Taking Care To Plan For The Inevitable –
   Practical Advice For Protecting Your Business

Almost every franchise agreement is equipped with some provision dealing with the death of a franchise owner.  Most franchise agreements permit a decedent’s personal representative to locate a third-party buyer within a specified amount of time.  Some, on the other hand, merely provide a mechanism under which the franchisor is permitted to take-over the franchisee’s business without just compensation. While in some instances this may not be cause for alarm, in others it could mean a substantial loss to the value of your estate and ultimately a loss to your loved ones.

Most individuals, including franchisees, do not want to think about their ultimate demise, let alone take the time to effectively plan and take steps to protect their most valuable assets.  In a franchisee’s case, it is not unusual for a substantial portion of one’s estate to consist of the franchisee’s business. As such, it is important that franchisees have a plan in place in the event of death.

Franchisees should consider drafting a will and/or trust document, or revising existing ones, to deal with issues such as the sales/transfer of the franchise, qualifying family members to take-over the business, and preparing for any potential tax consequences. A franchisee should also have in place a formula for how the franchise is valued at death to avoid your personal representative or trustee from selling your franchised business at a reduced rate. Keep in mind that whatever your plan may be, it must not run afoul of any requirements contained in your franchise agreement.
 

Covenants Not To Compete: Another Franchise Quandary

Imagine that you have operated a successful franchise business for the past several years.  Your franchise agreement’s term expires in the near future and you are contemplating whether renewing the agreement would be a wise business decision.  In the past couple of years it has become all too apparent that you are receiving little, if any, benefit or assistance from your franchisor.  Yet, you continue to pay the franchisor thousands of dollars each year in royalties and other fees.  You therefore decide that it would make better “business sense” to operate independently after expiration of your franchise term.  After all, you are very familiar with the business and have worked extremely hard in developing and establishing a solid client base to enable you to continue running a profitable and prosperous operation. 

After your franchise term expires, you continue contacting and providing services for new and former clients – albeit under a different business name.  Shortly thereafter you receive a “cease and desist” letter from your former franchisor notifying you that you are in breach of your post-term covenant not to compete and could face court proceedings, including injunctive relief, if you do not immediately turn over all of your client and business records and stop operating from your current location.  Effectively, you have been put on notice that you are no longer permitted to operate your business or, in most instances, carry on your livelihood.  

While it is true that most courts do not favor restraints on trade, as these contract clauses are sometimes called, many courts have held that so long as the covenant not to compete is reasonable as to the geographical scope, the duration and the activities regulated, it is valid.

What is a Covenant Not to Compete?

      Simply put, a covenant not to compete is an agreement that prohibits an individual from operating or working for a business that is the same as or substantially similar to a business with which the individual was previously affiliated.  This agreement is sometimes referred to as a post-term covenant not to compete and is common in employment agreements.  In the context of franchises, covenants not to compete are designed, from the franchisor’s standpoint, to protect franchisors from unfair competition from departing franchisees.

Signing a franchise agreement that contains a covenant not to compete can potentially harm your business and restrict your ability to carryon your livelihood after your franchise relationship has ended.  If you are an individual that has signed a franchise agreement with restrictive covenants, or are considering signing one, you should always review the contract language with an experienced franchise attorney and analyze it in terms of the statutory and controlling case law in the state where your franchise is located, as well as in the state designated in the franchise agreement for choice of law purposes. This will enable you to make the most informed business decision in order to continue maximizing your business interests.

To read the entire article on Covenants Not to Compete: Another Franchise Quandary, click here.

Case Updates: Recent Legal Decisions That Could Impact Franchisees

 

Choice Hotels Int’l, Inc. v. Niteen Hotels, LLC –

A recent arbitration decision makes clear that franchisees must follow the “rules.” In Niteen, the arbitrator properly excluded the franchisee’s counsel from the arbitration hearing due to the franchisee having failed to inform opposing counsel and the arbitrator that it had retained counsel until the eve of the arbitration hearing. AAA Rule 26 requires that a party “shall notify” opposing counsel and the arbitrator of the name of its representative at least three days before the hearing. A good rule of thumb for franchisees is to immediately retain counsel when involved in a lawsuit to avoid such litigation pitfalls.

Travelodge Hotels, Inc. v. Honeysuckle Enterprises, Inc. –

A New Jersey District Court judge recently ruled that franchisors can no longer hide behind strongly worded clauses in their franchise agreements to avoid fraud by their salesmen. In Honeysuckle, Judge Joseph A. Greenaway ruled that if a contract is induced by fraud, it is voidable, and that neither the integration clause nor the “no representations” clause would apply.

Pirtek USA, LLC v. Zaetz

A federal court recently denied a franchisor’s request for injunctive relief against a terminated franchisee for allegedly violating his noncompetition covenant. The franchisor alleged that when the franchisee was winding down his business, his son and his son’s business violated, and aided and abetted the father in violating, a covenant not to compete in the terminated agreement. In denying the injunction, the court noted the franchisee and his business were not currently involved in the operation of the son’s business or any other competing business, and that the son and his business were not currently illegally competing with the franchisor. As such, there was no continuing harm that would warrant an injunction.

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