- Restrictive Covenants Must Be Carefully Considered in Franchise Agreements, Court Ruling Shows
- February 13, 2005 | Author: Steven K. Winnie
- Law Firm: Pepper Hamilton LLP - Philadelphia Office
A Massachusetts Superior Court decision shows that courts will enforce restrictive covenants in franchise agreements, so long as the franchisor has a legitimate interest in the covenant and the covenant's restrictions are reasonable. Franchisors and franchisees alike should carefully consider the inclusion or exclusion of such provisions, and work to anticipate the probability that a franchisee may consider franchising elsewhere in the industry during the time of a restrictive covenant.
In Boulanger vs. Dunkin' Donuts Incorporated, 815 N.E. 2d 572 (Mass. Super. Ct., 2003), the Massachusetts Superior Court tackled the issue of whether covenants not to compete found in franchise agreements are enforceable.
The plaintiff, as a former owner of Dunkin' Donuts franchises in upstate New York, signed covenants not to compete as part of his franchise agreements with Dunkin' Donuts, which restricted him from owning or working for a competing business within five miles of any Dunkin' Donuts establishment for two years after the expiration or termination of the agreements.
In February 2002, Boulanger sold his franchises and moved to New Hampshire. Soon thereafter, and before the expiration of his covenants with Dunkin' Donuts, the plaintiff contacted the management of Honey Dew Donuts regarding an opportunity to work for Honey Dew or to own a franchise. Upon learning of the covenants with Dunkin' Donuts, Honey Dew declined to speak with him further. After Dunkin' Donuts refused Boulanger's request to waive the covenants, Boulanger sued seeking damages and a declaratory judgment that the covenant not to compete within each franchise agreement was not enforceable with respect to his employment and opening of franchises in Massachusetts and New Hampshire.
Ultimately, the Massachusetts high court ruled against Boulanger and affirmed the trial court's decision to uphold the covenants. In large part, the court focused on whether a legitimate business interest was underlying the covenant, and whether the covenant's restrictions were reasonable and comported with public policy.
Dunkin' Donuts argued that the covenant was grounded in its interest in protecting its confidential information. Despite the plaintiff's argument that this information was provided to employees other than franchisees and therefore not confidential, the court found that this information was confidential.
The remaining relevant inquiry was whether a geographic limit of five miles from any other Dunkin' Donuts was reasonable. Boulanger argued that the five-mile, essentially worldwide, geographic limit hampered his ability to be employed and that this restriction unreasonably restricted his right to work for or own a competitive business in New Hampshire or Massachusetts. In response, the court noted that in applying the less-liberal interpretation of covenants not to compete in the business context, courts have upheld restrictive covenants that apply to large geographic areas. Ultimately, the court found that the five-mile limit was reasonable.
The court elaborated on the issue of protecting the franchise system in stating "[t]he issue is whether confidential information could be used by the plaintiff to harm other franchisees in other locations . . . The system is part of what the plaintiff, as franchisee, purchased and what protected him while he was a franchise owner."