Poorly Drafted Franchise Agreement Leaves Franchisor Helpless To Enforce Covenant Not-To-Compete
By Brian A. Loffredo, Esq. Franchise agreements are complex, often spanning more than 50 pages crammed with terms, conditions, obligations and dense legal jargon. The typical franchise agreement leaves minimal opportunities for franchisees to gain the upper hand in the franchise relationship. However, while a franchise agreement may appear impervious to attack, a tiny ambiguity or missed detail can result in a major victory for a franchisee. This was the situation in the recent case of Hamden v. Total Car Franchising Corp. d/b/a Colors on Parade, litigated in the United States District Court for the Western District of Virginia, where a simple “choice of words” error precluded a franchisor from enforcing a covenant not-to-compete. In Hamden, the franchisee signed a franchise agreement that lasted a specific period of time. When the period ended, the franchisee decided he no longer wished to continue with the franchise. Instead of closing his business, the franchisee continued to compete with the franchisor under a different name. The franchisor responded by filing suit to enforce a covenant not-to-compete in the franchise agreement. The court held that the covenant not-to-compete did not preclude the franchisee from competition because the words used in the franchise agreement were ineffective. The covenant not-to-compete precluded competition within two years following the termination of the franchise agreement. The Court held that because the franchise agreement had expired, there was no “termination” to trigger the covenant not-to-compete. The Court found that the words “termination” and “expiration” had separate and distinct meanings when read together with the remainder of the franchise agreement. While the Hamden case was fact-specific, it is an example of good lawyering, and highlights the importance of careful contract review and interpretation. Franchise agreements are typically iron-clad documents in favor of franchisors, with minimal protections for franchisees. However, by hiring experienced, detail-oriented counsel, franchisees can sometimes use the franchise agreement to tip the scales in their favor in the event a dispute arises.
Brian Loffredo is a commercial litigator with more than thirteen years of experience representing clients in the franchise industry. Prior to joining Offit Kurman, Mr. Loffredo worked at a franchise litigation boutique specializing in the representation of franchisees. He can be reached at 301.575.0345 or firstname.lastname@example.org. You may also be interested in the following articles: