Franchisee 101: Successor Slips Out of Non-Compete

Lewitt Hackman

A Florida federal court granted a preliminary injunction against a terminated franchisee. The court enjoined the ex-franchisee from using the franchisor’s trademarks and trade dress. The court enforced the franchisor’s post-termination “step-in rights” to place franchisor employees and designees at the business. But the court denied enforcement of the non-compete provision. This was because the franchisee, a successor-in-interest, was not a signatory to the franchisee agreements.
The franchisee was successor-in-interest to a former franchisee under two franchise agreements. The franchised businesses provided nursing, non-medical home care, hospice and healthcare staffing. The franchisee failed to make payments under the agreements. After failure to cure the defaults, the franchise agreements were terminated. The franchisor demanded compliance with post-termination obligations to not compete and to place the franchisor’s employees and designees at the business. The franchisee refused and continued to use the franchisor’s marks.
The franchisor sued the franchisee for breach of the agreements and trademark infringement. The franchisor moved for a preliminary injunction to bar the franchisee from continuing to use the franchisor’s marks without consent and to enforce post-termination obligations.
The court granted the preliminary injunction with respect to trademark infringement, holding the franchisor likely to succeed. This was because the franchisee’s continued use of the trademarks after termination was likely to cause customer confusion and the franchisor was likely to suffer immediate and irreparable harm since the franchisor lost the ability to control its trademarks.
The court also granted the franchisor a preliminary injunction with respect to the contractual right to place employees and designees at the business after termination. The court found that the franchisor was likely to suffer irreparable harm because the franchisee poorly managed the hospice business and the potential threat to the safety and health of the hospice patients.
The court denied an injunction with respect to post-termination non-compete obligations. A restrictive covenant will not be enforced in Florida unless it is in writing, signed by the person against whom enforcement is sought. The franchisee was a successor who did not sign the original franchise agreements or any other agreement not to compete after termination.
Franchisees and prospective franchisees should seek advice from franchise counsel before, during and after assignment or transfer of a franchise to understand what contractual rights and obligations under the franchise agreement are enforceable.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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