This is Part II to our previous blog regarding non-competition agreements. Part I described the legitimate business interests that satisfy the first part of the rule of reason test, the test which determines whether or not a non-competition provision will be enforced in the franchising context.
The second part of the rule of reason test focuses on the reasonableness of the non-competition provision with respect to time and geographic scope. In the franchise context, courts have enforced covenants against competition with varying time limitations and geographic scope, provided that the restrictions are reasonably related to the franchisor’s legitimate business interests.
Time: The court in Westbury Donuts, Inc. v. Dunkin’ Donuts of America, Inc., Bus. Fran. Guide ¶7871, upheld a restrictive covenant prohibiting the operation of a competitive donut shop for 18 months. InDAR & Associates, Inc. v. Uniforce Services, Inc., 37 F.Supp.2d 192, ServiceMasterResidential/Commercial Services, L.P. v. Westchester Cleaning Services, Inc., 2001 WL 396520 andTKO Fleet Enterprises, Inc. v. Elite Limousine Plus, Inc., 708 N.Y.S.2d 593, a one year restrictive covenant enjoining the franchisee from owning or operating a competing business was upheld. In three separate but similar cases, courts upheld a restrictive covenant that prohibited an ice cream shop franchisee from engaging in a competing business for a period of three years. See Carvel Corp. v. DePaola, 2001 WL 528203, Carvel Corp. v. Rait, 503 N.Y.S.2d 406 and Carvel Corp. v. Eisenberg, 692 F.Supp. 182.
Geographic Scope: This may vary greatly. In DAR & Assocs., 37 F.Supp.2d 192 and TKO Fleet Enterprises, 708 N.Y.S.2d 593, the respective courts upheld restrictive covenants that prevented competition within a 50 mile radius. In Westbury Donuts, Bus. Fran. Guide ¶7958 and the three Carvel Corp. cases noted above, the respective courts found that the restrictive covenants barring competition within a radius of two miles were reasonable. In Singas Famous Pizza Brands Corp. v. New York Advertising LLC, 2011 WL 497978, a case in which this firm represented the franchisor, the court granted a preliminary injunction in Singas’ favor prohibiting the franchisee from operating an Italian restaurant at the franchise’s former location as well as within ten miles from the location of its former franchise restaurant. In upholding the above temporal durations and geographic scopes, courts have indicated that the restrictive covenants reasonably relate to the franchisor’s business interests, discussed in Part I of our blog.
Hardship: The third part of the rule of reason test analyzes the degree of hardship that enforcing the provision would have on the franchisee. Generally, any potential hardship to be suffered by the franchisee is mitigated by the fact that the franchisee specifically agreed to bear the risk of any such hardship when it entered into a franchise agreement and/or non-competition agreement.
“Blue Pencil”: In the event that the restrictive covenants are too broad so as to make the covenants unenforceable as written, New York courts are empowered to “blue pencil” the restrictive covenants so as to shorten the duration and narrow the geographic scope as well as tailor the scope of the restricted activities so as to ensure that the restrictive covenants are reasonable as modified by the court. See Winston Franchise Corp. v. Williams, 1992 WL 7843. However, courts are not required to do so and in some instances, if the restrictive covenants are overly broad, New York courts may refuse to enforce the restrictive covenants altogether.
For our franchisor clients, we draft their restrictive covenants broadly enough so as to protect their legitimate business interests without being overly broad, thereby avoiding the risk of being unenforceable. For our franchisee clients, we make it a point to review and discuss the restrictive covenants so as to determine whether the covenants, if enforced, would pose a significant hardship for our clients.