If you own a franchise, there is a good chance that your agreement with the franchisor contains a non-compete agreement. Non-compete agreements are intended to prevent you from competing with the franchisor if your franchise ends or is terminated.
Although non-compete agreements are legal in North Carolina, they are not limitless. There are certain restrictions that North Carolina law places on them.
If a non-compete goes too far, a judge may be able to invalidate it. Notably, however, if a non-compete goes too far, a judge cannot rewrite it to make it at least partially enforceable. This is called the “Blue Pencil” Rule – it holds that when a contract clause is invalid, it must be discarded, and may not be revised by the judge.
Non-compete agreements involving franchises are subject to a test for reasonableness. The restrictions under a non-compete may be no wider than necessary to protect the franchisor’s business interests with regard to the issues of scope, time, and location. This means that if a non-compete is too broad, a North Carolina judge can apply the Blue Pencil Rule and strike it entirely.
There are no exact tests for evaluating when a non-compete is too broad. Judges will typically take into consideration the entire agreement. But some general guidelines are as follows.
Scope of the Non-Compete
The scope of the non-compete in the franchise agreement may not prevent the former franchisee from working in all aspects of the same industry. If the franchisee only worked in a particular segment of a certain industry, then a restriction as to that segment is probably acceptable. But if the scope is overbroad, then restricting the franchisee from working in any related industry would probably be struck by a judge.
Duration of the Non-Compete
The duration of the non-compete in the franchise agreement must be a reasonable length of time. Reasonable is commonly understood to mean somewhere between six months and two years. Depending on the business, it might be more or less. But generally speaking, more than two years seems like it is intended to punish the franchisee, rather than protect the franchisor’s business interests.
Geographic Location of the Non-Compete
Similarly, the geographic location of the non-compete in the franchise agreement must also be reasonable. If the non-compete prevents the franchisee from working anywhere in Southeast, or certainly anywhere in the country, it is probably overbroad.
Franchisees should be aware that if the non-compete is governed by the law of another state besides North Carolina – a state that does not use the Blue Pencil Rule – then the clause might be modified by a judge, rather than struck entirely. Evaluation of this issue, and the above issues, should be handled by a competent attorney.
DYE CULIK PC is a Charlotte, North Carolina based law firm that represents business owners and franchisees in all stages of the lifecycle of their businesses. Contact us to see how we can help you succeed.
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