Franchisor 101: (Non)Competing for Care

Lewitt HackmanA U.S. Court of Appeals upheld a federal district court decision partly granting a preliminary injunction sought by a companionship and domestic care services franchisor against a former franchisee, for violating the franchise agreement’s non-compete provision.

The franchisor is ComForCare Franchise Systems. The franchisee gave notice to the franchisor of terminating the franchise agreement and its plan to serve existing patients under a new name. The franchisor sued, claiming violation of the franchise agreement’s non-compete provision and moved to enjoin the franchisee from providing services to patients. The district court granted the injunction in part, but denied it as to the franchisee servicing existing patients.

The non-compete provision restricted the franchisee, for two years after termination, from diverting customers to a competitive business and from maintaining a competitive business in its exclusive area or within 75 miles of any ComForCare franchise. The court noted that Michigan courts have upheld non-compete provisions with a two-year time restriction, with larger geographic restrictions, and restrictions on franchisees with multiple locations across the country. The court noted the combined geographic and time restrictions were on the outer bounds of reasonableness but found the harm to ComForCare weighed in favor of an injunction. The franchisor was likely to be harmed if the franchisee continued to solicit current ComForCare clients away from the franchisor. The court granted a narrower preliminary injunction, enjoining the franchisee from soliciting or contacting ComForCare clients it was not currently servicing.

The franchisor appealed, arguing the district court rewrote the non-compete provision when it allowed the franchisee to continue serving existing patients. The Sixth Circuit disagreed and found the lower court was within its discretion, holding that no contract can dictate the decision whether to grant injunctive relief. The Sixth Circuit ruled that in granting the narrower preliminary injunction, the district court applied relevant case law and did not abuse its discretion.

Franchisors should review the time, scope and geographic restrictions of their franchise agreement’s non-compete provisions and be prepared to state sound reasons to support each restriction. Even states that enforce post-termination non-compete provisions may find that the contract language is too broad and use their own judgment to decide whether and how to enforce such covenants.

ComForCare Franchise Sys. v. ComForCare Hillsboro McMinnville Corp., No. 19-2467 (6th Cir. Aug. 5, 2020)

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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