Covenants not to compete are generally disfavored by courts since they can be viewed as a partial restraint on trade and can limit an individual’s ability to earn a living. These clauses, however, are important to franchisors who expend a great deal of time and money training franchisees on how to operate their franchised business and provide franchisees with confidential information about the franchise system. Noncompete provisions allow franchisors to protect this investment and often serve to protect other franchisees from having to compete with a similar business after the franchise term ends.
The Larkin Hoffman franchise litigation team, led by Susan Tegt, recently successfully enforced a post-term covenant not to compete in a franchise agreement between The Bar Method, a fitness studio franchise, and a former franchisee who opened a competitive fitness studio at the same location as the former franchised studio. Larkin Hoffman filed a lawsuit in the United States District Court for the District of Colorado seeking to enforce the post-termination covenant not to compete which restricted the franchisee from operating a competitive business within 5 miles of her former franchised studio or within 5 miles of any other Bar Method studio. The Bar Method also alleged the former franchisee misappropriated its trade secrets and violated her obligations to keep certain information about the franchise system confidential, including information about the clients of the franchised business. Larkin Hoffman moved for a preliminary injunction, arguing that the operation of a competitive fitness business would cause substantial irreparable harm to The Bar Method franchise system.
At the evidentiary hearing on the motion, the franchisee argued that The Bar Method’s post-termination covenant not to compete was unenforceable under Colorado law, challenged The Bar Method’s ownership of trade secrets and its confidential customer information, and argued that she would be greatly harmed if the competitive business stopped operating.
The court, however, agreed with The Bar Method’s arguments and granted the motion requiring the franchisee to cease operating her competitive fitness business and cease using The Bar Method’s confidential information. The court found that a preliminary injunction was warranted to protect the significant irreparable harm to The Bar Method’s goodwill and market position, even when examined under the court’s heightened standard of proof that applies when an injunction will change the status quo.
Of interest, the federal court also determined that The Bar Method was likely to prevail in pursuing a fraud claim against its former franchisee for the franchisee’s fraudulent inducement of a settlement agreement entered into by the parties about 2 months prior, whereby The Bar Method agreed to limit the scope of the franchisee’s post-term noncompete to allow her to operate a fitness business so long as she did not offer classes the same or similar to The Bar Method’s offerings and did not use The Bar Method’s confidential information.
The court determined the franchisee’s actions in immediately offering similar fitness classes to her former Bar Method client base showed an intent never to abide by the terms of the settlement agreement and also showed a substantial breach of that agreement sufficient to rescind the agreement. As a result, the court enforced the broader noncompete in the parties’ franchise agreement, restricting the franchisee from operating any fitness business within a 5-mile radius.