Michael Einbinder of this firm recently argued an appeal in the United States Court of Appeals for the Second Circuit for a matter involving the enforcement of a non-competition covenant by our clients, Singas Famous Pizza Brand Corp. and Singas Famous Pizza & Restaurant Corp., which operate or franchise Singas Famous Pizza restaurants. The United States District Court for the Southern District of New York originally held that the defendants, a former franchisee and its principals, were enjoined from operating similar pizza restaurants from the location of the franchised business and from a Queens location that was located within ten miles of the franchised business. The defendants appealed the District Court’s decision as to the Queens location only, arguing that the ten-mile geographic scope of the non-competition covenant was unreasonably broad. The United States Court of Appeals for the Second Circuit affirmed the decision.
The holding of this case is of interest to the franchise community. The Court of Appeals found that defendants expressly agreed in the Franchise Agreement that the ten-mile geographic restriction was fair, reasonable and necessary for the protection of the franchisor’s proprietary interest and that a breach of the non-competition covenant would cause substantial and irreparable harm to the franchisor. The Court of Appeals noted that the defendants’ agreement to such contractual provisions could be viewed as an admission.
The Court of Appeals referred to the legitimate interest of the franchisor in preventing a former franchisee from using knowledge that it gained from the franchisor to serve former customers and in preventing customer confusion and damage to the franchisor’s goodwill. The Court of Appeals found that defendants’ operation of a pizza restaurant in the Queens location posed a danger to Singas Famous Pizza’s institutional know-how, reputation and goodwill, especially because the defendants used a virtually identical menu, adopted certain practices distinctive to the Singas Famous Pizza system, employed personnel from its former Singas Famous Pizza franchised restaurant and used custom made equipment from that former franchised restaurant.
As a practice advisory, this decision serves as a lesson to draftsmen to make sure that their franchise agreements and non-competition agreements contain express statements and admissions that establish the fairness and reasonableness of the restrictive covenants.