You have worked hard to grow your business and brand. The last thing you want to do is give it all away. A carefully drafted non-competition agreement can protect your brand and trade secrets.
Well-drafted, enforceable non-compete agreements include the following elements:
Narrow List of Prohibited Activities
Courts are increasingly focusing on balancing former franchisees’ right to work against franchisors’ interests in preserving its trade secrets and protecting its brand from unfair competition. For this reason, a court is unlikely to enforce a non-competition that is drafted to prohibit activities that would not adversely affect the franchisor’s rights or trade secrets. For example, a court will likely strike down as too broad a non-compete that would prevent the former owner of a pizza restaurant franchise from working in any business that sells pizza of any type or quantity. This is because the franchisor’s interests would not really be adversely affected if this former franchisee worked as a cashier at Trader Joe’s. A more enforceable non-compete would prohibit such a former owner from managing, owning, or investing in a restaurant that primarily sells pizza.
As nice as it would be to keep a former franchisee from competing forever, courts will not enforce an unlimited term of non-competition. What’s considered reasonable can vary widely by state, so it’s important to talk to an experienced franchise attorney to determine what time period is considered reasonable in your and your franchisees’ jurisdictions. The risk of defining the term for too long (and for drawing the restricted territory too broadly, as described below) is that the court will not enforce any part of the agreement.
A franchisor must define the territory in which the competitive activities are prohibited and, just like with the list of activities and the term, the territory must be drafted narrowly to be enforced by courts. Most typically, a franchise agreement non-compete will prohibit a former franchisee from competing within a set radius around the franchised location and other system locations. The proper radius for the territory will depend on factors such as the jurisdictions involved, the uniqueness of the concept, or the ubiquity of the brand.
In today’s judicial climate, a franchisor must think carefully about each of these terms, but with careful drafting, the non-competition agreement can be a powerful defense for the franchisor.