Franchise 101: Mowing and Blowing Past Mediation; and When the Competition Leaks
Franchisor 101: Mowing and Blowing Past Mediation
A California federal court denied a franchisor’s motion to dismiss a franchisee’s complaint claiming the franchisee failed to first mediate the dispute before filing an action as required under the franchise agreement.
The franchisee purchased a lawn care and landscaping franchise. Prior to the purchase, the franchisee had discussions with executives and representatives of the franchisor to develop the business in Central California. The franchisee was led to believe that the franchisor never had a presence in California and that the first franchisee in California joined the system a few months earlier. After the franchisee could not generate a profit, the franchisee filed suit against the franchisor, asserting claims for fraud and deceptive business practices based on the franchisor’s alleged material misrepresentations and omission in the offer and sale of the franchise.
The franchisor moved to dismiss the complaint, arguing, in part, that the franchise agreement required the franchisee to mediate the dispute prior to filing the action in federal court, which the franchisee had not done. The franchisor contended that dismissal was proper under Texas law based on a choice of law provision that stated the agreement is governed by Texas law and a requirement that mediation take place in Texas before initiating a lawsuit.
The federal court denied the franchisor’s motion. The court found that the choice of law provision cannot govern the franchise agreement to the extent it undermines the California Franchise Relations Act (“CFRA”). The court found that the requirement for mediation in Texas obstructed California franchisees from California courts.
Prelitigation mediation requirements may conflict with applicable state franchise laws and a franchisee’s right to have their case litigated in the franchisee’s home state. A provision that negates a franchisee’s right to recover attorney fees as a prevailing party for failing to undertake required mediation, might have averted the lawsuit brought in this case. Franchisors should consult franchise counsel to review provisions covering alternative dispute resolution.
Argus Capital v. Allison, No. 1:23-cv-00043 JLT, 2025 U.S. Dist. LEXIS 68192 (E.D. Cal. Apr. 9, 2025)
Franchisee 101: When the Competition Leaks
A Massachusetts federal court granted a franchisor’s request to enforce the franchise agreement’s post-termination non-compete provision against a terminated franchisee.
The franchisor terminated over a dozen franchise agreements for the franchisee’s failure to pay royalties and other franchise fees. The franchisor then filed suit against the terminated franchisee to enforce the 3-year post-termination non-compete provision, among other post-termination terms, because the terminated franchisee continued to offer the same plumbing and water damage restoration services.
Under Massachusetts law, a covenant that restricts competition is only enforceable if it is (1) necessary to protect a legitimate business interest, (2) reasonably limited in time and space, and (3) consonant with the public interest. The court found the non-competition provision enforceable, provided the terms are reasonable.
The provision reasonably protected legitimate business interests because it served to protect the franchisor’s confidential information, trade secrets, and goodwill.
Public interest weighed in favor of enforcement because the public has an interest in enforcing reasonable contracts. The court acknowledged the terminated franchisee may suffer hardship from enforcement of the non-competition provision, but that such harm is a predictable consequence of the franchisee’s breach because the franchisee knowingly agreed to the reasonable post-termination restrictions in exchange for the benefits of participating in a franchise system.
As to time and space, the court found the 3-year term unreasonably long for a non-competition obligation and reformed (shortened) the provision to a 2-year term. The geographic range, as worded, was also found unreasonable. The term covered 100 miles of any franchise territory. However, given the franchisor only sought to enforce the provision within the franchise territories under the terminated agreements, the court ultimately found it reasonable.
Franchisees should consult franchise counsel to evaluate the applicability and reasonableness of any post-termination restrictive provisions prior to transitioning operations of a former franchised location. Though there are differing state laws and policies concerning non-competition provisions, courts may find the franchise relationship serves as a reasonable basis for enforcement so long as the provision is reasonable in time and scope.
Rooterman, LLC v. Belegu, — F.Supp.2d —- (D. Mass. Apr. 11, 2025) (No. 24-cv-13015-PBS, 2025 U.S. Dist. LEXIS 70947)