In this article, we explore how to get out of a franchise non-compete agreement. We specifically address the question in the context of a franchise non-compete agreement governed under American law.
Franchise agreements are different from other contractual relationships and it is important to first understand the dynamics of franchise relationships.
The franchisor (the company owning the franchise business) owns the intellectual property and the operating system for the franchise and licenses them to the franchisee according to the terms and conditions set forth in the franchise agreement.
Under the franchise agreement, the franchisee (the company licensing the franchise business) pays the franchisor a fee known as a franchise fee for using the franchise in exchange for the franchisor directing the franchisee on how to run the franchise business model, how to grow the business, how to market the business and follow the rules and procedures in the franchise agreement. Every franchise is different and franchisees are usually provided information about the franchise and the contract in the Franchise Disclosure Document.
Take for example the Arthur Murray International Dance Studios franchise which is headquartered in Coral Gables, Florida. If you want to start an Arthur Murray Dance Studio franchise, you will pay Arthur Murray corporate a $25,000 to $100,000 franchise fee and start-up costs for construction and equipment. Those start-up costs average between $46,000 and $225,000 depending on various factors such as location, size, and décor. Then you pay Arthur Murray corporate 10% of your annual gross sales. Any other franchise such as Mc Donald’s works the same way although the fees can differ greatly.
Generally, the franchise non-compete agreements prohibit franchisees from working or operating competitive independent businesses after their franchise agreement terminates or if they refuse to renew the franchise agreement. In other words, if John owns a Mc Donald’s franchise and after the franchise agreement terminates he wants to open a Burger King a franchise non-compete agreement will not allow John to operate a Burger King for a certain period of time (usually a couple of years) in a certain area. Seems unfair? Probably because it is.
Now, if you are a franchisee and you executed a franchise non-compete agreement, you may be able to get out of the franchise non-compete agreement in the following ways:
- Check the choice of law of the agreement. In certain U.S. states, for example in California, non-compete agreements are not enforceable. As a result, if your franchise agreement provides that the contract must be interpreted in accordance with the law of the State of California you are in luck because the franchise agreement will not be enforceable. For states like New York or Illinois, you may be able to win and have a court not enforce the franchise non-compete agreement but it is likely with a court fight. However, under Florida law, this will be tough.
- Check for overbroad and abusive language. If the franchise agreement contains overbroad restrictions not to compete to the point that it is abusive you may be able to have the franchise non-compete agreement stroke in its entirety. However, the ability to strike the franchise non-compete depends on the state law and how courts interpret state law.
- Check for breach of contract by the franchisor. A material breach of the franchise non-compete agreement by the franchisor may invalidate your non-compete or you may negotiate a release from the non-compete agreement or a settlement.
- Check for fraud and any material misrepresentation by the franchisor. If the franchisor has engaged in misrepresentation or fraud you may be able to strike the non-compete agreement or obtain a release.
Franchise non-compete agreements are complex and can result in disastrous legal and financial consequences. Contact us, your business lawyers in Miami, Florida USA to assist you with your franchise non-compete needs and help you on how to get out of a franchise non-compete agreement.
Malescu Law P.A. – Business Lawyers