Covenant Against Competition

Understanding the Covenant Against Competition in Franchising

Short Definition:
The Covenant Against Competition, often referred to as a non-compete clause, is a provision in a franchise agreement that restricts the franchisee from engaging in business activities that compete with the franchisor during and after the term of the franchise agreement.

Long Definition:
The Covenant Against Competition is a legal agreement embedded within the franchise contract that prohibits the franchisee from starting or operating a business that directly competes with the franchisor’s business model within a specified geographical area and for a specified period. This covenant is designed to protect the franchisor’s intellectual property, trade secrets, customer base, and investment in the franchisee by preventing market saturation and ensuring brand integrity.

Additional Definition: The clause or term of a franchise agreement in which the franchisee agrees not to engage in or maintain any interest in a business activity that competes with the franchise business. Also see “Competing Operation.”

History and Usage:
Historically, non-compete clauses have been used across various industries to protect business interests when substantial training, investment, or sensitive information is involved. In franchising, the Covenant Against Competition became prevalent as franchisors sought to safeguard their proprietary knowledge and avoid internal competition that could dilute the brand and affect the profitability of both franchisor and franchisee. This clause has been critical in maintaining the exclusivity and competitiveness of the franchise brand in the market.

Five Questions often asked and answers to each question:

1. How long does the Covenant Against Competition typically last?
   • The duration of the covenant varies but generally lasts for 1 to 3 years after the expiration or termination of the franchise agreement, depending on what is deemed reasonable in the franchise agreement and compliant with local laws.
2. Is the Covenant Against Competition enforceable in all states?
   • Enforceability can vary significantly from state to state in the U.S. Some states are very restrictive or do not allow non-compete clauses at all, especially if they are considered to unfairly restrict a former franchisee’s ability to earn a livelihood.
3. What geographical areas do these covenants typically cover?
   • The geographical scope of the Covenant Against Competition must be reasonable and is usually defined as the area in which the franchisee operated and potentially surrounding areas where the franchisor plans to expand.
4. Can a franchisee ever negotiate the terms of a Covenant Against Competition?
   • Yes, franchisees can negotiate the terms of the Covenant Against Competition, particularly its duration and geographical scope. It’s essential for franchisees to seek legal counsel to ensure that the terms are fair and reasonable.
5. What happens if a franchisee violates the Covenant Against Competition?
   • Violation of the Covenant Against Competition can lead to legal action by the franchisor, including but not limited to seeking an injunction to stop the competing business and claiming damages for breach of contract.

Example of three, legally correct, sentences using the term – ‘Covenant Against Competition’ related to franchising:

1. The franchise agreement clearly stipulated that the franchisee must adhere to the Covenant Against Competition, which prohibits any directly competing business activities within a 50-mile radius of the original franchise location for two years after the agreement’s termination.
2. To ensure compliance with the Covenant Against Competition, the franchisor provided the franchisee with a detailed map delineating the geographic area covered by the non-compete clause.
3. During the franchise agreement renewal discussions, the franchisee requested a modification of the Covenant Against Competition to reduce the non-compete period from three years to one year, citing the need for more flexibility in future business endeavors.

Summary:
The Covenant Against Competition is a standard yet crucial element of franchise agreements, designed to protect the franchisor’s interests and prevent market saturation by former franchisees. While intended to maintain the competitive edge and integrity of the franchise network, it must be crafted to balance protection with fairness, considering legal standards of reasonableness in terms of duration, geographic scope, and overall impact on the franchisee’s future business opportunities. Understanding and negotiating the terms of the Covenant Against Competition is essential for both parties to ensure a successful and conflict-free franchise relationship.

Learn more about franchising in The Educated Franchise – 3rd Edition