An ex-franchisee of a vehicle transportation and shipping management franchise was enjoined by a federal court, for two years, from operating a competitive business at its former location in Virginia or anywhere the franchisor, Auto Driveaway Franchise System (ADFS) operated, as required under the franchise agreement’s non-compete provision.
The court found a valid contract existed between the franchisor and franchisee. Although the franchise agreement expired in 2014, it remained in force on a month-to-month basis by the parties’ mutual assent.
The court noted that Virginia courts have upheld covenants not to compete in franchise agreements and nothing about this covenant was against Virginia law. In granting injunctive relief, the court found there was a “better than negligible chance” that ADFS would succeed in showing the ex-franchisee breached the covenant not to compete by using ADFS’s confidential information to build its competing service business, and by continuing to display ADFS’s trademarks while providing competing services. The court also found ADFS suffered harm to consumer goodwill and lost customers due to the ex-franchisee’s unauthorized use of its trademark.
The result may have differed in some other states, such as California, which resist enforcing typical non-compete provisions in franchise agreements.
Franchisees in any state need to confer with their franchise counsel to understand the consequences of non-compete language in their franchise agreements and the attitude of courts in the particular state toward enforcing noncompetition restrictions. In many states, courts will uphold and enforce covenants not to complete that are reasonable in duration, geographic scope and scope of restricted activity, especially if the franchisee continues to display the franchisor’s marks or use its confidential information. In some other states, enforcement of covenants not to compete is limited.
Auto Driveaway Franchise Systems, LLC v. Corbett, 1:18-cv-04971 (N.D. Ill. Oct. 26, 2018)
