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Watch for Non-Compete Provisions of Franchise Agreements

Think back to the first job you ever held. Whether you were flipping burgers at McDonald’s or busing tables at Red Lobster, you probably learned a number of life lessons in the process, gained some insight into how successful businesses are run, and perhaps developed specific skills that could be applied to a future job.

The same holds true for the owners of a business franchise, whether the business is a restaurant, hardware store, or cleaning service. The franchisee typically receives management training, a detailed business plan, and ongoing consultations from the franchisor to ensure that the local owner is maintaining the quality and standards of the larger corporation in selling its products and services.

Franchise Agreements Limit Competition

Some franchisees may eventually wish to take what they’ve learned in the operation of the franchise and strike out on their own, launching a separate business and running things their way, independent of the franchisor’s rules and procedures.

But before running off to build a better mousetrap, so to speak, there are important legal considerations the franchisee needs to take into account. The business relationship between the franchisee and the larger corporation is governed by the franchise agreement the local owner signed, which is far more complicated than any employment contract most workers have ever seen. Franchise agreements typically carry a non-compete clause restricting the rights of the franchisee with respect to future business endeavors.

Two Types of Non-Compete Clauses

Non-compete clauses generally fall into two categories, known as “in-term” and “post-term” covenants. An in-term non-compete clause prohibits the franchisee from having any investment interest in a competing business while operating the franchise. A national pizza chain, for example, wouldn’t want a franchisee who is also a part-owner of a competing pizzeria.

A post-term non-compete clause prohibits the franchisee from engaging in a competing business for a period of time, perhaps as long as a year or more, after the franchise agreement ends. It may also contain a geographic limitation so that a well-established fast-food restaurant doesn’t have to worry about a former franchisee running off and setting up a mom-and-pop burger joint in the same territory.

Non-compete clauses have been controversial, particularly in Florida. Courts generally frown on restrictions that prevent someone from earning a living, and judges have struck down such provisions if the geographic territory is too large or the time limitation is too long. But as long as the restrictions are deemed “reasonable,” the covenants are usually upheld. As Forbes reported earlier this year, one out-of-state court called Florida’s law on non-competes “truly obnoxious” in the way it interprets the reasonableness of such provisions, which cuts against individuals who’ve signed non-compete agreements.

Trade Secrets Also an Issue

Lawmakers have also moved to protect the rights of franchisors through the Uniform Trade Secrets Act, which a number of states, including Florida, have passed. The law prevents entrepreneurs from stealing what amounts to a competitor’s secret recipes, and using those secrets in their own business. As the Florida Bar Journal has documented, in some situations a customer list can be treated as a trade secret if the original business undertook considerable effort and expense to create it.

If you’re considering going into business by becoming a franchisee, you’ll want to consider the long-term implications of any restrictive covenants in the franchise agreement.

At the Law Offices of Larry E. Bray, P.A., with offices in Lake Worth, West Palm Beach and Boca Raton, we’re ready to help you understand the terms of any business contract before you sign it. To discuss the legal obligations involved in owning and operating a franchise, contact us today.

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