Franchisors Receive Helpful Non-Compete Ruling
March 15, 2018 l Will Cantrell
Franchisors received a court ruling in Florida that bolsters their chances of winning non-compete disputes against franchisees. Specifically, in Peterbrooke Franchising of America, LLC v. Miami Chocolates, LLC et al., Case No. 16-CV-20417, a judge in the Southern District of Florida held a franchised retail chocolate store had an enforceable non-compete against one of its former franchisees who began operating a competing chocolate store.
As discussed below, however, the case left open important issues that were not addressed in determining the enforceability of non-competes in the franchisor-franchisee context. Such issues should be considered by franchisees going forward when challenging a non-compete.
Background Summary. Peterbrooke Franchising of America, LLC (“Peterbrooke”) is a retail chocolate store and franchises its chocolate business. In 2007, Miami Chocolates entered into a franchise agreement with Peterbrooke. The agreement contained a non-compete provision with a twenty-five (25) mile geographical radius. Specifically, the provision read in relevant part:
Upon termination of this Agreement by Us in accordance with its terms and conditions, or by You without good cause … neither You nor any of Your Principal Owners shall directly or indirectly, through a member of the immediate family of You or a Principal Owner or otherwise for a period of two (2) years commencing on the effective date of such termination or expiration or the date on which You cease to operate the Shop, whichever is later: (a) have any interest as a disclosed or beneficial owner in any Competitive Business located or operating within a twenty five (25) mile radius of the Shop or any other Peterbrooke Chocolatier Shop.
In late 2015, due to an administrative dispute between Peterbrooke and Miami Chocolates, Peterbrooke terminated the franchise agreement. Afterwards, Miami Chocolates continued to operate as a retail chocolate store in the same location. Peterbrooke then sued to enforce the 2-year non-compete provision.
Miami Chocolates argued the non-compete provision was unenforceable because it was not supported by any legitimate business interest. As context, under Florida Statute § 542.335, a non-compete is only enforceable to the extent the enforcing party demonstrates the existence of one or more “legitimate business interests.” The statute goes on to provide that “the term ‘legitimate business interest’ includes, but is not limited to” several categories of protectable business interests, such as:
- Trade secrets as defined by Florida Statute § 688.002(4);
- Valuable confidential information;
- Substantial relationships with specific prospective or existing customers;
- Customer goodwill associated with (i) an ongoing business or professional practice, by way of trade name, trademark, service mark, or trade dress, (ii) a specific geographic location, or (iii) a specific marketing or trade area; and
- Extraordinary or specialized training.
The Court’s Holding. Peterbrooke argued – and, in late February 2018, a judge in the Southern District of Florida agreed – that Peterbrooke had a legitimate business interest in “protecting the goodwill associated with Peterbrooke in the geographic region and protecting the ability to sell new franchises.” In siding with Peterbrooke, the judge cited a 2005 ruling from the Middle District of Florida, Gators Franchise Sys., Inc. v. MBC Restaurants, Inc. In Gators, it was held that the franchisors non-compete provision was enforceable because the franchisor would be effectively unable to re-enter the market formerly serviced by franchisee if the non-compete was not upheld.
In sum, the court in Peterbrooke made it harder for franchisees to escape non-compete provisions in Florida – namely, by affirming that a franchisor can have a legitimate business interest in protecting a specific market’s appeal to that franchisor.
Takeaways for Franchisors/Franchisees & Other Companies. There are at least three important takeaways from the Peterbrooke ruling, including some recommendations that apply to all non-compete disputes:
- First, when defending themselves in a non-compete dispute, former franchisees should conduct discovery into whether the franchisor has legitimate and immediate plans to attempt to re-enter the market in the same location. For example, in Peterbrooke, the judge accepted at face value Peterbrooke’s argument that, absent the non-compete, it would have a more difficult time selling new franchises in the market. Curiously, it appears the attorneys for Miami Chocolates failed to test that statement. In other words, if Miami Chocolates were able to show that Peterbrooke did not have any legitimate and immediate plans to sell franchises within the 25-mile radius, then it likely would not have any legitimate business interest in enforcing the non-compete.
- Second, when prosecuting a non-compete dispute, franchisors should remember that they may have additional legitimate business interests than those raised in Peterbrooke – namely, substantial relationships with current and specific prospective customers. In Peterbrooke, that specific legitimate business interests only failed to apply because of the business dynamics involved in selling chocolate on the retail level. It is doubtful any individual consumer buys chocolate from a retail chocolate shop because of their relationship with the store. That is not the case with many other franchises.
- Finally, for all restrictive covenants (e.g., non-competes, non-solicits, and non-disclosures), the ruling is a reminder that the term “legitimate business interests” is not limited to those items enumerated by Florida Statute § 542.335. The enforcing party can and should get creative. As recently reiterated by the Florida Supreme Court, the list is non-exhaustive, and each case must be analyzed on its own unique circumstances.