Franchise 101: (Non)Competing for Care; and COVID-19 Defense Leads to Contempt

Elder Care Franchise

Franchisor 101: (Non)Competing for Care

A U.S. Court of Appeals upheld a federal district court decision partly granting a preliminary injunction sought by a companionship and domestic care services franchisor against a former franchisee, for violating the franchise agreement’s non-compete provision.

The franchisor is ComForCare Franchise Systems. The franchisee gave notice to the franchisor of terminating the franchise agreement and its plan to serve existing patients under a new name. The franchisor sued, claiming violation of the franchise agreement’s non-compete provision and moved to enjoin the franchisee from providing services to patients. The district court granted the injunction in part, but denied it as to the franchisee servicing existing patients.

The non-compete provision restricted the franchisee, for two years after termination, from diverting customers to a competitive business and from maintaining a competitive business in its exclusive area or within 75 miles of any ComForCare franchise. The court noted that Michigan courts have upheld non-compete provisions with a two-year time restriction, with larger geographic restrictions, and restrictions on franchisees with multiple locations across the country. The court noted the combined geographic and time restrictions were on the outer bounds of reasonableness but found the harm to ComForCare weighed in favor of an injunction. The franchisor was likely to be harmed if the franchisee continued to solicit current ComForCare clients away from the franchisor. The court granted a narrower preliminary injunction, enjoining the franchisee from soliciting or contacting ComForCare clients it was not currently servicing.

The franchisor appealed, arguing the district court rewrote the non-compete provision when it allowed the franchisee to continue serving existing patients. The Sixth Circuit disagreed and found the lower court was within its discretion, holding that no contract can dictate the decision whether to grant injunctive relief. The Sixth Circuit ruled that in granting the narrower preliminary injunction, the district court applied relevant case law and did not abuse its discretion.

Franchisors should review the time, scope and geographic restrictions of their franchise agreement’s non-compete provisions and be prepared to state sound reasons to support each restriction. Even states that enforce post-termination non-compete provisions may find that the contract language is too broad and use their own judgment to decide whether and how to enforce such covenants.

Franchisee 101: COVID Defense Leads to Contempt

A federal court in Tennessee held a Gus’s World Famous Fried Chicken former franchisee in contempt for failure to deidentify its restaurant after entry of a temporary restraining order and consent to a permanent injunction.

The franchisee operated a Gus’s fried chicken franchise until the franchise agreement was terminated in May 2020. The franchisor moved for a Temporary Restraining Order (TRO), which the court granted. The parties then entered into a permanent injunction, which prohibited the franchisee from operating a Gus’s restaurant and using Gus’s proprietary information. But, the franchisee continued to operate as a Gus’s restaurant and use Gus’s proprietary information.

The franchisor moved for contempt, showing use of Gus’s marks and trade dress inside and outside the restaurant. The franchisor alleged that Gus’s handbooks were still in the restaurant, and that the restaurant continued using Gus’s fried chicken batter. The franchisee admitted the restaurant still displayed a Gus’s sign. However, the franchisee claimed this continued use was based on advice from his lawyer that it was best for the restaurant and its employees to stay open during the COVID-19 shutdowns.

The court rejected the franchisee’s argument, finding the COVID-19 pandemic did not excuse the franchisee from complying with the TRO and permanent injunction. The court found the franchisee in contempt and set a hearing to determine sanctions to be imposed.

While many businesses are struggling to stay open during the COVID-19 pandemic, the crisis does not let anyone ignore a court’s orders. Franchisees with struggling businesses should consult counsel to determine the best strategy for themselves and their businesses in this difficult time.

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