Franchisee 101: The Small Business on Main Street

Lewitt Hackman

A federal district court denied a motion for preliminary injunction brought by pizza franchisor, Breadeaux’s Pisa, LLC, seeking to stop a former franchisee from operating a competing pizza business.

The franchise agreement had a non-compete covenant prohibiting the franchisee from operating or owning an interest in a pizza business for two years after termination. Yet the franchisee continued to operate a pizza restaurant at the same location after termination of the franchise agreement, using the name “Main Street Pizza” and using the same phone number as the Breadeaux franchise.

The former franchisee eventually changed the phone number and deidentified the restaurant to no longer resemble Breadeaux. The franchisor demanded the ex-franchisee stop operating Main Street Pizza. The ex-franchisee continued operating. The franchisor sought a preliminary injunction ordering the former franchisee to stop operating Main Street Pizza and not operate any other pizza restaurant for two years.

The court ruled the franchisor failed to meet its burden for injunctive relief. For a preliminary injunction, the franchisor must show: (1) the threat of irreparable harm; (2) the balance between this harm and the injury that the injunction will inflict on other parties; (3) the probability the movant will succeed on the merits; and (4) public interest. The court concluded that the franchisor could not show sufficient threat of, or actual irreparable harm if the former franchisee continued to operate Main Street Pizza.

The franchisor argued the non-compete covenant established a threat of irreparable harm. The argument was that in the provision the former franchisee consented to entry of a preliminary injunction if it breached the non-compete covenant, and the former franchisee was clearly in breach. The court was not persuaded. The court found that language of a contract, standing alone, is not enough to require entry of injunctive relief, nor does such language, by itself, establish a threat of irreparable harm.

The court found that competition by the former franchisee would not result in irreparable harm to the franchisor. The nearest Breadeaux location was 75 miles from Main Street Pizza. It was unlikely the Main Street Pizza operation robbed the franchisor of Breadeaux customers. Further, there was no appreciable danger of damaging Breadeaux’s trademarks or goodwill since the former franchisee stopped using the Breadeaux name, branding, color scheme, and telephone number.

Franchise agreements often have non-compete covenants. Franchisees contemplating operating a competing business after leaving a franchise system should consult with franchise counsel to assess strength and enforceability of any non-compete clause in the franchise agreement. Enforceability of these covenants is often a challenge and depends largely on state law and language of the covenant.

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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