on courts to revise their contracts, the more risk they take that the final agreement won’t be what they agreed to. Parties seeking robust protection against competition may end up receiving no protection at all.