Drafting Enforceable Noncompete Covenants in Franchise Agreements

Description

Almost all franchise agreements include a provision that requires the franchisee to covenant not to compete with the franchisor during the franchisor-franchisee relationship and after the relationship ends. Noncompete provisions protect the franchisor against the risk that the franchisee will use confidential or proprietary information gained from the franchisor to start a competing business.

Noncompete clauses are a hotly litigated topic. Counsel drafting and negotiating noncompete covenants in franchise agreements must exercise care in structuring the provisions. Counsel must take into account potential enforceability challenges with the clauses, both statutory and contractual.

Courts have refused to enforce noncompete provisions that are overly broad or contain unreasonable restrictions. The reasonableness of a noncompete provision is evaluated based on its duration, geographic scope, and the scope of prohibited activities. The surge in ecommerce businesses has impacted how courts assess the reasonableness of a noncompete’s geographic scope.

Courts have also grappled with such issues as whether a nonsignatory may be bound by a noncompete covenant in a franchise agreement.

Listen as our authoritative panel of business attorneys discusses best practices for drafting clear and enforceable noncompete covenants in franchise agreements. The panel will discuss the features of effective noncompete covenants and review the latest case law developments regarding the validity of noncompete agreements in the franchise context.