MIAMI NON-COMPETE AGREEMENT: FRANCHISORS, LICENSORS, AND BUSINESS PURCHASERS

Restrictive covenant non-compete agreements are typically associated with an employer/employee relationship. An employer usually requires its employees to execute restrictive covenant agreements to protect its trade secrets, customers, vendors, and goodwill. However, the employer/employee relationship is not the only context a restrictive covenant can be used. Non-compete agreements and similar restrictive covenant agreements can also be used in a franchisor/franchisee relationship, a licensor/licensee relationship, and when one purchases a business from another. The agreements protect the franchisor, licensor, and business purchaser from unwanted competition just like the employer/employee relationship. In effect, the restrictive covenant agreements protect the investment made by the franchisor, licensor, or business purchaser. In this article, we explore some of the issues relating the non-compete agreements concerning these other relationships. The Miami business litigation attorneys of the Mavrick Law Firm represent businesses and their owners in breach of contract litigation and related claims of fraud, non-compete agreement litigation, trade secret litigation, trademark infringement litigation, employment litigation, and other legal disputes in federal and state courts and in arbitration.

As an initial matter, a non-compete agreement for franchisors, licensors, and business purchasers utilizes the same mechanics as the employer/employee relationship. The franchisors, licensors, and business purchasers must ensure the agreement is in writing and that the agreement protects one or more legitimate business interests such as trade secrets, valuable confidential business information, substantial customer relationships, extraordinary training, or goodwill. Fla. Stat. § 542.335. A franchisor, licensor, or business purchaser cannot enforce a non-compete agreement without pleading and proving the existence of at least one of these legitimate business interests. Passalacqua v. Naviant, Inc., 844 So. 2d 792 (Fla. 4th DCA 2003) (“[T]here must be special facts present over and above ordinary competition” such that, absent a non-competition agreement, “the [competitor] would gain an unfair advantage in future competition.”).

Although many of the mechanics for enforcing a restrictive covenant against franchisees, licensees, and business sellers are the same as the employer/employee relationship, there are differences. One main difference is the amount of time a non-compete provision is deemed reasonable, and, therefore enforceable. Winmark Corp. v. Brenoby Sports, Inc., 32 F. Supp. 3d 1206 (S.D. Fla. 2014) (holding that the duration of a restrictive covenant enforced against a franchisee must be reasonable to be enforceable). Courts presume restrictive covenants lasting six months or less for employer/employee relationships reasonable and restrictive covenants lasting more than 2 years unreasonable. Fla. Stat. § 542.335. By contract, in the franchisor and licensor contexts, courts presume restrictive covenants are reasonable when they last for a year or less and unreasonable when they last for more then three years. The time frames increase even more for business sales. Courts presume restrictive covenants lasting three years or less reasonable, and more than seven years unreasonable.

The covenant’s geographic scope can play a prominent role for franchisors and business purchasers. Intuitively, franchisors do not want former franchisees to create a new competing business close to the franchisor’s current locations because it could reduce franchise revenues and upset other franchisors who continue paying the franchise for use of the franchise’s products, services, and trademarks, concepts. Franchisees will leave the franchise if they know they can use the franchise’s business concepts to compete without paying the franchisor fee. It is therefore paramount for franchisors to have, maintain, and enforce restrictive covenants to maintain value in the franchise. Similarly, the purchaser of a business does not want to spend significant sums to purchase a business from the seller only to find out the seller opened a new competing business close by. Business purchasers should prevent this unwanted competition by requiring the seller to refrain from competition for maximum period allowed by statute.

The Miami business litigation lawyers of the Mavrick Law Firm also represent clients in Fort Lauderdale, Boca Raton, and Palm Beach. This article does not serve as a substitute for legal advice tailored to a particular situation.