The U. S. Court of Appeals for the Fourth Circuit recently ruled in Hamden v. Total Car Franchising Corporation that the words "termination" and "expiration" had different meanings in a franchise agreement between Total Car Franchising and Hamden, its franchisee, and that TCF could not enforce post-termination, non-competition and non-solicitation covenants against Hamden after the natural expiration of the term of the franchise agreement.
Hamden signed a franchise agreement in May 1996 that prohibited Hamden from participating in a paint restoration business for "2 years following the termination of this Agreement" and signed a Non-Competition and Confidentiality Agreement that contained 1) a non-compete covenant, which barred Hamden from engaging in a similar business for two years following the termination or transfer of the franchise agreement; 2) a non-disclosure covenant, which barred Hamden from disclosing any of TCF's trade secrets during the term of the franchise agreement and thereafter; and 3) a non-solicitation covenant, which barred Hamden from soliciting any customers in his former territory for two years following the termination or transfer of the franchise agreement. Even though Hamden's franchisee status ended in December 2011, he continued operating a paint-restoration business at his former franchised location.
TCF sued Hamden for breach of the post termination covenants, and the district court, applying Virginia law, held in favor of Hamden, ruling that the term "termination," as used in the franchise agreement, did not encompass the natural expiration of the franchise agreement at the end of its term, and thus, none of the restrictive covenants were binding on Hamden. The Court of Appeals agreed that "termination," as used in the franchise agreement, connoted an end to the agreement distinct from its expiration. The court held that the two terms were not used interchangeably and that a termination of the franchise agreement only occurred upon the occurrence of certain events specifically listed in the franchise agreement, not passively upon the expiration of the franchise agreement's natural term. Because of this, the non-compete and non-solicitation provisions were not enforceable against Hamden. The appellate court held, however, that TCF could enforce the non-disclosure provision of the Confidentiality Agreement against Hamden because, unlike the other clauses, it applied "during the term of the franchise agreement and thereafter."
A franchisee planning to not renew a franchise agreement at the natural expiration of its term should review the franchise agreement's post-term covenants to determine if they will apply after the expiration of the agreement. To read the entire case, click here.