Post-Term Non-Compete Enforced Against California Franchisee
By Sandra Gibbs on December 09, 2020
In Servpro Industries, Inc. v. Woloski, No. 3:17-cv-01433, 2020 WL 5629452 (M.D. Tenn. Sept. 21, 2020), the court granted summary judgment on behalf of the plaintiff franchisor.
Servpro had terminated the California franchisee’s agreement after receiving numerous customer complaints about the franchisee’s services and observing no improvement after giving notice that the franchisee’s business practices were materially damaging the franchisor’s reputation. After termination, the franchisee continued to use the franchisor’s marks, failed to transfer the telephone number, failed to return manuals containing confidential information, and operated a competing business from the same premises, all in violation of franchisee’s post-termination obligations under the franchise agreement. After finding that the franchise agreement had been properly terminated, the court—applying Tennessee law—granted injunctive relief against the corporate and individual franchisees enforcing all of these provisions.
An interesting question arises as to why California law was not applied, particularly its notoriously broad prohibition on any contract restraining a person from engaging in a lawful business. Cal. Bus. & Prof. Code § 16600. In an earlier opinion, 2019 WL 3552516 (M.D. Tenn. Aug. 5, 2019), the court considered the franchisee’s argument that the franchise agreement’s Tennessee choice of law provision was unenforceable. The deciding factor under the Tennessee choice of law rules was whether application of Tennessee law would be contrary to a “fundamental policy” of a state (here, California) having a “materially greater interest” in the outcome and whose law would otherwise govern. The franchisee highlighted California’s compelling interest in consumer protection in franchising. However, because the franchisee failed to provide any information about Tennessee law governing franchise relationships, the court dismissed the franchisee’s California Franchise Relations Act (CFRA) counterclaim because the franchisee had failed to demonstrate that Tennessee law would contravene this compelling interest. The franchisee also asserted that the parties had incorporated California law into the franchise agreement through the mandated language in the California Addendum. The court left open this possibility and proceeded to address it in the summary judgment proceeding.
The California regulations implementing the Franchise Investment Law (CFIL) require that franchisors seeking to offer or sell franchises in California include certain language in their Franchise Disclosure Document. Cal. Code R. tit. 10, § 310.114.1(c)(5)(B). Among other things, if a franchise agreement contains a post-termination non-compete provision, the FDD must reflect that such a provision “may not be enforceable under California law.” Indeed, this required language appeared in the Servpro FDD and was added to the franchise agreement through a California Addendum.
But the court rejected the franchisee’s argument that Section 16600 was thereby incorporated into the franchise agreement. The court first noted that the required language does not expressly incorporate Section 16600 or state that California law “controls” in the context of a post-termination non-compete, in contrast to mandated language relating to the CFRA. Accordingly, the court held that the only effect of this language was to put the franchisee on notice that the terms of the franchise agreement are contrary to those of California law so that she may make an informed decision. To explain its reasoning, the court observed:
- [I]t would make little sense to include a non-competition provision in a contract, and then, through an addendum, incorporate a provision of local law arguably rendering the provision unenforceable.
There is no indication in the opinion that the court was presented with, or considered, the language or intent of the CFIL in reaching its conclusion.
The court also rejected the franchisee’s argument that, due to the confusion engendered by this language, there was no “meeting of the minds” regarding the enforceability of the post-termination non-compete provision. The required language in the California Addendum, the court opined, was designed to ensure that the franchisee was not misled.
This case report was prepared by Sandra Gibbs (firstname.lastname@example.org) of the law firm of Mulcahy LLP. Mulcahy LLP is a boutique litigation and regulatory firm that provides legal services to franchisors, manufacturers and other companies in the areas of franchise, trademark, trade secret, unfair competition, and distribution laws.
Disclaimer: While every effort has been made to ensure the accuracy of this article, it is not intended to provide legal advice as individual situations will differ and should be discussed with an experienced franchise lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.