Franchise 101: A Committed Medical Group; and Out of The Closet Competition
Franchisor 101: A Committed Medical Group
A federal district court in Alabama found that a franchisor wrongfully refused to offer a successor agreement to a franchise developer, holding that the developer met all conditions for renewal and could not be penalized for requirements the agreement never imposed.
In 2009, Groves Enterprises (“Groves”) entered into a 15-year master developer agreement with AFC Franchising (“Franchisor”) to develop, own, and operate American Family Care urgent care centers. The agreement gave Groves the option to request up to four additional five-year terms, provided it had substantially complied with the agreement during the initial term and was in full compliance at the time it requested renewal.
By 2022, Groves had opened 15 centers, was operating 7 centers, and had 3 more centers under development. When Groves sought to sell 10 centers, Franchisor insisted the agreement required Groves to keep operating at least one center. Groves disagreed and, with Franchisor’s approval, completed the sale of 10 of its centers in February 2023.
After a dispute regarding Groves’s desire to open another center, Groves filed suit against Franchisor, seeking a declaratory judgment regarding the terms of Groves’ obligation to operate at least one center. The following month, Franchisor sent a default notice asserting that Groves was in default because it no longer operated one center. Days later, Groves formally exercised its right to request a successor agreement.
The court ruled that Groves was not in default. The agreement only required Groves to open a center within 365 days, not to operate one indefinitely, holding that Franchisor’s termination was wrongful. Building on that ruling, the court addressed whether Franchisor had to offer a successor agreement.
The court found the agreement’s language relating to the grant of a successor agreement was clear: if Groves met the renewal conditions, Franchisor had to offer a successor agreement. Franchisor’s sole reason for refusing was that Groves was not operating a center, a requirement the court already determined did not exist.
Meanwhile, Franchisor negotiated successor agreements with four other developers during 2024, each adding a new requirement to operate at least one center, raising questions about whether Franchisor imposed impossible conditions in bad faith.
Franchisors should periodically review their agreements to ensure they are only enforcing terms and obligations that actually exist. If a franchisor wants to impose new requirements, franchise counsel can advise what changes are permissible.
Groves Enterprises, Inc. v. AFC Franchising, LLC, No. 2:23-cv-00340-ACA (N.D. Ala. Jun. 30, 2026)
Franchisee 101: Out of The Closet Competition
A California appellate court affirmed One Day Doors & Closets, Inc. (“One Day”) summary judgment motion against CBD Franchising, Inc. (“CBDF”), the franchisor of the Closets By Design custom closet businesses. The court held that a post-term non-compete clause in a franchise agreement was void under California law. The ruling reinforces California’s strong policy favoring open competition and an individual’s freedom to pursue any lawful trade or business.
William and Mary Conway (the “Conways”) signed a franchise agreement with CBDF in 2013 to operate a Closets By Design business in New Jersey. The agreement barred the Conways from engaging in any “Competitive Business,” such as custom closets or home organizers, for two years after the franchise ended, within 75 miles of their territory or any other Closets By Design territory.
The franchise agreement specified New Jersey law for the non-compete provisions. CBDF terminated the franchise in 2015 for non-compliance with reporting and royalty obligations. In 2016, the Conways sold their business assets and goodwill and began operating a door and closet business under a license agreement from One Day. CBDF sued, alleging the Conways’ activities violated their two-year post-term noncompete and that One Day tortiously interfered by continuing to do business with the Conways.
The court had to determine whether (i) New Jersey law should govern, (ii) the non-compete was enforceable under California law, and (iii) whether a “goodwill” exception saved it. The court declined to apply New Jersey law, finding it would violate California’s pro-competition policy. The statute, Business & Professions Code §16600, declares void any contract restraining someone from engaging in a lawful profession, trade, or business. On appeal, CBDF raised a new “materially greater interest” argument, but the court refused to consider it.
The court distinguished this case from the 2020 California Supreme Court decision Ixchel Pharma v. Biogen, which applied a flexible “rule of reason” to restraints in ongoing business relationships. Here, the court held that standard does not extend to post-term non-competes, restrictions taking effect after the relationship ends.
Because the franchise non-compete applied only after termination, it was void. The court also rejected CBDF’s goodwill exception under §16601 because the non-compete was in the franchise agreement between CBDF and the Conways, not in the asset sale, and the Conways never sold goodwill to CBDF.
Post-term non-competes restricting a former franchisee after the franchise relationship ends are generally void in California. Even if a franchise agreement designates another state’s law, California courts may refuse to enforce that choice when it conflicts with California’s strong pro-competition policy. Franchisees should consult counsel about the enforceability of their non-compete obligations, particularly when California law applies.
CBD Franchising, Inc. v. One Day Doors & Closets, Inc., Case No. B342711 (Cal. Ct. App. Aug. 19, 2026)