Know Your "Business": Don't Bite Off More Than You Can Chew When Drafting A Covenant Not To Compete

more+
less-

The broadly written scope of the covenant not to compete before the Business Court in Outdoor Lighting Perspectives Franchising, Inc. v. Harders led to the denial of Plaintiff's Motion for a Preliminary Injunction this week.

The covenant said that the Defendant, a franchisee of the Olaintiff, could not compete "in any Competitive Business."  The term "Competitive Business" extended to any business in competition  with an outdoor lighting business or any business similar to the "Business."  The term "Business" was defined more narrowly, limited to "the business operations conducted or to be conducted by the [Defendant] consisting of outdoor lighting design and automated lighting control equipment and installation services, using the" Plaintiff's "systems, concepts, identifications, methods and procedures developed or used by the" Plaintiff for the sales and marketing of its Products and Services.

Judge Gale found the term "Competitive Business" to be overly broad and to reach[] beyond the outer limits of North Carolina court decisions upholding restrictive covenants" and that it therefore fell "within those cases which prohibit unreasonable restrictions on competition."  Op. ¶6.

He further said that the "expansive" term "extends well beyond activities that Defendants performed
pursuant to the Agreement. It likewise extends beyond the business [Plaintiff] itself conducts.  The language thus extends beyond [Plaintiff's] legitimate business interests." Op. ¶35

Lurking in the opinion was the possibility that the covenant might have been valid under the more liberal standard applied in evaluating a covenant given in connection with the sale of a business. Judge Gale obviously felt that he lacked the authority to give the covenant in this franchise agreement that kind of interpretation, as urged by the franchisor, but he highlighted that issue for a future case, saying:

A North Carolina appellate court may later adopt a standard of general application to franchises that affords well written competition restrictions in a franchise agreement the benefit of the more liberal standard afforded to agreements incidental to the sale of a business.

Op. ¶9.

But until that happens, the scope of a franchisee's covenant not to compete is more likely to pass scrutiny if it is limited to the current scope of the franchisee's business.